The Bombay High Court on Friday ruled in favour of Vodafone Group Plc in a long-run dispute with the Income tax department for allegedly undervaluing the shares of Indian arm Vodafone in a transfer pricing dispute.
The income tax department had sent Vodafone a Rs3,200-crore tax bill for allegedly undervaluing the shares Vodafone issued to its parent company, arguing that the difference in valuation (the difference between market price and the transfer price) was in fact a disguised loan subject to transfer pricing provisions.
Vodafone argued that share premium is a capital receipt and not income and hence not taxable.
Vodafone had appealed against the income tax department’s decision to add about Rs3,200 crore ($523 million) to its taxable income for the financial year 2009-10.
Obviously, Vodafone, like several other foreign companies, has effectively used the loophole in tax laws even as the tax authorities continue to make endless claims of tax avoidance and tax evasion by large companies.
In the three-minute judgment delivered today, the court said that there can be no tax without an income. However, the verdict is a boost for the British telecoms group whose tax battles have been seen as emblematic of the troubles facing foreign investors in India.
Vodafone, the biggest foreign corporate investor in India, has been caught in a string of tax disputes since it entered the country seven years ago, hoping to tap the world’s second-biggest mobile phone market by customer numbers.
incidentally, Vodafone also faced similar tax avoidance case in the UK as well with tax demands of up to £6 billion. It was alleged that Vodafone made a lot of money in Germany, selling things from German shops to Germans. This profit was then parked in a Luxembourg company, Germany, having already paid tax in that country.
Vodafone, remaining a UK company, the question was should these profits made in Germany be taxed in the UK while they still remained in Luxembourg?