Vodafone vs taxman: One step forward, two steps back

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New Delhi: Tax disputes between the government and Vodafone seem to be becoming a never-ending affair.

Now, the government has decided to appeal against a decision of the Bombay high court in a Rs.8,500 crore Vodafone India Ltd transfer pricing decision.

The tax department will challenge an 8 October decision of the Bombay high court in the apex court through a special leave petition (SLP).

The high court had ruled that the income-tax department did not have the jurisdiction regarding the sale of Vodafone’s call centre business to Hutchison Whampoa Properties and assignment of call options to Vodafone International Holdings BV in 2007-08.

The income-tax department took to microblogging site Twitter late Wednesday night to announce its decision to challenge the high court order. “In the case of one of the cases of Vodafone, it has been decided to file SLP before Hon’ble Supreme Court against the order of Mumbai HC. A substantial question of law has arisen on the issue of taxability of capital gains arising on the surrender of call option rights. Hon’ble High Court has held that surrender of option rights is not a transfer under the provisions of IT Act. This ruling will have adverse effect in many other domestic cases also. As such it has been decided to challenge the said ruling.”

The high court’s ruling overturned the decision of the income-tax appellate tribunal (ITAT) which said that it had the jurisdiction to try these transfer pricing cases.

Transfer pricing refers to the practice of arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price—one that would have been charged to an unrelated party—is levied.

Vodafone India Services Pvt. Ltd had challenged the jurisdiction of the tax department over a December 2011 order which sought to add Rs.8,500 crore to its taxable income for the fiscal year 2007-2008.

In 2013, the tax department claimed tax of Rs.3,700 crore from Vodafone India in this case.

This case will add to the long list of tax disputes between Vodafone and the Indian government.

The tax department and Vodafone have been locked in a dispute since 2007 over the telecom company’s $11 billion acquisition of Hutchison Essar Ltd, now known as Vodafone India Ltd. The tax demand, which was initially around Rs.8,000 crore, has now more than doubled to Rs.20,000 crore after adding interest and penalty.

Though the Supreme Court ruled in favour of Vodafone in the tax case, the government in 2012 brought in retrospective amendments to tax laws, bringing such transactions under the tax net. This prompted Vodafone to launch international arbitration proceedings.

The matter again surfaced earlier this year after the tax department recently sent a notice to Vodafone warning the company of seizure of its assets in case the tax claim is not paid.

In this year’s budget, finance minister Arun Jaitley offered a one-time settlement of pending tax disputes for such cases wherein companies can pay tax arrears and get a waiver of interest and penalty provided they withdraw all appeals against the government in all judicial forums, including international arbitration proceedings invoked under bilateral investment protection agreements. However, Vodafone Plc did not seem very enthused with the government’s offer, maintaining they believe they do not have to pay any tax in India.

Another dispute between the tax department and Vodafone was over alleged underpricing of shares in a rights issue to the parent firm for fiscal year 2009-10 by Vodafone India Services. Again, the Bombay high court had ruled against the tax department in this Rs.3,200 crore case. However, the National Democratic Alliance decided against appealing against such share pricing transactions, providing a reprieve to many firms, including Shell India, involved in similar disputes.