Bombay high court chief justice Mohit Shah and Justice MS Sanklecha ruled in favour Vodafone India Services in its Rs 3,200 crore transfer pricing tax case, deciding that there was no taxable income on share premium received on the issue of shares to their parent companies, reported Mint and others.

Senior counsel Harish Salve acted for Vodafone, arguing that “share premium received on issue of shares is never taxable” and that the tax authority’s action was a “blatant attempt to tax hypothetical or non-existent income”.

Vodafone was represented by litigation firm Duttmenon Dunmorrsett and partners Anuradha Dutt and Fereshte Sethna, who also advised Vodafone on its massive 2012 dispute with the tax office.

Over 20 companies, such as Bharati Telecom, Essar Group companies, HSBC Securities, Patel Engineering, Havells India, Shell India Markets and Leighton India Contractors, are facing similar disputes with the income tax department of transfer pricing. Shell is expecting an order in its case on Monday.

Vodafone Bombay HC transfer tax judgment

IANS reported:

The case pertains to Vodafone's outsourcing arm in Pune issuing shares to its parent.

The IT Department had demanded the amount from Vodafone's outsourcing unit, with taxes plus interest, which the company had challenged. The authorities said the funds were infused by the parent company into its Indian arm at a discounted share premium.

Accordingly, the authorities said, this transaction had resulted in Vodafone Plc paying a much lesser amount to get more shares in its Indian arm, which they said was subject to taxes under what is called transfer pricing.

"We feel that there is no taxable income on the share premium received on the issue of the shares," a division bench of Chief Justice Mohit Shah and Justice M.S. Sanklecha ruled.

"Vodafone has maintained consistently throughout the legal proceedings that this transaction was not taxable. We welcome the decision today (Friday) in the Bombay High Court," the company said in a statement.

The verdict could prove to be a major setback to the Income Tax Department (ITD), which is expected to challenge the high court ruling in the Supreme Court. On the flip side, it spells hope for at least 20 other companies involved in similar tax disputes.

"Any share premium that is received on issue of shares is never taxable," said Harish Salve, senior counsel for Vodafone, adding that such a demand was an untenable attempt by Indian authorities to tax hypothetical, non-existent income.

Vodafone is involved in another tax dispute with the Indian authorities. This pertains to Vodafone's $11.2-billion deal with Hong Kong-based Hutchison in 2007, on which the government has slapped a capital gains tax with retrospective effect.

The amount claimed is around Rs.11,000 crore ($1.8 billion). This matter is sub-judice.

In fact, the Supreme Court in 2012 had ruled in favour of Vodafone, holding that such a deal was not taxable in India. But to counter this, the government amended the law with retrospective effect to bring such transactions under the capital gains tax net.

This has been a major sour point with global investors.

Both Finance Minister Arun Jaitley and Commerce Minister Nirmala Sitharaman have sought to allay the fears of the global investing community on this saying the government will not raise any fresh tax claims on them with retrospective effect.