Bombay HC rules in favour of Vodafone in transfer pricing case

The Bombay High Court today ruled in favour of telecom major Vodafone, as it pronounced that the telecom major need not pay tax in a transfer pricing case.

“The court today said that without income there will be no tax, which is very logical,” said a Vodafone official who refused to be quoted.

The order went against the two-year-old tax demand from the Income Tax Authorities, who were hoping to collect as much as Rs 3,200 crore in tax from Vodafone’s outsourcing unit in Pune. The amount included tax as well as interest for the IT demand for the year 2008-09.

In the three-minute judgment delivered today, the court said that there can be no tax without an income.

The IT Department had asked the second largest telecom operator in the country to pay tax for a share transfer that was done by the subsidiary to the parent company. The IT Department slapped tax on the value of the shares that were issued. The IT Department claimed that related party transactions should be done at arm's length pricing and hence comes under the accounting practice of transfer pricing.

This however is not the only transfer pricing case that Vodafone is fighting. It has yet another tax demand from the IT Department, which accounts to as much as Rs 4,200 crore for the financial year 2010-11. It is also mired in a much larger tax controversy for the purchase of 67% stake in Hutchinson Essar in 2007. The claim for this is as large as Rs 11,200 crore.

Vodafone had earlier responded to the transfer pricing claim saying that the transaction is a share subscription and not a share sale. The British telecom also said that it is not covered under tax laws both in India and abroad.

The ruling might set a precedent for 25 other companies facing similar tax demands.