Indian High Court Pressed On Vodafone Transfer Pricing Case

by Mary Swire, Tax-News.com, Hong Kong

16 January 2014

India's Income Tax Department has challenged a court decision to freeze one of its many demands on Vodafone.

The telecoms giant was accused last February of undervaluing shares transferred between Vodafone India and Vodafone Teleservices Mauritius in 2007-08. Vodafone challenged the Transfer Pricing Order (TPO) in the Bombay High Court, arguing that the Order had "no base in law," because share subscriptions do not fall under the remit of India's transfer pricing rules. Its petition also argued that the Government had no jurisdiction in the case, because a precedent had been established in a separate tax dispute, involving the acquisition of mobile phone company Hutchison Essar.

In September, the High Court ruled that transfer pricing authorities did have the right to investigate the alleged underreported cross-border transactions. It did nevertheless request that the Income Tax Department delay the issue of a final assessment order. In December, the Income Tax Appellate Tribunal (ITAT) stayed the demand for a further six months, and instructed Vodafone to pay an initial deposit of INR2bn (USD32.6m) in two monthly instalments of INR1bn. The company must make corporate guarantees for the entire sum due, totalling INR35bn.

India's Economic Times claims to have spoken with two officials familiar with the case. One of its sources said that a plea had been filed challenging the High Court order. The authorities take the view that Vodafone India "should have been asked to pay a higher amount of around 25 percent of the demand as [a] deposit with the Department."

The Department has questioned Vodafone's reference to the Hutchison Essar case, contending that the precedent set "regarding deposits by assessees should have been followed," and raised concerns about the "enforceability of corporate guarantees."