Bombay HC annuls Rs3,100-cr tax demand on Vodafone’s call centre deal

The Bombay High Court on Thursday ruled in favour of Vodafone in its efforts to oppose a move by tax assessment officials to add Rs8,500-crore (about $1.3 billion) to the taxable income of its call centre unit, Vodafone India Services Pvt Ltd. 

The income tax department had, in 2007, placed a Rs3,700 crore demand on the telecom company for ''under-pricing'' the sale of Vodafone India Services Pvt Ltd to Hutchison and assigning call options to its parent Vodafone International BV in 2007-08.

The case is one of a series of tax cases involving Vodafone Plc in India and is different from a Rs12,000-crore tax case involving the British telecom giant's purchase of Hutchison Whampoa's telecom assets in India.

The Bombay High Court overruled an order issued by the Income Tax Appellate Tribunal (ITAT) last year, which had suggested that the I-T department had jurisdiction over transfer pricing.

The high court bench of Justices C S Dharmadhikari and Anil Menon also held that the question relating to the put options was already considered by the Supreme Court and no scope for valuation could arise. 

Legal experts view the judgement as a "clear sign to foreign investors that rule of law prevails".

Vodafone India Services Pvt Ltd provided call centre services to some group companies. In 2006, Vodafone had entered into a framework agreement with three companies, namely, Asim Ghosh Group, Analjit Singh Group and IDFC Group, which together held 15 per cent equity share capital in HEL/VIL, in terms of which Vodafone India services Pvt Ltd was entitled to purchase the entire share capital of these companies owned by Asim Ghosh, Analjit Singh and IDFC investors.

According to Beni Chaterjee, counsel for the income tax department, the transfer pricing officer (TPO) had found that the framework agreements were re-negotiated and in June 2007 Vodafone had entered into a fresh framework agreement with Asim Ghosh, Analjit Singh and IDFC Group, which were in material terms different from earlier framework agreement. The TPO had also noted that the call option rights, which were exclusively held by Vodafone India services Pvt Ltd, were diluted so as to entitle Vodafone Group PLC (the holding group) also to purchase the 12.5 per cent share capital held by Asim Ghosh and Analjit Singh Group in VIL. 

TPO found that such price dilution in an international transaction through fresh agreement has valuable interest and, therefore, determined Rs6,178 crore as value of call option that had been transferred by Vodafone India services Pvt Ltd to its associated enterprises that are wholly owned subsidiaries of Vodafone Group PLC.

The I-T department had also assessed a call centre transaction in 2007 by Vodafone at over Rs2,000 crore but subsequent revaluation brought it down to over Rs200 crore.

Vodafone had challenged the orders of the Income Tax Appellate Tribunal and maintained that the call centre transaction was "domestic" and hence not amenable to any transfer pricing regime.

The HC has now accepted Vodafone's arguments.