Bombay High Court ruled in favor of Vodafone in transfer pricing dispute of Rs.3200 crore regarding under-priced valuation of shares. There are atleast 20 other companies that are facing the same disputes and the ruling of Bombay High Court in favor of Vodafone gives relaxation to these 20 companies to the some extent.
Vodafone India (Subsidiary) issued the right share at share premium to its UK based Parent Company ( Vodafone Group Plc) and method for the valuation of share was duly approved by RBI. However tax department disputed on valuation at which Vodafone India had issued shares to its UK based parent company, the tax department used a methodology called discounted tax flow to arrive at a higher value per share. Department has accused Vodafone India for violating transfer pricing regulations by claiming that the value of right share had been under-priced which is meant the Parent company ( Vodafone Group Plc) paid less to get a higher stake in Vodafone India and the same is liable to tax.
Now the question arises whether the issuance of shares gives rise to income under transfer pricing regulation?
Transfer price refers to actual price at which a transaction takes place between two related parties. According to Income Tax law, all international transaction between related parties need to be at arm length prices, that is, as if it was the transaction entered with an unrelated parties. This law is come into existence to ensure that companies not shift their profits into low or zero tax rate countries.
Further, Vodafone lawyers consistently maintaining its claim that issuance of shares is a capital account transaction and the difference in actual and arm length value of share is a capital receipt and the same should not be taxable.
Both tax department and DRP held that the income tax law does not prohibit charging a tax on capital receipt.However, High Court has made it clear that capital receipt is not an income, unless its attract a definition of capital gain as per income tax law.
So we wish that Government should not challenge the Bombay High Court ruling before Supreme Court because on doing so it will be reflect as a next step taken by Indian Government towards Tax Terrorism.