The Bombay High Court on Thursday ruled in favour of Vodafone Plc in a Rs 8,500 crore transfer-pricing tax dispute. The court has overturned the decision of the Income Tax Appellate Tribunal (ITAT) which, in December 2014, ruled that the tax authorities have powers to raise a demand on the telecom company.
The transfer-pricing dispute relates to the sale of Vodafone’s Ahmedabad-based call centre business —Vodafone India Services — to Hutchison Whampoa Properties India in 2007 and an assignment of call options to its group entity Vodafone International. The dispute arose after the tax authority issued a draft transfer pricing order in December 2011 and added Rs 8,500 crore to Vodafone’s taxable income for sale of its call centre business.
Transfer pricing is the practice of arm’s length pricing for transactions between a group’s companies based in different countries to ensure that a fair price — one that would have been charged to an unrelated party — is levied.
A division bench of high court headed by Justice SC Dharmadhikari, in an oral order on Thursday, said the court is of the view that there is no transfer of “call options” in the sale transaction and the deal does not fall under the purview of transfer-pricing.
The high court order is a major relief to Vodafone which has locked horns with the government over several tax disputes in the past, according to tax experts. The tax department, however, may approach the Supreme Court against the high court order. “A welcome ruling of the High Court which may help in encouraging investment opportunities in India. But the sky is still unclear in terms of whether the revenue department would file an appeal before the Supreme Court. And if it happens, then the investors’ sentiments may hit adversely to a certain extent,” said Rakesh Nangia, managing partner of Nangia & Co, a chartered accountancy firm.
In February 2012, Vodafone challenged the jurisdiction of the tax department before the ITAT in this case and also approached the Bombay High Court. In 2013, the tax authority issued a tax demand of Rs 3,700 crore to Vodafone India. However, the tribunal had stayed the demand and directed Vodafone to deposit Rs 200 crore by February 15, 2014 which was done by the company.
The ITAT later ruled that the call centre sale deal was structured with the motive to “circumvent the transfer pricing provisions of the Income Tax Act” and was in essence an “international transaction between two related parties and thus would be subject to the transfer pricing provisions”. In a partial relief to the company, the tribunal however sent the case back to the I-T department for determining the revised taxable amount as it did not accept the valuation arrived at by the tax authority.