Tax bills pile up on Vodafone's account

British telecom major Vodafone is facing taxing times with the Indian revenue authorities.

It is fighting a second case over transfer pricing at the high court (HC) in New Delhi. The tax claims on the company total Rs 15,500 crore (Rs 155 billion).

The dispute over the tax payable for its purchase in 2007 of the 67 per cent stake in Hutch is on an amount of Rs 11,200 crore (Rs 112 billion).

It also has a pending transfer pricing dispute on Rs 4,200 crore (Rs 42 billion) for the assessment year 2008-09.

The latest transfer pricing matter has a Rs 370-crore (Rs 3.7 billion) claim for the assessment year of 2009-10.

In both these matters, the tax department believes shares transferred by the Pune business unit to its parent company was not done with arms-length pricing.

A petition filed by Vodafone on the first transfer pricing case, was dismissed by the HC in Mumbai last month, asking them to go back to the tribunal.

The court is presently hearing the second case. The company did not respond to queries sent on this matter.

Legal experts say additions to the tax claim can go on.

“Issues like share transfers might not happen every year.

But the department considers the income as a loan by the parent company to the subsidiary and interest on that could accrue every year,” said Ajit Tolani, partner at Economic Laws Practice.

In the Hutchison stake purchase, the Supreme Court had given Vodafone a favourable verdict but the government then re-worked

its laws to retax with retrospect effect.

Tolani says most transfer pricing issues are solved only in the SC and these could take four or five years.

“The government should clarify transfer pricing issues. Indian law has only a few sections and 10 pages on the issue; in the US, it is explained in 300 pages,” he said.

Operationally, the company has been performing well, as its data revenues grew 75 per cent last year.

The telecom sector's phase of hyper-competitiveness has also ended and the country's top telecom company, Bharti Airtel, recently closed a deal to sell five per cent of its stake to Qatar Foundation Endowment for $1.2 billion (Rs 6,796 crore.

Yet another, Idea Cellular, has been gearing up for a qualified institutional placement, to raise equity.

However, Vodafone's plans to raise money by going for an initial public offer has been delayed many times, over many reasons. These include unfavourable markets, apart from the tax troubles.

The parent company invested into the Indian company at 16 times its Ebitda (earnings before interest, taxes, depreciation and amortisation) from Hutch in 2007.

In spite of these setbacks, experts believe such issues would not make much of a dent in the fortunes of a global giant such as Vodafone.

VODAFONE'S TAX DISPUTES

• Hutch deal tax: 11,200 crore (Rs 112 billion)
• Transfer pricing case 1: 4,200 cr (Rs 42 billion)
• Transfer pricing case 2: 370 crore (Rs 3.7 billion)