Vodafone wins Rs 8,500 transfer pricing tax dispute case

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In a major relief to British telecom major Vodafone in the transfer pricing case, the Bombay High Court ruled in its favour, setting aside a tax demand of Rs. 3,700 crore imposed on Vodafone India by the income tax authorities. This is likely to benefit multinational companies such as IBM, Royal Dutch Shell and Nokia that face similar tax demands.

What is Transfer pricing ?

Transfer pricing is referred to the setting of the price for goods and services sold between related legal entities within an enterprise. This is to ensure fair pricing of the asset transferred. For example, if a subsidiary company sells goods to a parent company, the cost of those goods is the transfer price.

What is the case all about?

  • The case dates back to financial year 2007-8  involving the sale of Vodafone India Services Private Ltd., the call centre business of  Vodafone, to Hutchison. The income tax department issued a notice to the company seeking to add Rs 8,500 crore to the taxable income of 2007-08, saying it has skirted the transfer pricing rules. In December 2013, the department sought a tax of Rs 3,700 crore from the company in this case.
  • Vodafone challenged the order of the Income Tax Appellate Tribunal against the tax demand, saying it was not an international transaction and did not attract transfer pricing rules. But the tribunal ruled in favour of  income tax department on December 10 last year saying that sale of the call centre business was an international transaction and assignment of call options had taken place. Therefore, the revenue department had jurisdiction to proceed against the company. Vodafone challenged the order in the Bombay High Court, which ruled in its favour on Thursday.

Significance of the High Court's order :-

  • The High Court has upheld the company's stand that the I-T department has no jurisdiction in the case. The order pointed out that call options were not part of the transaction and so it did not attract the transfer pricing rules. It has been welcomed by the company. Other global majors, including IBM Corp, Royal Dutch Shell Plc and Nokia Oyj that are also fighting transfer-pricing cases in India, see a ray of hope in the order. The decision by Bombay High Court will improve the ease of doing business and create a more welcoming environment as part of  Make in India initiative 

The finance ministry has said it will study the order and then take a decision. It has the provision to move the Supreme Court. But finance minister Arun Jaitley had recently hoped for a speedy resolution to tax issues. If he is indeed serious about that and is committed to ending the tax terrorism, it would be better for the government to not pursue the matter further.

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