High court rules in favour of Vodafone in tax case

Vodafone pleaded in High Court that IT department had no jurisdiction in the transfer pricing case because the said transaction was not international and did not attract tax.

In a big relief for telecom major Vodafone India, the Bombay High Court on Thursday set aside an order of Income Tax Appellate Tribunal (ITAT) which had ruled that the IT department had powers to raise tax demand on the company in a Rs 8,500 crore (Rs 85 billion) transfer pricing case.

The transfer pricing case dates back to 2008 relating to sale of one of its call centres in Ahmedabad in 2007.

Transfer pricing involves related entities dealing at arm's length to ensure fair pricing of the asset that is transferred.

Vodafone had appealed against the order of the Tribunal, which was admitted by High Court division bench of Justices S C Dharmadhikari and Anil Menon.

The IT Appellate Tribunal had on December 10 last year held that 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.

However, the Tribunal had referred the case back to the IT department asking it to revise the amount to be recovered from Vodafone.

Vodafone pleaded in High Court that IT department had no jurisdiction in the transfer pricing case because the said transaction was not international and did not attract tax.

The Tribunal had then ruled that the deal relating to sale of the call centre business was structured with the motive to "circumvent the transfer pricing provisions of the Income Tax Act" and was essentially an "international transaction between two related parties and thus would be subject to the transfer pricing provisions."

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 department slapped a tax demand on the company on October 31, 2012 under various sections of the Income Tax Act.

Vodafone India Services was originally incorporated in March 1999 in the name of 3 Global Services as a wholly-owned arm of Hutchison Teleservices India Holdings, a company incorporated in Mauritius.

Hutchison Teleservices, in turn, was a wholly-owned subsidiary of CGP Investments Holdings, incorporated in the Cayman Islands.

The transfer pricing dispute arose after the Income Tax department issued draft transfer pricing order in December 2011 and added Rs 8,500 crore to Vodafone's taxable income for sale of its call centre business in 2007.

In February 2012, Vodafone challenged the jurisdiction of the Income Tax department before the ITAT and also approached the Bombay High Court.

In 2013, the Income Tax department had issued a tax demand of Rs 3,700 crore (Rs 37 billion) to Vodafone India. However, the Tribunal had stayed the demand during the pendency of the plea and directed Vodafone to deposit Rs 200 crore by February 15, 2014, which it had done.

Vodafone had argued before the IT Appellate Tribunal that the Supreme Court order of February 2011 had upheld the company's position that there being no assignment of call options there was no question of taxable income.

It also argued that the sale of call centre business was between two domestic companies and that the transfer pricing officer had no jurisdiction over the deal.