India’s Bombay High Court on October 10 ruled in favor of Vodafone in a transfer pricing dispute, potentially resolving about two dozen other Indian tax disputes involving whether the transfer or issuance of undervalued shares by an Indian company to an overseas related party should trigger a transfer pricing assessment.
The dispute involves a 2010 issuance of shares by Vodafone India Services to a related company. India’s tax department claimed the transfer was undervalued and, since the transaction was between related parties, India’s transfer pricing rules applied requiring the transaction to be priced at arm’s length. The tax department included the shortfall plus an interest charge in the Indian subsidiary’s income, assessing additional tax of Rs 3,200 crore (USD 523 million). India’s dispute resolution panel agreed with the tax department.
In a major victory for Vodafone and similarly situated MNEs, the High Court concluded that the transaction did not give rise to taxable income.
Former Finance Minister Palaniappan Chidambaram, in April 2013, said Vodafone was one of 27 Indian subsidiaries that received tax assessments because of the transfer or issuance of undervalued shares to related companies. Included were local units of Essar, Shell, HSBC Securities, Standard Chartered Securities, Havells, Patel Engineering, and Bharti Airtel. Shell’s case alone involves an alleged undervaluation of 15,220 crore (USD 2.7 billion).
It is unclear whether India’s tax department will appeal the decision to the Supreme Court. The written decision is expected to be released shortly.
Update: the Bombay High Court has released the Vodafone decision, see Vodafone
