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Tax trouble again: I-T dept alleges Vodafone underpriced shares by Rs 1,300 cr
February, 07th 2013

Vodafone finds itself under renewed assault from Indian tax authorities even as it attempts to resolve a long-running tax dispute over the acquisition of Hutchison's Indian telecom business in 2007. This time around, the I-T Department has alleged that the Indian arm of the world's largest telecom company by revenue under-priced shares issued to a Mauritius-based group company by nearly Rs 1,300 crore.

The development, coming as it does after the Indian arm of energy giant Shell was charged with under-valuing shares issued to its overseas parent, has raised the spectre of a return to heavy-handed tax administration in contrast to the gentler methods promised by Finance Minister P Chidambaram.

In case of Shell, the under-valuation is alleged to be as much as Rs 15,000 crore, though the tax liability could be different from this. Shell has lashed out at the order, claiming that it amounts to a tax on FDI.

Two persons familiar with the development told ET NOW that last week Vodafone was served with a fresh order challenging the valuation method adopted by Vodafone India Services Pvt Ltd while issuing shares to Vodafone Teleservices Mauritius in FY09.

"Vodafone's valuation methodology to arrive at Rs 8,000 per share has been challenged by the Income-Tax Department, which claims that the valuation should have been Rs 50,000 per share instead," one of the sources privy to the development told ET NOW. He said Vodafone's potential tax liability in this case will become clear once the assessing officer finalises the order, the deadline for which ends on March 31, 2013. Meanwhile, the company can exercise the option of challenging the transfer pricing order by filing a writ petition in the high court.

A spokesman for the company said, "Vodafone disagrees with the Income-Tax Department and refutes the basis of the order. We have no further comment to make."

Vodafone has been a particular favourite of the Indian tax authorities, battling accusations of alleged tax infractions of all manners. The Indian arm of Vodafone, the country's second largest by subscribers and revenues, is currently battling a Rs 8,500-crore transfer pricing order in the Bombay High Court.

The fresh transfer pricing order was issued last week. The original tax dispute, in which Vodafone Plc is charged with failing to withhold capital gains tax on its purchase of Hutchison-Essar, is reckoned to be around $2 billion (over Rs 10,000 crore) though media accounts of the exact amount vary depending on whether penalty and interest are included.

"The same principle has been used while dealing with Shell and Vodafone," said an individual familiar with the cases. Transfer price refers to the actual price at which a transaction takes place between two related parties, usually belonging to the same group. India has a high incidence of disputes relating to transfer pricing because it is often difficult to arrive at a price that is agreeable to both the I-T Department and the companies involved.

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