Vodafone wins transfer pricing case in India

The Bombay High Court has ruled against the income tax department in its Rs3,200 crore tax demand on Vodafone Group Plc for allegedly undervaluing the shares of Indian arm Vodafone in a transfer pricing dispute.

The income tax department had sent Vodafone a Rs3,200-crore tax bill for allegedly undervaluing the shares Vodafone issued to its parent company, arguing that the difference in valuation (the difference between market price and the transfer price) was in fact a disguised loan subject to transfer pricing provisions.

Vodafone argued that share premium is a capital receipt and not income and hence not taxable.

Vodafone had appealed against the income tax department's decision to add about Rs3,200 crore ($523 million) to its taxable income for the financial year 2009-10, CNBC TV18 said.

Obviously, Vodafone, like several other foreign companies, has effectively used the loophole in tax laws even as the tax authorities continue to make endless claims of tax avoidance and tax evasion by large companies.

The income tax authorities were hoping to collect as much as Rs3,200 crore (including interest for the IT demand for the year 2008-09) from Vodafone's outsourcing unit in Pune.

In the three-minute judgment delivered today, the court said that there can be no tax without an income.

Vodafone had earlier fought a tax case in India over the purchase of the Hutchison-Essar business. Under Indian law the sale of a company in India can lead to a possible capital gains tax bill. Vodafone, however, circumvented that law by routing the deal through Ireland, Hong Kong and Mauritius - making it a non-Indian acquisition by non-Indian company, thereby successfully avoiding tax payment.

Vodafone, incidentally, also faced similar tax avoidance case in the UK as well with tax demands of up to £6 billion. It was alleged that Vodafone made a lot of money in Germany, selling things from German shops to Germans. This profit was then parked in a Luxembourg company, Germany, having already paid tax in that country.

Vodafone, remaining a UK company, the question was should these profits made in Germany be taxed in the UK while they still remained in Luxembourg?

It was argued that when the profits came to the UK (say, to pay a dividend) then they would have to pay UK corporation tax. Also, if those profits were being stashed in Cayman, or Bermuda, then UK tax was due under the ''controlled foreign corporation'' rules. The question was did the CFC rules apply to a company within the EU? The answer was ''no'' - the CFC rules do not apply within the EU - that no tax was due on those profits stashed in Luxembourg.