Vodafone India Services Pvt Ltd (VISPL) has won a $690m tax battle in the Bombay High Court against the country's income tax department over transfer pricing. The ruling pertains to VISPL being assessed as owing $399.6m (plus interest of $291m) in respect of: a transfer pricing margin charged for the international call centre of Hutchison Telecommunications International Ltd (HTIL) prior to the 2007 Vodafone purchase of HTIL’s mobile telecom assets; the sale of a call centre by VISPL to HTIL; and share options held by VISPL for Vodafone India Ltd’s equity shares. 

According to Vodafone’s latest annual report, the first two of the three heads of tax are subject to an indemnity by HTIL under the Vodafone International Holdings BV Tax Deed of Indemnity. The larger part of the potential claim is not subject to any indemnity. VISPL unsuccessfully challenged the merits of the tax demand in the statutory tax tribunal and the jurisdiction of the tax office to make the demand in the High Court. The tax appeal tribunal heard the appeal and ruled in the tax office’s favour. On October 8, the Bombay High Court set aside the tribunals’ ruling against Vodafone. 

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Transfer pricing is the value at which different units of the same company conduct crossborder trade in products, services or assets. It refers to the practice of arm’s-length pricing for transactions between group companies to ensure that a fair price – one that would have been charged to an unrelated party – is charged. Vodafone has maintained that the transaction is not an international transaction and so it does not attract tax. The Bombay High Court’s division bench said there is no transfer of share options and hence the transaction is not falling within the purview of transfer pricing. 

This verdict holds out hope for multinational corporations embroiled in similar transfer pricing disputes with India’s income tax authorities. In September, union finance minister Arun Jaitley told the news agency Press Trust of India that the government was keen on an early resolution of pending tax disputes involving Vodafone, Cairn Energy and Shell. “The resolution can be by way of judicial tribunals, by way of discussions within or by way of some other methods that we have used in other cases... But I am certain [it will be resolved], because it’s necessary to resolve these issues as tax uncertainty does not help the investment environment,” he said.

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