Judgement Call: Bombay HC Rules In Favour of Vodafone

Judgement Call: Bombay HC Rules In Favour of Vodafone

The Bombay HC has ruled in favour of Vodafone India Services/VISPL is going to have massive repercussions for nearly 26 other firms including Shell India, HSBC Securities and as many as 5 Essar Group companies. The ruling is going to have a positive impact for companies who are suffering from similar transfer pricing disputes with the tax authorities regarding the shares sold by them to the international parent companies.

The court has ruled on Friday, 10th October that transferring the shares have not led to generation of any income so the question of obtaining tax from this transaction was not relevant in the first place. Some of the cases have also been “listed for direction” by the HC in the period after the Diwali festival.

This 53 page order has declared that “It is well settled position in law that a charge to tax must be found specifically mentioned in the Act. In the absence of there being a charging Section in Chapter X of the Income Tax Act, it is not possible to read a charging provision into Chapter X of the Act… In the present facts, issue of shares at a premium by the Petitioner to its non-resident holding company does not give rise to any income from an admitted International Transaction.”

“Vodafone has maintained consistently … that this transaction was not taxable. We welcome the decision…,” a Vodafone Plc statement released to the media said. The telecom company had earlier lost the case in the Dispute Resolution Panel of the tax department. It is unclear at this juncture if the government will place an appeal with the SC regarding the case. Analysts have been quoted by the media as discussing how “the judgement lent clarity to the vexed question of applicability of the transfer pricing law to share issuance”.

With specific reference to the Vodafone case, tax authorities had added a sum of INR 3,200 crore to the income of the company. They had also held that the shares sold to the subsidiary of this company in Mauritius were undervalued. Vodafone would have had to pay tax to the tune of 1,000 crore had the tax authorities won. Though Vodafone received around INR 246.38 crore for shares in FY10, the shares were valued at Rs. 53,775 each, according to media reports.

Vodafone has issued shares at a premium of INR 8509 per share. As the original tax demand was based on retrospective amendment to the law in 2012, the court dud not rule on the validity of the legislation as this had not been challenged by the company. Following amendment of Section 92(1) of the IT act, share sales were said by the tax authorities as having come under the ambit. The Bombay HC ruled that even following the amendment of the section, premiums earned by the firms on share transfers are not income.

This judgement has set a precedence for the upcoming cases, and the remaining companies can now feel more confident about the future of their legal dispute with the tax authorities.