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

No government has the right to harass the assessee, says court

The high court here has asked British telecom major Vodafone to return to the dispute resolution panel (DRP) to settle a transfer pricing issue. Authorities have claimed Rs 370 crore as tax for assessment year 2009-10.

In a judgment delivered on Friday, the court said the matter seemed one to be decided 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, Vodafone can approach the court again if the DRP order is patently wrong.

The court said it wasn't going into the merits of the case, adding it didn't see prima facie evidence in the matter. It said Vodafone felt harassed as it was not given an opportunity by income tax authorities. "No government has the right to harass the assessee, but has the right to collect taxes," the verdict said.

Vodafone did not respond to queries on the matter.

The issue pertains to a share issuance by the unit to a group company in Mauritius for Rs 246 crore, at a fair market value of Rs 8,519 a share. Tax authorities feel this 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 came under the tax scanner twice. Earlier, a petition by Vodafone was turned down by the Bombay High Court. 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 Rs 2,805 crore. After adding interest, the total payout stood at Rs 4,200 crore.

Vodafone had claimed the transaction was a share subscription, not a share sale, and it wasn't covered under transfer pricing rules. It said the assessment by tax authorities had no legal basis.

The latest transfer pricing case, for which the order was delivered, was on similar lines, though for a different assessment year.

"Transfer pricing provisions in a cross-border transaction will not apply, unless there is income arising in such transaction between two related enterprises, at least one of whom is a non-resident," said Sanjay Sanghvi, Partner, Khaitan & Co.

Vodafone is also fighting a larger battle with the tax department over the purchase of 67 per cent of Hutchinson's stake in Hutch Essar for $11.2 billion in 2007. The tax liability for the case, being fought on the merit of jurisdiction of Indian tax authorities to claim tax on a transaction between two foreign parties, stands at Rs 11,200 crore.