Vodafone gets Rs3,700-cr tax demand over share transfer to Mauritius firm

Vodafone India Ltd, the Indian unit of British telecom major Vodafone Group Plc, has received a final tax demand of about Rs3,700 crore ($604 million) from income tax authorities in India over its sale of shares to a Mauritius-based company.

The case relates to a transfer-pricing order for assessment year 2008-09 over the sale of shares by the UK company's local unit, Vodafone India Services Pvt Ltd, to a Mauritius-based group company.

Vodafone India sold shares to the Mauritius company for Rs246 crore, at a value of Rs8,519 per share. However, the tax department estimated the value of the shares at Rs53,775 per share and has sought to tax the difference in pricing.

Vodafone India will have to pay Rs3,700 crore in tax and interest, in a case relating to the sale of shares by the local subsidiary, the income-tax department said on Wednesday.

''Vodafone has 30 days to pay up or appeal,'' income tax sources said.

The mobile phone service provider said it would challenge the order.

In September this year, the Bombay High Court had extended a stay on a final tax demand order by the authorities.

Earlier this month, the Bombay high court ruled that the tax department's dispute resolution panel (DRP) should decide on the transfer-pricing tax case of Vodafone (See: Bombay High Court asks Vodafone to go back to dispute resolution panel). DRP is an alternative mechanism to resolve tax disputes arising from transfer pricing.

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

Rules require all cross-border transactions between group companies to be valued at arm's length - or at the same value as if the transaction was with an un-related company.

"Vodafone maintains that there is no tax payable on this transaction and the company will file an appeal before the tax appeal tribunal as soon as possible," the company said. "Vodafone will continue to strongly defend its position against this order."

The original total tax demand raised by the tax department against the firm was a little over Rs400 crore ($65 million). Last year, Vodafone filed a petition after authorities sought to add Rs8,500 crore &135 million) to the taxable income of its unit, Vodafone India Services, which provided call centre services to some group companies.

Transfer pricing is the value at which companies trade products, services or assets between units.

Operations of Vodafone, which is the largest corporate investor in India, has been mired in  never-ending dispute with tax authorities ever since the over $2 billion tax demand on Vodafone over its deal to acquire Hutchison Wampoa's stake a joint venture with Essar Group to enter India.