Transfer pricing case: Bombay HC rules in favour of Vodafone

Written by ENS Economic Bureau | Mumbai | Updated: Oct 11 2014, 15:42pm hrs
VodafoneThe ruling in favour of Vodafone India Services (VISPL) will likely set free around 26 other firms including Shell India.
The Bombay High Courts ruling in favour of Vodafone India Services (VISPL) will likely set free around 26 other firms including Shell India, HSBC Securities and five Essar Group companies who have similar transfer pricing disputes with the taxman in connection with shares sold by them, mostly to their global parents.

The court ruled on Friday that transferring the shares did not lead to any income, so the question of imposing a tax did not arise. Some of these cases have been listed for direction by the HC after Diwali.

In its 53-page order, the HC said, It is well settled position in law that a charge to tax must be found specifically mentioned in the Act. In the absence of there being a charging Section in Chapter X of the Income Tax Act, it is not possible to read a charging provision into Chapter X of the Act... In the present facts, issue of shares at a premium by the Petitioner to its non-resident holding company does not give rise to any income from an admitted International Transaction.

Vodafone has maintained consistently ... that this transaction was not taxable. We welcome the decision..., a Vodafone Plc statement said. Vodafone had earlier lost this case in the tax departments Dispute Resolution Panel.

It is not certain if the government will appeal the case with the Supreme Court.

Mukesh Butani, managing partner, BMR Legal, observed that the high court had concluded the share issuance does not give rise to any income arising and, hence, there can be no question of an adjustment. Butani added that the judgement lent clarity to the vexed question of applicability of the transfer pricing law to share issuance.

In the Vodafone case, the taxman had added Rs 3,200 crore to VISPLs income, arguing that it had undervalued the shares it had sold to a Vodafone subsidiary in Mauritius had the taxman won, VISPL would have had to pay a tax of around Rs 1,000 crore. While VISPL received Rs 246.38 crore for the shares in FY10, the taxman valued the shares at Rs 53,775

each. VISPL had issued shares at a premium of Rs 8,509 per share.

Though the original Vodafone tax demand was based on a retrospective amendment to the law in 2012, the court did not rule on the validity of the law since the company did not challenge this. After Section 92(1) of the I-T Act was amended, the taxman said the share sales came under its ambit. The court, however, ruled that even after amendment of Section 92(1), the premiums that firms earned on share transfers could not be construed to be part of their ordinary income. FE