CBDT to soon clarify transfer pricing issue in Vodafone case

CBDT to issue clarification to transfer pricing department not to make adjustment for Vodafone for subsequent years

Assuming a non-combative approach, the Central Board of Direct Tax (CBDT) will soon issue a clarification to the transfer pricing division about making adjustments for the shares issued by Vodafone India to Vodafone Mauritius for the assessment year 2011-12, sources said.

“After the Bombay High Court ruling in favour of Vodafone India, the tax department was facing ambiguity on making adjustments for transfer pricing for subsequent years,” said a source.

CBDT is likely to direct the department to take the court ruling under consideration and treat it as binding for subsequent transfer pricing cases, if the I-T department chooses not to appeal.

Last month, the income tax department wrote to CBDT for a clarification on whether it should make transfer-pricing adjustments for the subsequent years and whether the Bombay High Court ruling should be taken as a precedent for other cases, too.

The department is yet to make adjustments for the transfer of shares by Vodafone India Services to Vodafone Teleservices Mauritius for 2011-12. The department can make an additional tax demand before January 31.

The Bombay High Court had in October 2014 ruled in favour of Vodafone India, saying it need not pay an additional tax of Rs 3,200 crore as demanded by the I-T authorities in a separate case. The department had said Vodafone India under-priced shares in a rights issue to its UK-based parent. The tax demand was for two financial years up to March 2011. The amount included tax and interest for the tax demand for assessment year 2009-10.

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

Vodafone is battling two other cases of tax demands. One pertains to a tax demand of Rs 8,500 crore on a transfer pricing tax dispute involving the sale of its call centre business to Hutchison in 2007.

A separate tussle with the I-T department is on a demand of Rs 11,000 crore related to acquisition of its Indian operation from Hutchison Telecom. This might not be impacted by the Bombay court ruling, since it fell under a retrospective amendment to the Income Tax Act and arbitration in the process is on.

The CBDT clarification will be a breather for not only the telecom services provider but for other cases of a similar nature, including that of IBM and Shell.

The Indian arm of oil and gas company Royal Dutch Shell had in November 2014 won against the demand by the tax department on a share sale to its foreign parent in 2009. IBM, the world’s largest technology services firm, is contesting a tax notice of Rs 5,357 crore sent to its Indian unit by the income-tax department, which accused the company of under-reporting profit for FY09.

“It is a good precedent and will help in reducing litigation in cases of a similar nature. Normally, a court pronouncement is taken as a preference by a majority of tax experts for determining the tax demand, until and unless it is appealed,” said Samir Gandhi, partner, Deloitte Haskins & Sells.

THE TAX CASE

• FY08-09
  Vodafone India issues shares to Mauritius arm for Rs 246 crore
   
• January 2013
  I-T makes transfer pricing adjustment of Rs 1,308 cr
   
• March 2013
  Draft assessment order with addition to income based on transfer pricing order
   
• April 2013
  Vodafone approaches dispute resolution panel & files writ petition in Bombay High Court
   
• September 2013
  Revenue department files reply in the court
   
• October 2013
  Bombay High Court hears arguments and reserves judgment
   
• October 2014
  Court rules in favour of Vodafone India