Vodafone India got a major relief on two tax disputes on Thursday from the Bombay High Court which set aside an earlier order of a tribunal that endorsed the tax department’s powers to demand an extra Rs 3,700 crore in taxes and interest from the company for the 2007-08 fiscal.
Vodafone India’s British parent had said earlier this year that despite “regulatory challenges” that hamper India’s economic development, the country offers a good long-term investment opportunity for global firms. The company is still battling a tax dispute on its 2007 purchase of Hutch Essar despite having won the case in Supreme Court in 2012 as the UPA government had subsequently changed the law retroactively to recover taxes on indirect sale of Indian assets by global firms. At last count, the updated tax demand including interest on this transaction was Rs 14,200 crore.
However, the Modi government, which is reforming the tax regime, has already given relief to multinational companies like Vodafone and Shell by not deciding to appeal on certain share valuation-related transfer pricing disputes where high courts or tribunals have favoured the taxpayers.
Finance minister Arun Jaitley has promised that all legacy tax disputes would soon be resolved through administrative and judicial measures.
“Disputes often reach high courts many years after the transaction. Appealing against high court decisions in the Supreme Court by the government is best done after due diligence and in cases where there is potential for substantial tax base increase, not in a routine manner in every case,” said SP Singh, senior director, Deloitte in India.
In the latest dispute resolved by the high court in favour of Vodafone, the tax department had claimed that the company’s alleged transfer of option rights to a Dutch entity in 2007-08 was chargeable to Rs 2,100 crore as tax on which Rs 11,00 crore interest was also applicable. The department also demanded Rs 300 crore as taxes and Rs 200 crore as interest on Vodafone’s sale of a call centre to Hutch in the same year.
The court accepted the company’s clarifications on both cases while dismissing the tax claims. Vodafone said in a statement that it welcomed the court decision. The company told the court that the option rights referred to by the tax authorities were never transferred to a foreign entity and is still with Vodafone India Services. It also told the court that the call centre sale was not subject to transfer pricing regulations meant to prevent profit shifting by MNCs. Vodafone had appealed against the order of the Income Tax Appellate Tribunal issued last December.
The UK’s Vodafone Group had said recently in its 2015 annual report that its Indian arms were involved in a number of tax disputes with a total tax demand of £1.5 billion (about Rs 14,440 crore) plus interest and penalty three times the principal demand. These cover issues such as applicability of value-added tax to SIM cards and dis-allowance of income tax holidays. The company is of the view that any finding of material liability to tax is not probable.