Vodafone wins Rs 8,500 cr transfer pricing case: Here's why it is important

The Bombay High Court has set aside an order of Income Tax Appellate Tribunal (ITAT) which said the IT department had powers to raise tax demand on the company in a Rs 8,500 crore transfer pricing case. The move has come as a major relief to the telecom company. Here are key facts about the case and its impact: What is the case all about? [caption id=“attachment_2253412” align=“alignleft” width=“380”]  Reuters[/caption] The dispute relates to the sale of the Ahmedabad-based call centre business (Vodafone India Services formerly known as 3 Global Services) for assessment year 2008-09. The income tax department issued a notice to the company seeking to add Rs 8,500 crore to the taxable income of 2007-08, saying it has skirted the transfer pricing rules. Transfer pricing involves related entities dealing at arm’s length to ensure fair pricing of the asset that is transferred. In December 2013, the department sought a tax of Rs 3,700 crore from the company in this case. The company approached the Income Tax Appellate Tribunal against the tax demand, saying it was not an international transaction and did not attract transfer pricing rules. But the tribunal ruled in favour of the department on December 10 last year. It held the company had structured the deal with another India-based entity Hutchison Whampoa Properties with the intention to circumvent the transfer pricing norms, even though it was an international transaction wherein there was no arm’s length dealing between the two related entities. It also referred the case back to the I-T department asking it to revise the amount to be recovered from Vodafone. Vodafone then appealed against the order of the tribunal in the Bombay High Court. Why is the high court order important? The High Court has upheld the company’s stand that the I-T department has no jurisdiction in the case. The order pointed out that call options were not part of the transaction and so it did not attract the transfer pricing rules, media reports said. It has been welcomed by the company. Other global majors, including IBM Corp, Royal Dutch Shell Plc and Nokia Oyj that are also fighting transfer-pricing cases in India, see a ray of hope in the order. “Verdict of the Bombay High Court reaffirms justice for Vodafone and an excellent signal for foreign investors into India,” Fereshte Sethna, Vodafone’s lawyer, has been quoted as saying in The Economic Times. What next? The finance ministry has said it will study the order and then take a decision. It has the provision to move the Supreme Court. But finance minister Arun Jaitley had recently hoped for a speedy resolution to tax issues. If he is indeed serious about that and is committed to ending the tax terrorism, it would be better for the government to not pursue the matter further. With inputs from agencies