The Bombay High Court has ruled in favour of Vodafone over its INR30 billion ($490 million) tax dispute with the Indian government.
The Indian tax office hit Vodafone with the order after claiming that Vodafone India Services had undervalued its shares when transferring the rights to its parent firm. The UK-headquartered operator has maintained that it owed no tax on the transaction.
Vodafone is not the only firm to have fallen foul of accusations from the Indian tax authorities concerning transfer pricing (the valuation of a company’s assets when traded between different geographical units), with Nokia and IBM reportedly implicated in the same practice.
The ruling will be welcomed by overseas investors as it may provide a foundation of certainty in the constantly shifting landscape of India’s tax laws and regulations. But despite this potentially positive impact, Vodafone cannot breathe easy just yet – it still faces an ongoing battle related to its acquisition of Hutch-Essar in 2007.
Vodafone entered the Indian market by acquiring a 67% stake in Hutchison Whampoa’s Indian business for $11 billion, and has been dogged by government tax demands for the majority of this period. It acquired the remaining 33% stake in 2011 for $5.5 billion.
The Indian tax office maintains that the transaction is taxable as the unit in question belonged to an Indian-based firm. This claim was overturned by the country’s Supreme Court in 2012, which noted that the tax authorities had “no jurisdiction” to charge tax on a transaction that took place between two firms incorporated overseas. However, this prompted an amendment of the income tax act.
Relations between Vodafone and the Indian government have thawed somewhat with the advent of new Prime Minister Narendra Modi, although the two parties have yet to agree on a third arbitrator for their tax dispute.