Government accepts Vodafone tax ruling

The government has accepted the order of the Bombay High Court in its case against Vodafone India Services Private Limited, in a reversal of its stance regarding a tax regime that it felt has adversely affected investor sentiment.

The union cabinet chaired by the Prime Minister Narendra Modi today decided to accept the High Court's order in the Vodafone India Services Private Limited (VISPL) case dated 10 October 2014.

The decision has been taken on the advice of the chief commissioner of income tax (international taxation), CBDT chairperson and the attorney general of India, an official release said.

Vodafone, the biggest foreign investor in India, has been involved in a series of tax disputes since it entered the country seven years ago.

The British group has been accused of under-pricing shares in a rights issue to its parent company and the tax department had demanded tax of about Rs3000 crore ($489 million).

The union cabinet chaired by the Prime Minister Narendra Modi has decided to accept the order of the High Court of Bombay in the case of Vodafone India Services Private Limited (VISPL) dated 10 October 2014, in a ''major correction of a tax matter which has adversely affected investor sentiment.''

The cabinet decision will bring greater clarity and predictability for taxpayers as well as tax authorities, thereby facilitating tax compliance and reducing litigation on similar issues. This will also set at rest the uncertainty prevailing in the minds of foreign investors and taxpayers in respect of possible transfer pricing adjustments in India on transactions related to issuance of shares, and thereby improve the investment climate in the country, a cabinet release said.

The cabinet came to this view as this is a transaction on the capital account and there is no income to be chargeable to tax. So applying any pricing formula is irrelevant.

VISPL is a wholly owned subsidiary of a non-resident company, Vodafone Tele-Services (India) Holdings Limited, Mauritius. On 21 August 2008, VISPL issued shares (at a premium of Rs8,509) which resulted in VISPL receiving a total consideration of Rs246.39 crore from Vodafone Mauritius, on issue of shares and this was shown as "Capital Receipts" in the books of accounts. VISPL reported this transaction as an "international transaction" and stated that this transaction does not affect its income.

The transfer pricing officer (TPO), in his order dated 28 January 2013, determined the arm's length price of the shares issued by VISPL was on the basis of net asset value of Rs53,775 per share and made an upward adjustment of Rs1,308.91 crore. In addition, the difference Rs1,308.91 crore between the transaction price and the arm's length price was treated as 'deemed loan' given by VISPL to the holding company; and interest that would have been payable on the loan in an arm's length transaction was computed at Rs88.35 crore.

In total, transfer pricing adjustment of Rs1,397.26 crore was proposed by the TPO for assessment year 2009-10. The matter was challenged by VISPL at the stage of draft AO itself and therefore the tax payable could not be realised. However, the tax rate of 33 per cent was applicable for assessment year 2009-10.

The DRP, on 11 February 2014, held that the premium determined by the TPO, to the extent not received, is an income arising from issue of shares, and that the AO and the TPO have jurisdiction. 

VISPL filed a second writ petition in the High Court of Bombay, following which the HC quashed the reference dated 11 July 2011 by the AO to the TPO, order dated 28 January 2013 of the TPO, draft AO dated 22 March 2013 of the AO and order dated 11 February 2014 of the DRP on the preliminary issue of jurisdiction to tax, setting them aside as being without jurisdiction, null and void.

Vodafone, however, is yet to resolve another, high-profile relating to capital gains tax in its 2007 acquisition of Hutchison Whampoa's stake in the Indian telecom group in Hutchison Essar, which is awaiting international arbitration