I-T department can't rewrite our balance sheets, Vodafone tells high court

Fights yet another transfer pricing battle in Bombay High Court

At the high court here on Thursday, British telecom major Vodafone Plc questioned the income tax (I-T) department's move to claim tax over shares issued by its Pune unit to the parent company.

This fresh case pertains to the tax assessment done by the I-T department for the year 2009-10. This comes after the HC here had recently turned down a petition filed by the company against the tax authorities over transfer pricing for the year 2007-08. The department wanted the company to add another Rs 8,500 crore to its income, taking the tax claim to Rs 4,200 crore, including interest and penalty.

The department had slapped yet another notice over transfer pricing, as it believes the valuation of the shares issued was suppressed. The tax authorities claim Rs 1,300 of income was suppressed by Vodafone.  

The parent company invested Rs 246 crore and bought 289,000 shares. The IT department values each of these shares at Rs 8,509, while the transfer pricing officer valued it around Rs 80,000. The department claims the difference in valuation is to be treated as a loan given to the company, and tax could be claimed on that. Senior corporate lawyer Harish Salve, who represented Vodafone, contends this move is against the law.

"The claim is departing from the real income and is being valued on notional income which is being fantasised," said Salve. He also said premium which is not received cannot be taxable.

The case was heard by the chief justice on Thursday and will heard on Friday, too. The parent company is yet to respond to a query on the issue. However, Salve said the IT department has no right to rewrite the balance sheet of a company.

"After they add this loan amount, they (I-T department) might say that the net worth is higher by Rs 2,000 crore," he said.

The current appeal by Vodafone is combined with a similar transfer pricing-based tax demand raised by the tax department on British oil company Shell. Friday’s arguments will include those on Shell.

Salve said companies are unaware of how they could be taxed in India, leading to such disputes. "Nobody knows what the tax law is in India. If they knew, they would have planned it," he said.