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Bombay HC backs Vodafone in transfer pricing case

The Bombay High Court on Friday ruled Vodafone is not liable to pay an income tax demand of Rs 3,200 crore in a case relating to transfer pricing, a verdict which comes as a big relief for the UK-based mobile service provider already locked in a big tax dispute with the government.

The I-T Department had asked the company to pay additional income tax alleging that it had undervalued its shares in the subsidiary Vodafone India Services while transferring them to the parent company in Britain. The transaction took place in FY10. 

Transfer pricing is the practice of arm’s length pricing for transactions between group companies based in different countries to ensure a fair price — one that would have been charged to an unrelated party — is levied.

A Division Bench headed by Chief Justice Mohit Shah and Justice M Sanklecha said ‘in our opinion there is no taxable income on share premium received on the issue of shares.’

The order in favour of Vodafone is being considered significant because some domestic companies too are involved in similar transfer pricing cases. The tax authority had issued a show cause notice to Vodafone India on January 17, 2014 and later passed an order asking it to pay additional Rs 3,200-crore tax for allegedly undervaluing the shares of its Pune BPO.

On 27 January, Vodafone moved the High Court challenging the I-T order and contended that its transaction on transfer of shares was not taxable under the Indian tax laws. Its counsel Haresh Salve argued that the share premium received on the issue of such shares was not taxable. He said the department's order amounted to levying tax on a ‘non- -existent income’.

It may be noted that many multinationals, including Shell India and Leighton India Contractors, are also fighting transfer pricing cases in various courts. This is not the first time Vodafone has questioned a transfer pricing tax order. It has in the past dragged I-T Department to High Court over two other transfer pricing tax orders that raised a demand of Rs 3,700 crore and Rs 400 crore on Vodafone India. Both these cases are pending.

Vodafone is locked in a separate $2 billion dispute with the government over its buying of Hong Kong-based Hutchison's stake in Hutchison-Essar. Welcoming the verdict, Vodafone, in a statement here said, ‘we have maintained consistently throughout the legal proceedings that this transaction
was not taxable.’

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