Bombay HC rules in favour of Vodafone

With the high court here ruling in favour of Vodafone in a transfer pricing case, the Indian arm of the British telecom company has scored another victory against tax authorities. The case pertains to the sale of its call centre business to Hutchison's India entity and assignment of call options to Vodafone International BV in 2007-08.

The authorities pursued with their tax demands under transfer pricing rules, despite the Supreme Court having ruled against similar cases earlier this year. In fact, Vodafone approached the high court after a fresh demand was made by the authorities this July.

Fereshte D Sethna, senior partner at DMD, legal advisor to Vodafone, said: "The verdict has reaffirmed justice for Vodafone and is an excellent signal for foreign investors. The high court has struck down the stand of the tax authorities premised inter alia on the fundamental position that tax exigibility of the transaction was already considered by the Supreme Court back in 2012. The tax office stance to bring an Indian subsidiary to tax on the very same transaction was rightly not countenanced by the court."
 

The ruling has come as a rap on the knuckles of tax authorities for pursuing the case even after the government decided not to pursue similar transfer pricing cases earlier this year.

Following the Supreme Court ruling in 2012 in favour of Vodafone in a $2-billion tax case, tax authorities adjusted the valuation of assignment of call options under the transfer pricing rules by Rs 8,500 crore and slapped a fresh tax demand of Rs 3,100 crore on the Indian arm of Vodafone.

The tax authorities took suo motu cognisance of the two said transactions and held that even though the transaction of the call centre was between two domestic companies, "it was pursuant to the share sale agreement with Vodafone International" and so was liable to come under transfer pricing rules.

The earlier claim was on the parent company Vodafone International BV, which was dismissed by the Supreme Court in 2012. Interestingly, the tax authorities made fresh claims in the same case on the Indian arm Vodafone India Services, citing the call centre transaction and assignment of put options to Vodafone International BV in 2007-08. In February 2012, Vodafone India Services skipped the process of appeal with the tax authorities and filed a writ petition with the Bombay High Court, as the fresh demand had been made after the January 2012 ruling of the Supreme Court.

CASE HISTORY

• Sept 2007: Income tax (I-T) department slaps Vodafone International BV with a tax demand of $2 billion
• Jan 2012: Supreme Court sets aside I-T department's claim, saying transaction carried out of India cannot be taxed
• Feb 2012: I-T department slaps Rs 3,100-crore tax notice on Vodafone India  
• Sept 2013: Bombay HC dismisses Vodafone's petition and refers it back to tax tribunal
• Dec 2013: Income Tax Appellate Tribunal asks Vodafone to deposit Rs 200 crore
• Dec  2014: Tribunal says Vodafone liable for tax payments
• Sep 2015: High Court sets aside Tribunal order on Vodafone tax notice

RESOLVED CASES

• Vodafone: Bombay HC ruled in favour of Vodafone, saying it was not liable to pay Rs 3,100 crore in additional tax in a transfer pricing case
• Castleton: Got relief on minimum alternate tax (MAT) after the AP Shah committee in its report said foreign companies without a permanent establishment or place of business in India should not be liable to pay MAT

STILL WAITING

• Cairn: Regarding a tax demand of Rs 20,495 cr for failing to deduct withholding tax on alleged capital gains. Matter in international arbitration;  government to appoint its arbitrator
• Nokia: Relates to a tax demand of Rs 21,153 cr over non-deduction of tax at source concerning royalty payments to its then parent, Nokia Oyj
• Shell: In November 2014, the Indian unit of Royal Dutch Shell Plc won Rs 18,000-cr transfer pricing cases against I-T department. Final call on the matter yet to be taken by the government

Throughout the proceedings, Vodafone India maintained that the transaction was not an international one and, therefore, could not attract tax under the transfer pricing rules.

In 2012, the Bombay High Court asked Vodafone India Services to go through the dispute resolution process of the income tax instead of appealing directly. After several rounds of appeal, the Income Tax Appellate Tribunal ruled in December 2014 that tax authorities had the powers to raise tax on Vodafone in theRs 8,500 crore transfer pricing case.

A Vodafone group spokesperson in London said the company welcomed the Bombay High Court's judgment. While the ruling may be a shot in the arm for Vodafone, tax specialists claim that such long-drawn cases are time consuming even if the end result is in favour of the aggrieved party.

Revenue Secretary Hasmukh Adhia on Thursday said the ministry would study the Bombay High Court order and "take a call accordingly".