Transfer pricing case: Bombay HC rules in Vodafone's favour in Rs 3,200 cr tax dispute

In a judgement that could set a precedent for other transfer pricing cases, the Bombay High court has ruled in favour of Vodafone saying that it was not eligible to pay Rs 3,200 crore in tax over the transfer of shares from an Indian subsidiary of the company to the parent company.

In its judgement the court held that there was no taxable income arising out of the transaction, reported CNBC-TV18.

The Income Tax department had served a notice to the telecommunications company over the transfer of shares by Vodafone India Services to its parent company in FY11.

The case arose from Vodafone’s purchase of Hong Kong-based Hutchison Whampoa’s stake in Hutchison Essar for over $11 billion in 2007. According to the IT department, the British telecom company did not deduct capital gains tax from the seller.

Around 20 companies are expected to benefit from the judgement including Essar group of companies and Shell India, according to CNBC-TV18.

The income tax department had issued a show cause notice to Vodafone on 17 January, asking the company to pay Rs 3,200 crore as transfer pricing adjustment. The department said the shares issued to Vodafone’s parent company had been undervalued.

After getting the showcause notice, Vodafone moved the Bombay High Court, challenging the transfer pricing adjustment of Rs 3,200 crore.

Transfer pricing refers to the rate at which transactions take place between two related parties, usually belonging to the same group. In the other transfer pricing case in which the tax department had made a tax demand of Rs 3,700 crore on Vodafone, the bench decided to hear arguments on February 6.

The case was a fallout of an earlier transfer-pricing order that sought to add Rs 8,500 crore to the taxable income of the company from the sale of its BPO unit to an offshore entity.