The Bombay High Court on Thursday ruled in favour of the Indian arm of Vodafone Group Plc in tax dispute over a Rs 8,500 crore transaction involving a local subsidiary in 2007-08.
The ruling is likely to soothe nerves of foreign investors who are caught in similar “transfer pricing” disputes and help counter the perception that India was a difficult place to do business.
The case involves sale of Vodafone’s call centre business to Hutchison in 2007, and is different from a bigger Rs, 12,000 crore tax case involving the British telecom giant’s purchase Hutchison Whampoa’s telecom assets in India.
The Finance Ministry announced that it will study the Bombay HC order which favoured Vodafone in the Rs 8,500-crore transfer pricing case and then decide on its future course of action.
“We will study the order of Bombay High Court on Vodafone transfer pricing issue and then take a call accordingly,” Revenue Secretary Hasmukh Adhia said.
The Bombay High Court overruled an order of the Income Tax Appellate Tribunal (ITAT) of last year, which had suggested that the I-T department had jurisdiction over this issue.
The income tax department had placed an Rs 3700 crore demand on the telecom company charging its local arm—Vodafone India Services Pvt Ltd-- with under-pricing share sales of its call centre business to Hutchison and assigning call options to its parent Vodafone International BV in 2007-08.
Vodafone India Services Pvt. Ltd challenged the tax department’s jurisdiction in issuing the “transfer pricing” order that added Rs 8,500 crore to the company’s taxable income for 2007-2008.
It moved the Bombay High Court in February 2012 maintaining that the transaction is not an international transaction and, therefore, should not attract tax.
Transfer pricing is the value at which companies trade products, services or assets among various arms in different countries.
According to tax avoidance rules, these transactions need be carried out on an “arm’s length” basis—in a manner that it involves an unrelated company.
On Thursday the Bombay High Court ruled in favour of the British telecom giant.
“Vodafone welcome’s today’s decision by the Bombay High Court,” the company said in a statement.
Vodafone’s repeated run-ins with taxmen had stoked fears about the country’s high-handedness in dealing with foreign investors.
In 2012, India changed laws to impose taxes on older corporate deals such as British telecom giant Vodafone’s acquisition of Hutchison Whampoa’s telecom assets in India.
While the government has said India will not bring on fresh cases of retrospective taxes, there is still some anxiety among multi-national corporations about it.
The company is now engaged in an international arbitration on the case with India under a bilateral investment treaty.
(With inputs from PTI)