Vodafone wins Rs 3,200-cr tax dispute in Bombay HC

Ruling to help many MNCs such as Shell, IBM, Nokia locked in transfer pricing dispute

In a ruling that could have a significant bearing on several multinationals fighting transfer-pricing cases in India, the high court here on Friday ruled in favour of British telecom major Vodafone Group, saying it didn’t have to pay additional tax of Rs 3,200 crore, as demanded by income tax authorities.

The income tax department had said Vodafone India under-priced shares in a rights issue to its parent. The tax demand was for the two financial years ended March 2011. The amount included tax and interest for the tax demand for assessment year 2009-10.

Shell, IBM and Nokia are also fighting transfer pricing cases in India.

When contacted, a Vodafone spokesperson said: “Vodafone has maintained consistently through the legal proceedings that this transaction was not taxable. We welcome the decision.”

A senior finance ministry official said, “We can’t comment without seeing the order. The next step has to be a considered decision. The HC order has to be carefully studied and after that, it will be decided whether we need to file a special leave petition in the Supreme Court or abide by the HC verdict.”

Though Vodafone India had issued shares at about Rs 8,000 a share, with an investment of Rs 246 crore, the tax department had determined the price at Rs 53,000 a share. It said as the company had under-priced the shares, the shortfall and differential ought to be treated as taxable income of Vodafone India through an international transaction.

Corporate lawyers said the judgment would impact oil major Shell’s investment in India, as well as IBM’s. The tax demands had led to negative investor sentiment, as many multinationals had accused the tax department of taxing foreign direct investment into India. “This is a very welcome order by the Bombay High Court. The controversy arose due to the stand of the revenue authorities to tax capital infusion through transfer-pricing provisions,” said Girish Vanvari, co-head (tax), KPMG.

“The HC has stated the shares issued at premium didn’t give rise to income and there is no ‘international transaction’ to trigger transfer-pricing provisions. The decision provides the much sought after clarity on this contentious issue and is of great relevance to international investing community,” he added.

NOT QUITE AT HOME

Other transfer pricing disputes

• Shell India: Income tax department argued Shell under-priced its shares, which led to a loss of Rs 15,000 crore to its Indian subsidiary. A demand order pegging Shell’s tax liability at Rs 5,000 crore was sent. An order by HC is awaited
• Leighton India Contractors: Leighton India was slapped a notice by tax authorities for subscribing to the shares of its Indian arm. The transfer-pricing dispute was over an amount of Rs 900 crore
• IBM: The US technology major was asked to pay Rs 5,753 crore as income tax for under-reporting revenue for 2008-09
• Nokia: Nokia got a Rs 13,000-crore tax demand for transfer-pricing violations. Since then, the company has moved courts and shut its Chennai unit
• Cairn India: Cairn Energy transferred shares of Jersey-based Cairn India Holding to Cairn India in 2006. The total share transfer in India was valued at about Rs 26,000 crore. Authorities claimed this led to capital gains for Cairn UK Holdings taxable in India

Transfer pricing is the value at which companies trade products, services or assets between units in different countries, a regular part of business for a multinational company, but a practice tax authorities feel it is often exploited. Rules require all cross-border transactions between group companies to be valued at arm’s length, or as if the transaction is with an unrelated company.

Lawyers said the ruling was good news for companies facing similar transfer pricing demands. “The court decision is a welcome ruling in the midst of various controversial tax assessments made by revenue officials. The high court has reaffirmed the principle that capital receipt cannot be taxed unless it is specifically provided for. Though the principle is obvious and the ruling meets the expectations of the investor community at large, it will mandate tax officers to live by the fundamental canons of taxation,” said Milind Kothari, managing partner and head (direct tax) of BDO India LLP.

Others agree. “The verdict is a welcome relief for taxpayers facing a transfer-pricing adjustment on undervaluation of shares. Post adjustment in the case of Vodafone, Shell, etc, transfer-pricing officers have started questioning share valuation in cases of fresh issue of shares to associated enterprises,” said Arun Chhabra, director, Grant Thornton.

“Vijay Iyer, partner, EY, said, “This is a huge relief for foreign investors who were being burdened with an unnecessary transfer-pricing controversy, litigation costs and compliance burden for bringing in foreign direct investment. The position of the revenue authorities seemed unsustainable from the outset, but it caused a lot of stress to foreign investors. If the government does not appeal to the Supreme Court, this matter might reach finality and that might provide a huge impetus for fast-forwarding foreign investment.”

Girish Vanvari, co-head (tax), KPMG, said, "A very welcome pronouncement by the Bombay High Court in the Vodafone share valuation case, it resolves in favour of the taxpayer the controversy due to the stand of the revenue authorities to tax the capital infusion through transfer pricing provisions…The decision provides much sought after clarity on this contentious issue and is of great relevance to the international investing community."

This, however, isn't the end of Vodafone's woes in India. The company is also fighting another demand from the income tax department, which amounts to Rs 4,200 crore for 2010-11. Besides, it is also mired in a much larger capital gains tax controversy for the purchase of 67 per cent stake from Hutchison in 2007, the claim for which stands at Rs 11,200 crore. Though the Supreme Court had ruled in favour of Vodafone, the United Progressive Alliance (UPA) government came out with an Ordinance to tax the company with retrospective effect.

The matter is under arbitration.

During his Lok Sabha elections campaign, Prime Minister Narendra Modi had promised to do away with the "tax terrorism" unleashed by the UPA government. After assuming charge, he set up a panel to review all transfer-pricing cases.

"This is a welcome judgment at a point when the PM is inviting the world to invest in India. This will certainly help in boosting the 'Make in India' campaign and the investment climate in the country," said Sanjay Tolia, leader (transfer pricing), PWC.