Mumbai: The Bombay high court on Friday ruled that the tax department’s dispute resolution panel (DRP) should decide on the transfer pricing tax case involving the Indian unit of Vodafone Group Plc. DRP is an alternative mechanism to resolve tax disputes arising from transfer pricing.

A division bench of the high court consisting of chief justice Mohit Shah and justice M.S. Sanklecha was hearing a writ petition filed by Vodafone challenging the department’s transfer pricing adjustment of 1,300 crore. The case relates to a transfer pricing order for assessment year 2008-2009 over the issue of shares by the UK company’s local unit, Vodafone India Services Pvt. Ltd.

Vodafone India issued shares to a Mauritius-based group company for 246 crore at a fair market value of 8,519 per share. However, the tax department determined the value of the shares at 53,775 per share. The differential amount is being sought to be taxed by the authorities as income in the hands of Vodafone India.

The total tax demand raised by the tax department against the firm is over 400 crore.

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.

On Friday, the high court gave Vodafone two weeks to file its objection against the tax order before DRP. “The DRP should decide the issue of jurisdiction in case of the petitioner (Vodafone) and pass an order within two months," said the court.

So far, Vodafone has maintained that these are capital transactions and, hence, do not fall under the transfer pricing ambit. The tax department has contended that the case should be first decided by DRP. In October, the high court had asked the tax department to stop the proceedings of DRP against Vodafone India till its final order.

“Bombay high court has left it open to the petitioners to come to court if they are unhappy with the decision of the DRP," said Amit Maheshwari, a partner at chartered accountants Ashok Maheshwary and Associates. “Vodafone is definitely expected to exercise this option. It would be helpful if we all start having more confidence in the tax department and its hierarchy."

“The writ has been disposed of in a very fair manner," said Sanjay Sanghvi, partner at law firm Khaitan and Co. “The court has effectively tried to achieve a ‘balance’ by sending the matter to the dispute resolution panel by directing it to first rule on whether this transaction of subscribing to the share capital of the Indian group entity of Vodafone really resulted in any ‘income’ on which transfer pricing adjustment is warranted. It will be interesting to wait for the finding of the DRP."

The Vodafone case is a fallout of retrospective amendments introduced in the Union budget of 2012 that included capital financing under the transfer pricing net.

The high court in its order said it is “natural for the petitioner (Vodafone) to feel harassed as the assessing officer did not give them a proper hearing".

According to the order, Vodafone can challenge the DRP order in the high court.

“The DRP has been asked to hear the matter within two weeks and dispose of it within four weeks thereafter. Vodafone can then go back to the court if it is aggrieved. It is indeed a satisfactory outcome," said Dinesh Kanabar, deputy chief executive officer at KPMG India.

Vodafone is not the only firm fighting the tax department.

The Indian arm of oil and gas company Royal Dutch Shell Plc, too, has filed a similar petition in the high court challenging 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.

Earlier this year, finance minister P. Chidambaram said at least 26 companies, including the local units of HSBC Holdings Plc and Standard Chartered Plc, underpaid taxes in the last fiscal year after they sold shares to their overseas arms too cheaply.

India’s top mobile operator Bharti Airtel Ltd and some units of the diversified Essar conglomerate, including Essar Power Ltd and Essar Investments Ltd, also feature in this list.

This is not the first time Vodafone has locked horns with the Indian tax department. The company is already facing a tax liability of 11,200 crore for the purchase of Hutchison Whampoa Ltd’s stake in its Indian telecom business in 2007. Vodafone is now in the process of seeking a settlement of the tax issue.

More recently, in September, the Bombay high court dismissed a writ petition filed by Vodafone India that had questioned the income-tax department’s jurisdiction in passing a 8,500 crore transfer pricing order on transactions by the company’s call centre business. The court directed Vodafone to appeal against the tax order in an appellate tax tribunal instead.

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