The Supreme Court on Friday admitted the income tax department’s appeal challenging the Bombay High Court’s judgement that favoured Vodafone India Services Pvt. Ltd, the Indian arm of Vodafone Group, in a R8,500-crore transfer pricing tax dispute. A bench headed by Justice AR Dave “granted leave” which means that it will hear the matter in detail.
The high court on October 8 last year had overruled an order by the Income Tax Appellate Tribunal (ITAT) issued in 2014 that the tax department has the jurisdiction in the transfer pricing tax case involving 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.
Vodafone India Services had challenged the jurisdiction of the tax department that sought to add R8,500 crore to its taxable income in fiscal year 2007-2008. In 2013, the tax department claimed tax of R3,700 crore from Vodafone India in this case.
Transfer pricing is the value at which different units of the same company conduct cross-border trade in products, services or assets. It refers to the practice of arm’s length pricing for transactions between group companies to ensure that a fair price — one that would have been charged to an unrelated party — is charged.
Vodafone has maintained that the transaction is not an international transaction and so it does not attract tax.
Days after Vodafone approached the International Court of Justice seeking intervention in its R20,000-crore retrospective tax case, the government decided to appeal against the decision of the Bombay High Court ruling.
“A substantial question of law has arisen on the issue of taxability of capital gains arising on the surrender of call option rights,” the income tax department had said in April immediately after filing the appeal. “This ruling will have adverse effect in many other domestic cases also. As such it has been decided to challenge the said ruling,” the revenue authorities said while justifying its decision to appeal.
The department has raised various questions as to whether the HC was justified in holding that there was no assignment of option rights while ignoring the fact that introduction of a fresh assignee amounted to assignment of option rights.