In a major relief to British telecom major Vodafone in the transfer pricing case, the Bombay High Court on Thursday ruled in its favour, setting aside a tax demand of Rs. 3,700 crore imposed on Vodafone India by the income tax authorities. This is likely to benefit multinational companies such as IBM, Royal Dutch Shell and Nokia that face similar tax demands.
The case dates back to financial year 2007-8 involving the sale of Vodafone India Services Private Ltd., the call centre business of Vodafone, to Hutchison, and the tax authorities demanded capital gain tax for this transaction. The Income Tax department had demanded that Rs.8,500 crore be added to the company’s taxable income.
Transfer pricing is referred to the setting of the price for goods and services sold between related legal entities within an enterprise. This is to ensure fair pricing of the asset transferred. For example, if a subsidiary company sells goods to a parent company, the cost of those goods is the transfer price.
The court decision came as Vodafone challenged the order of the Income Tax Appellate Tribunal which held last year that it structured the deal with Hutchison Whampoa Properties, a company based in India, to circumvent transfer pricing norms, though it was an international transaction wherein there was no arm’s length dealing between the related entities.
Vodafone welcomes decision
Vodafone has repeatedly clashed with the authorities over taxes since it bought Hutchison’s mobile business in 2007.
Vodafone acquired the telecom business of Hutchison in India to enter the Indian market. And the British company is also fighting another case with the tax authorities relating to this transaction.
In this current transfer pricing case, Vodafone argued in the High Court that the Income Tax Department had no jurisdiction in this case because the transaction was not an international one and did not attract any tax.
The dispute on transfer pricing surfaced after the Income Tax Department issued a draft transfer pricing order in December 2011 and added Rs. 8,500 crore to Vodafone’s taxable income for the sale of the call centre business. In 2013, the Income Tax Department issued a tax demand of Rs. 3,700 crore to Vodafone India.
However, the IT tribunal stayed the demand during the proceeding of the case and asked Vodafone to deposit Rs. 200 crore by February 15, 2014. It complied with the order.
However, Vodafone argued that the sale of the call centre business was between two domestic companies and the transfer pricing officer had no jurisdiction over the deal. On Thursday, Vodafone India did not issue any elaborate statement. It said: “Vodafone welcomes today’s decision by the Bombay High Court.”
The tax authorities are likely to challenge the decision in the Supreme Court.
In October last year, Vodafone won a transfer pricing case having an additional demand of Rs.3,200 crore from the tax authorities in the Bombay High Court.
“The High Court has reversed the decision of the tax tribunal that the recasting of the framework agreement between taxpayer and Indian business partners was to be regarded as a transfer of call options by assesse to its Parent entity merely because the latter was a confirming party. The tribunal, in so holding had rejected taxpayers contention that Supreme Court in its own case had already settled the issue in its favor,” Arun Chhabra, Director, Grant Thornton Advisory said while commenting on the case.