British telecom major Vodafone might be heading for another battle with the tax authorities. It claims a tax order issued last week, pertaining to share subscription to a company abroad, is not covered by the law.
The I-T department had sent an order alleging Vodafone India Services, an outsourcing unit in Pune, issued shares to a Mauritius-based group company in 2007-08 at lower prices. The reported amount is Rs 1,300 crore.
This is in relation to a battle where the unit is already fighting the taxman over a transfer pricing issue. Vodafone has challenged this in a dispute resolution panel.
“As this latest order relates to a share subscription, and share subscriptions are not covered by the transfer pricing rules either in India or internationally, we will be challenging the order as it has no basis in law,” said a Vodafone company spokesperson, in response to a questionnaire.
Tax experts too agree that share subscriptions are not covered by transfer pricing rules. “Transfer pricing rules say that when one Indian company signs an agreement with a foreign company, it should be done at arms length and open market pricing. But share subscriptions are not covered by transfer pricing, only goods,” said H P Ranina, senior laywer and tax expert.
Pranay Bhatia, partner at Economic Laws Practice, also says that share subscriptions are different from share sales. “Share subscriptions by non-resident parties, unlike share sales, are not income- generating as they generate capital with which business is done. So, transfer pricing rules do not apply,” he said.
Apart from this issue, Vodafone Plc is also working on resolving a Rs 14,200 crore possible tax liability issue with the Indian government. The company already got a favourble judgement from the Supreme Court. But, change in possible retrospective laws resulted in yet another claim from the government.
A similar claim by the Income tax department on yet another British company, Shell India, is also being challenged. The tax authorities claimed that Shell India's share sale to its parent was undervalued by the company. Shell claimed that this is an incorrect interpretation of the tax rules and bad in law, as income tax cannot be levied on capital receipt.