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Bombay HC stays Rs 3,000-cr ‘new’ income tax demand on Vodafone

The new case pertains to the transfer of shares by Vodafone India Services to its parent company in the financial year 2010-11.

Vodafone, the country’s second-largest telecom operator, is already fighting a separate Rs 3,700 crore tax notice in a transfer-pricing case related to the sale of its Pune BPO arm to an offshore group entity in FY08.

The company is also in talks to resolve a capital gains tax demand from the government, even after it won the case in the Supreme Court. The case arose from Vodafone’s purchase of Hong Kong-based Hutchison Whampoa’s stake in Hutchison Essar for over $11 billion in 2007. According to the IT department, the British telecom company did not deduct capital gains tax from the seller.

Hearing Vodafone’s plea, a bench headed by Chief Justice Mohit Shah granted an interim stay till 7 March on the demand made by the Income Tax department in an order on Wednesday. The court also ordered status quo on the new income tax order and asked the assessment officer not to take any steps until further orders. The income tax department had issued a show cause notice to Vodafone on 17 January, asking the company to pay Rs 3,000 crore as transfer pricing adjustment. The department said the shares issued to Vodafone’s parent company had been undervalued.

After getting the show cause notice, Vodafone moved the Bombay High Court, challenging the transfer pricing adjustment of Rs 3,000 crore. The company on Thursday pleaded with the court to stay the demand until the matter was heard on merit.

Transfer pricing refers to the rate at which transactions occur between two related parties, usually belonging to the same group.  In the other transfer pricing case in which the tax department had made a tax demand of Rs 3,700 crore on Vodafone, the bench decided to hear arguments on 6 February. The case was a fallout of an earlier transfer-pricing order that sought to add Rs 8,500 crore to the taxable income of the company from the sale of its BPO unit to an offshore entity.

Vodafone had challenged the demand before the Appellate Tribunal, which on 27 December stayed it for six months or till the final disposal of the plea, whichever is earlier.

The Tribunal directed Vodafone India Services to make a Rs 200-crore initial deposit. The first instalment of Rs 100 crore was to be paid by 15 January and the second is due by 15 February.

Vodafone was also directed by the Tribunal to provide corporate guarantees for the balance tax amount of Rs 3,500 crore by February 15. The I-T department, in its petition, said the  amount of Rs 200 crore to be paid by Vodafone was too low.
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