Telecommunications company Vodafone has been secured relief by the Bombay High Court from a transfer pricing-related tax demand by the country’s revenue authorities. A tax bill of $490m, relating to the two financial years up to March 2011, was given to Vodafone India Services Private for allegedly underpricing its shares in a rights issue to its parent incorporated in Mauritius. On October 10, 2014, the Bombay High Court ruled that the share issue did not give rise to any income; as a result, the question of imposing any tax did not arise from an international transaction. 

“It is a 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 the 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,” the court stated in a 53-page order. This order provides hope to 26 other firms, including Shell India, that are facing similar transfer pricing disputes. 

Advertisement

The central board for direct taxes, India's top policy-making body within the income tax department, is studying the Bombay High Court’s judgement. It has sought advice from the law ministry on this matter and is expected to take a decision shortly on whether or not to challenge it in the Supreme Court. Since cases similar to Vodafone have come to light, “existing cases will be treated as per relevant laws in existence, while new ones relating to transfer pricing will go to a specifically constituted high-level co-ordination committee,’’ stated the central board's chairman KV Chowdary. 

In a statement, Vodafone said that it has “maintained consistently throughout legal proceedings that this transaction was not taxable”. It is still disputing a much bigger $2.2bn bill, for the company's acquisition of Hutchison Whampoa’s stake in a local telecommunications entity in 2007. As conciliation efforts with revenue and finance ministry officials have so far not succeeded, arbitration is under way.

N Chandra Mohan is an economics and business commentator based in New Delhi