)
The department had sent a notice to Vodafone’s outsourcing unit, based in Pune, in 2008-09. The notice asked Vodafone to add Rs 8,500 crore to its taxable income.
The department claimed Vodafone India Services, the outsourcing unit, issued shares to a Mauritius-based group company in 2007-08 at lower prices. The tax authorities wanted an extra Rs 8,500 crore to be added to the taxable income. After adding interest, the total liability on Vodafone could work out to Rs 4,200 crore.
Transfer pricing is an accounting practice used to conduct transactions between related parties, at an arm’s length basis.
Vodafone had earlier said the transaction was a share subscription and not a share sale. It also said share subscriptions were not covered by transfer pricing rules, in India and abroad. Hence the department’s claim has no basis in law. The high court on Friday rejected the petition on the ground that alternative remedy was available for such issues, such as the tax tribunal or the dispute resolution panel, under income tax laws.
This order by the court, Vodafone said, was focused solely on procedure. “The high court’s decision today focused solely on procedure and not on the merits of Vodafone’s case. The court ruled that the matter should be looked at by the tax tribunal in the first instance, rather than passing directly to the it. The court also extended the stay, on the final assessment order already granted by the court and the company now has almost 12 weeks to review its options,” Vodafone Plc said. H P Ranina, senior Supreme Court lawyer, said transfer pricing was a technical issue. “Under Article 226 of the Constitution, one does not go for a writ petition unless there is prima facie error in law. The normal process is to go to the appellate body provided under the statute,” he said. Vodafone can challenge the decision in the Supreme Court, asking it to entertain the petition. It can also go to the Income Tax Appellate Tribunal.
Vodafone is not the only company to have come under the tax department’s net over disagreements on what is the arm’s length pricing between two subsidiaries. Another British company in that category is Royal Dutch Shell. The tax authorities claimed Shell India’s share sale to its parent was undervalued by the company. Shell claimed this was an incorrect interpretation of the rules, as income tax cannot be levied on capital receipt.
For Vodafone, too, the latest case was an additional burden, as it was already mired in a high-profile tax controversy relating to retrospective changes in tax laws. The I-T department had claimed as much as Rs 11,218 crore in capital gains tax for a 2007 deal, where Vodafone bought a 67 per cent stake in Hutch Essar for $11.2 billion. The Supreme Court had given a verdict in the company’s favour. The government later changed the laws to bring the issue back under its net. The firm is negotiating with the government over this.
TIMELINE
Vodafone’s transfer pricing issue
* 2007-08: Vodafone India Services issues shares to Mauritius-based group company
* 2008-09: I-T department sends a notice on the transfer pricing issue
* December 2011: I-T department issues draft transfer pricing order to Vodafone
* February 2012: Vodafone challenges the jurisdiction of transfer pricing order in Bombay HC
* February 2013: I-T department sends assessment order
* February 2013: Vodafone says order has no basis in law as it relates to share subscription and not sale
* September 2013: Bombay HC dismisses Vodafone’s petition
