British telecom major Vodafone is facing taxing times with the Indian revenue authorities. It is fighting second case over transfer pricing in the Bombay High Court. Adding in the latest case, the total claims that have been made on the company is over 15,500 crore.
The Vodafone's dispute over tax payable for its purchase of Hutch's 67% stake in 2007, is at Rs 11,200 crore. It also has a pending transfer pricing matter claims as much as Rs 4,200 crore, for the assessment year 2008-09.
The latest transfer pricing matter, has a claim of Rs 370 crore for the assessment year of 2009-10. In both these matters, the department believes that shares transferred by the Pune business unit to its parent company, was not done at arms-length pricing.
A petition filed by Vodafone on the first transfer pricing case, was dismissed by the Bombay High Court, last month, asking them to go back to the tribunal. The second case is being heard in Bombay High Court. The company did not respond to queries sent on this matter.
Legal experts say that the additions can keep happening every year. "Issues like share transfers might not happen every year. But, department considers the income as a loan by the parent company to the subsidiary and interest on that could be accrued every year," said Ajit Tolani, partner at Economic Laws Practice.
This is an additional blow for Vodafone as its long-pending case over Hutchinson's stake purchase was at a close shot to being resolved, but hasn't. The Supreme Court had given Vodafone a favourable verdict in the case, government had re-worked its laws to tax the company, in retrospect.
"It is more of an exception than a general rule," says Tolani He also believes that most transfer pricing such issues are solved only in the Supreme Court and these matters could take four to five years to settle. "Government should clarify transfer pricing issues. Indian law has only a few sections and ten pages on the issue, while in the US it is explained in 300 pages," he said.
The Indian subsidiary's revenues grew exponentially ever since its annual revenues were at Euro 4,324 million (Rs 36,321crore) by the end of March 2013, which grew by 10.7%. Operationally, the company has been performing well as its data revenues grew 75% last year.
The telecom sector's phase of hyper-competitiveness has also ended and the country's top telecom player, Bharti Airtel recently closed a deal to sell 5% of its stake to Qatar Foundation Endowment for $1.2 billion (Rs 6,796 crore. Yet another player, Idea Cellular has been gearing up for a qualified institutional placement as well, to raise equity.
However, Vodafone's plans to raise money by going for an initial public offer (IPO) has been delayed many times, over meany reasons including unfavourable markets, apart from tax troubles. The parent company invested into the Indian company at 16 times its EBIDTA (earnings before interest depreciation tax and amortisation) from Hutch in 2007. In spite of these setbacks, experts believe that such issues would not dent the fortunes for a global giant like Vodafone.
"These are not small companies. Giants like Vodafone enter a country with strategy that lasts for decades. They have large balance sheets and do not expect return on investments very quickly," said Jagannadham Thunuguntla, chief strategist of SMC Global.
Vodafone's tax disputes
Hutch deal tax: 11,200 cr
Transfer pricing case 1: 4,200 cr
Transfer pricing case 2: 370 cr