Vodafone gets relief in transfer pricing case

The tax department had raised a tax demand of Rs 3,900 crore

Vodafone got relief in one more tax case with Bombay HC on Thursday accepting the company’s contention that the deal under which its call centre business was sold can’t be taxed under transfer pricing rules.

The tax department had included Rs 8,500 crore in company’s income for 2007-08 when the business was sold and raised a tax demand of Rs 3,900 crore.

The department’s view was that the deal to sell the call centre business was between two overseas entities even though the operations were in India and were sold by an Indian unit of Vodafone to Indian subsidiary of Hutchison. It had said the India units of both Vodafone and Hutch involved in the deal were wholly owned by their overseas subsidiaries.

Vodafone’s argument was that the transfer happened between its Indian subsidiary and an Indian unit of Hutchison and transfer pricing rules can’t be applied to such transactions between two domestic companies, which the court accepted.

Other issue that the court decided in favour of Vodafone was on transfer of rights on call options on shares in its India business held by other investors to its overseas subsidiary.

The department had also demanded tax on transfer of these rights. The call options related to stakes held by one of the former promoter of telecom business of Huchison in India and the company’s chief executive. When Hutch sold that business to Vodafone in 2007, the call option rights that were vested with Hutchison were transferred to an overseas subsidiary of the buyer.

“The HC has reversed the decision of tax tribunal that the recasting of framework agreement between taxpayer and Indian business partners was to be regarded as a transfer of call options by assessee to its parent entity merely because the latter was a confirming party,” director at Grant Thornton Advisory Arun Chhabra said.

“In the light of the recent legislative reforms, this is a welcome move re-establishing confidence in the tax judiciary and seeks to cleen up the ‘tax terrorism’ reputation for the country,” manager (transfer pricing) at Nangia & Co Ayush Rajni said.

“We will study the judgment before deciding on further course of action,” revenue secretary Hasmukh Adhia said when asked whether the order of Bombay HC would be challenged in the Supreme Court.

The article appeared in the Financial Chronicle. The article can be found here.