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Tribunal upholds income tax authorities' stand on raising tax demand on Vodafone
December, 12th 2014

In a fresh blow to Vodafone India, the Income Tax Appellate Tribunal has ruled that the tax authorities have the powers to raise a demand on the telecom major in the Rs 8,500 crore transfer-pricing dispute.

The case relates to the sale of one of its call centres in Ahmedabad in 2007.

The tribunal held that the company had structured the deal with another India-based entity Hutchison Whampoa Properties with the intention to circumvent the transfer pricing norms, even though it was an international transaction wherein there was no arm's length dealing between the two related entities.

However, the tribunal has sent the case back to the Income Tax department, asking them to revise the amount to be recovered from the company.

The Mumbai bench of ITAT, in a 189-page order yesterday, ruled that the deal relating to sale of the call centre business was structured with the motive to "circumvent the transfer pricing provisions of the Income Tax Act" and was in essence an "international transaction between two related parties and thus would be subject to the transfer pricing provisions".

Presiding officers Vijay Pal Rao and R C Sharma said: "According to us, this is an international transaction since the assignment of the call option took place."

In a partial reprieve for the company, the tribunal however sent the case back to the I-T dept for determining the revised taxable amount as it did not accept the valuation arrived at by the tax authority.

"Vodafone India's appeal is partly allowed," the presiding officers said.

A Vodafone India spokesman refused to comment on the development, saying that only its London headquarters could offer a reaction. A mail sent to the company's spokesman in London did not elicit any response.

The dispute relates to the sale of the Ahmedabad-based call centre business (Vodafone India Services formerly known as 3 Global Services) for assessment year 2008-09. The department slapped a tax demand on the company on October 31, 2012 under sections 143(3) and 144C(13) of the Income Tax Act.

Vodafone India Services was originally incorporated in March 1999 in the name of 3 Global Services as a wholly-owned arm of Hutchison Teleservices India Holdings, a company incorporated in Mauritius. Hutchison Teleservices, in turn, was a wholly-owned subsidiary of CGP Investments Holdings, incorporated in the Cayman Islands.

Transfer pricing involves related entities dealing at arm's length to ensure fair pricing of the asset that is transferred.

The dispute had arisen after the tax authority issued draft transfer pricing order in December 2011 and added Rs 8,500 crore to Vodafone's taxable income for sale of its call centre business in 2007.

In February 2012, Vodafone challenged the jurisdiction of the Income Tax department before the ITAT and also approached the Bombay High Court.

In 2013, the Income Tax department had issued a tax demand of Rs 3,700 crore to Vodafone India. However, the tribunal had stayed the demand during the pendency of the plea and directed Vodafone to deposit Rs 200 crore by February 15, 2014 which it had done.

Vodafone's counsel Abhishek Manu Singhvi argued that the Supreme Court order of February 2011 had upheld the company's position that there being no assignment of call options there was no question of taxable income.

He also argued that the sale of the call centre business was between two domestic companies and that the transfer pricing officer had no jurisdiction over the deal. Vodafone counsel added that they had established a conclusive case at the prima facie stage.

This is not the only tax dispute the British telecom giant is facing in the country. In another dispute, the Bombay High Court ruled in favour of Vodafone in October, saying it need not pay an additional tax of Rs 3,200 crore as demanded by the tax authority.

The company is also about to begin an international arbitration against the government claim of Rs 21,000 crore in taxes as capital gains levy for its purchase of Hutchison assets in February 2007.

The government claims that Vodafone should have deducted capital gains tax when it made the USD 11 billion payment to Hutchison while purchasing its India assets. This argument was quashed by the Supreme Court in February 2011 but the then government introduced retro tax in that year's budget, prompting Vodafone to challenge the validity of the claim at an international court of arbitration.

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