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Vodafone In New Indian Tax Dispute

by Mary Swire,, Hong Kong

11 February 2013

Vodafone has confirmed that it is to challenge claims by the Indian Income Tax Department that it under priced shares issued to a subsidiary, just days after Shell announced that it would fight a similar transfer pricing allegation.

The Indian tax authorities are alleging that a share transfer between Vodafone India and Vodafone Teleservices Mauritius in 2007-8 undervalued the shares issued by as much as INR13bn (USD243.9m). A Transfer Price Order (TPO) was issued by the Income Tax Department last week, detailing the claim.

A spokesperson for Vodafone confirmed that the telecoms giant had received the TPO, and that it has already begun its challenge before the Dispute Resolution Panel. Vodafone's case will be based on the argument that the Order "has no basis in law," as share subscriptions do not fall under the remit of India's transfer pricing rules. A writ petition has also been filed, the spokesperson stated, "challenging the jurisdictional issues on the basis of precedent established in the recent Vodafone International Holdings BV-Hutchison Supreme Court judgment."

In January, 2012, India's Supreme Court came down in Vodafone's favor in a long running dispute over the acquisition of mobile phone company Hutchinson Essar in 2007. Issue was taken with the way the transaction was structured. It involved Vodafone International Holdings, a Dutch-registered subsidiary of Vodafone Group, making the USD11bn payment to a Cayman Islands-registered subsidiary of HTIL, in order to acquire a 67% stake in Hutchinson Essar.

The Supreme Court ruled that the company was not liable for a USD2.2bn bill in back taxes and penalties in connection with the acquisition. The government was also ordered to repay the USD496m deposit paid by Vodafone in late 2010, plus 4% interest. However, retrospective tax changes made to the Income Tax Act threatened to re-ignite the row, and Vodafone took steps towards international arbitration proceedings, fearing that the reforms would overturn the Court's verdict.

Vodafone subsequently set aside USD2.2bn for the payment of its Indian tax liabilities, and announced that it may be willing to settle the bill, were any interest and penalty charges waived. After a "reminder" was issued by the Indian government last month, Vodafone said that it would meet with ministers to discuss the matter and find a solution. Talks have since taken place but no progress has been announced.

On February 4, Royal Dutch Shell PLC's Indian unit confirmed that it was in discussions over "baseless" accusations that a share transfer had been undervalued. The Income Tax Department has charged Shell India with under pricing a share transfer by a total value of USD2.8bn, thereby enabling it to underpay taxes.

As with Vodafone, Shell's defense also attacks the authorities' interpretation of the law. According to a spokesperson: "Taxing the money received by Shell India is in effect a tax on Foreign Direct Investment, which is contrary not only to law but also to the spirit of the recent global trip by the Finance Minister to attract further FDI into India."

This comprehensive report in our Intelligence Report series examines the global and national landscapes in which companies can use transfer pricing to improve their after-tax returns, including summaries of recent developments in design of the corporate supply train, the usefulness of 'offshore' in international corporate tax planning, and a section covering the spread of DTAAs and CFC laws. It is available in the Lowtax Library at and a description of the report can be seen at
TAGS: compliance | Finance | tax | business | tax compliance | India | Mauritius | tax avoidance | interest | law | Cayman Islands | group taxation | multinationals | tax planning | transfer pricing | tax reform | penalties | telecoms | services

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