Vodafone gets `3,700 crore tax demand in India transfer pricing case

Mumbai: The Indian unit of Vodafone Group Plc will have to pay 3,700 crore in tax and interest, the income-tax department demanded on Wednesday, in a case relating to the sale of shares by the local subsidiary.

“Vodafone has 30 days to pay up or appeal,” a tax official said, requesting anonymity.

The wireless services provider will challenge the order, a company spokesperson said.

Last month, the Bombay high court ruled that the tax department’s dispute resolution panel (DRP) should decide on the transfer-pricing tax case of Vodafone. DRP is an alternative mechanism to resolve tax disputes arising from transfer pricing.

Transfer pricing is the practice of arm’s length pricing for transactions between a group’s companies based in different countries to ensure that a fair price—one that would have been charged to an unrelated party—is levied.

The case relates to a transfer-pricing order for assessment year 2008-09 over the sale of shares by the UK company’s local unit, Vodafone India Services Pvt. Ltd, to a Mauritius-based group company.

Vodafone India sold shares to the Mauritius company for ₹ 246 crore at a value of ₹ 8,519 per share. However, the tax department determined the value of the shares at 53,775 per share. The difference is being sought to be taxed by the authorities as income in the hands of Vodafone India.

The original total tax demand raised by the tax department against the firm was a little over ₹ 400 crore.

The panel’s order came after the court hearing a writ petition filed by Vodafone challenging the department’s transfer-pricing adjustment of ₹ 1,300 crore.

“Vodafone disagrees with the dispute resolution panel decision relating to the transfer-pricing order which Vodafone received in December 2011,” its spokesperson said. “Vodafone maintains that there is no tax payable on this transaction and the company will file an appeal before the tax appeal tribunal as soon as possible.”

Vodafone Group is also involved in another legal battle with the income-tax department on a ₹ 11,000 crore tax case related to its acquisition of its Indian operation from Hutchison Telecom.

The latest tax demand is bound to impact investors’ sentiment about India, according to Amit Maheshwari, a partner at audit firm Ashok Maheshwary and Associates.

“The tax department is trying to bring the share-issue transaction into the transfer-pricing ambit as an international transaction which includes capital financing, thereby making a transfer-pricing adjustment,” Maheshwari said. “However, Vodafone is expected to evaluate next steps keeping in mind the direction given by Bombay high court last month at the time of disposing the writ.”

Vodafone is not the only firm fighting the tax department. Other foreign companies recently involved in tax disputes in India include International Business Machines Corp. (IBM) and Royal Dutch Shell.

The Indian arm of oil and gas company Royal Dutch Shell Plc has also challenged the claims by the tax authorities that a share sale to its overseas parent in 2009 was undervalued by about ₹ 15,200 crore and that consequently the company evaded paying taxes.

IBM, the world’s largest technology services firm, is contesting a tax notice of ₹ 5,357 crore sent to its Indian unit by the income-tax department, which accused the company of under-reporting profit for the 2009 fiscal year.