Vodafone India won its battle against the income-tax department over transfer pricing in the Bombay High Court, which set aside the appellate tribunal's ruling that had gone against the telecom company. Thursday's verdict was cause for optimism among multinationals mired in similar, long-running disputes that India will come good on its pledge to improve the investment climate by moving away from an adversarial tax regime.

The company's lawyer was emphatic about the wider implications of the decision in the Rs 8,500-crore transfer pricing case.

"Verdict of the Bombay High Court reaffirms justice for Vodafone and an excellent signal for foreign investors into India," said Fereshte Sethna, senior partner at law firm DMD Advocates. The division bench of SC Dharmadhikari and AK Menon decided against the Income-Tax Appellate Tribunal (ITAT) order.

Vodafone wins transfer pricing battle against I-T department The ITAT order had said local authorities had the power to raise the tax demand related to the sale of a call centre in Ahmedabad in 2007.

In an oral order, the bench relied on an earlier Supreme Court judgment and ruled that there had been no transfer of "call options" and hence the transaction didn't fall within the purview of transfer pricing. The detailed order had not been uploaded on the court website at press time.

Overseas investors such as Vodafone, IBM and Nokia Oyj hope the Narendra Modi government won't appeal against the ruling in the Supreme Court in line with its campaign to improve the ease of doing business and create a more welcoming environment as part of its Make in India initiative.

In line with this, the government decided in January not to challenge a Bombay High Court decision that favoured Vodafone in another transfer pricing case. Vodafone's Rs 20,000-crore withholding tax dispute is currently in arbitration.

Revenue secretary Hasmukh Adhia's response was carefully worded. "We will study the order of Bombay HC on Vodafone transfer pricing issue and then take a call on it accordingly," he told reporters.

Vodafone welcomed the decision. Thursday's decision is expected to offer relief to companies such as IBM and Leighton India that face similar cases, as the government has decided to accept the decisions of courts, tribunals and dispute resolution panels in favour of taxpayers.

The government adopted an investor-friendly position on minimum alternate tax as well recently.

Vodafone counsel Anuradha Dutt said the order will bring "quietus to litigation that struck (Vodafone) in 2007-2008. Hopefully, this is the last of the legacy litigation leaving us with just the arbitration, unless this is challenged."

The dispute stems from the sale of the Ahmedabad-based call centre business - Vodafone India Services, formerly known as 3 Global Services. The I-T department had slapped a transfer pricing order against Vodafone's India arm, seeking to add Rs 8,500 crore to its taxable income for FY08. The revenue authorities said the deal was an "undisclosed, international transaction" and therefore transfer pricing norms applied.
Transfer price refers to the actual price at which a transaction takes place between two related parties, usually belonging to the same group. According to law, all cross-border deals between group companies need to be at arm's length, that is, as if it was with an unrelated company.

The demand was challenged by the telecom company in the ITAT. In December 2014, the tribunal ruled that the sale of the call centre business was an international transaction and assignment of call options had taken place. Therefore, the revenue department had jurisdiction to proceed against the company. Vodafone challenged the order in the Bombay High Court, which ruled in its favour on Thursday.

"The judgment adds to the relief rally seen by Vodafone in its tax disputes and reinforces the trust of the taxpayer in the Indian judiciary, which has not been shying away in giving favourable orders, even in high-stake cases," said Rakesh Nangia, managing partner of tax advisory Nangia & Co. "The question relating to options was already considered by the Supreme Court and this decision is line with the said decision," said Tehmina Sharma, director, tax, transfer pricing, at Deloitte Haskins & Sells LLP. "However, one has to wait and watch whether revenue will appeal against the order in the Supreme Court or accept the position as in the matter of issue of shares.