Bombay High Court asks Vodafone to go back to dispute resolution panel

British telecom major's Indian arm Vodafone India has been asked by the Bombay High Court to return to the dispute resolution panel (DRP) to settle a transfer pricing issue. Authorities have claimed Rs370 crore towards tax assessment for the year 2009-10.

In a judgment delivered yesterday, the court said the matter seemed one for decision by DRP.

"The petitioner (Vodafone) should submit its preliminary objections on the case in two weeks. DRP will decide the area of jurisdiction. The DRP will consider preliminary applicability of transfer pricing provisions within two months," it said.

However, the telco could approach the court again if the DRP order was patently wrong.

According to the court, it was not going into the merits of the case, adding it did not see prima facie evidence in the matter. It added the company felt harassed as the income tax authorities had not given it an opportunity.

"No government has the right to harass the assessee, but has the right to collect taxes," the verdict said.

The issue pertained to a share issuance by the unit to a group company in Mauritius for Rs246 crore, at a fair market value of Rs8,519 a share.

Tax authorities felt the transaction, conducted between related parties, was done on an arm's length principle, and that it was much less than the fair value.

The case refers to assessment year 2009-10. The share transfer of Vodafone's Pune outsourcing unit to its foreign subsidiary had come under the tax scanner twice.

A petition by Vodafone had earlier been turned down by the Bombay High Court and in September this year, the court dismissed a petition by the company that challenged the jurisdiction of income tax department on the matter.

The department had told the company its taxable income for 2010-11 was higher by Rs 8,500 crore, taking its tax liability to Rs2,805 crore and after adding interest the payout stood at Rs4,200 crore.

The petition filed by Vodafone, represented by Dutt Menon Dunnmorrsett, Fereshte Sethna and senior counsel Harish Salve, raised questions about the transfer pricing officer (TPO)'s adjustment on the alleged Rs1,300-crore shortfall of premium on the issue of equity share without deciding whether issue of equity shares had any element of income capable of being chargeable to tax.

According to Vodafone, neither the TPO nor AO had examined whether any taxable income arose.

This preliminary issue needed to be decided first, according to Vodafone, before even going into its valuation.

The high court bench, without making observation on the merits of the case, said the DRP would need to be approached by Vodafone in two weeks.

The DRP would need to decide on the issue of jurisdiction under chapter X of the Income Tax Act without going into valuation, in two months time.

The HC said there was "no merit" in the submissions made by the revenue department that no hearing could be given on the issue of jurisdiction and the court observed that the proceedings under DRP were a "continuous process.

The IT department, represented by solicitor general Mohan Parasaran and Beni Chaterjee, had contended that all the issues could be raised on merit before the DRP first and the telco could always go and appeal before the tax authorities, as was permitted.

However, the HC said it was "the duty of revenue department" to present first a prima facie and probable case to avoid harassment.

The court said, it was natural for Vodafone to feel harassed if it was not given a hearing on the jurisdiction issue.

(Also see: Bombay HC directs Vodafone call centre to move income tax tribunal in transfer pricing case)