Retrospective tax laws trip up Vodafone again

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If the R10,000-crore tax on its $11.2-billion purchase of Hutch’s India operations wasn’t bad enough, Vodafone has got caught in another retrospective tax case. The company’s R3,434 crore transfer pricing addition case involving its subsidiary, Vodafone India Services Pvt Ltd (VISPL), is also based on a retrospective amendment, this time the one made to the FY12 Finance Act.

Another company to get caught up in the same Act is Shell India Markets and its adjustments to the income works out to R3,137 crore. Both cases pertain to FY10, and both orders were passed on January 29 this year.

The Vodafone case involves its issue of 5.6 lakh shares to Vodafone Tele-Services India Holding Limited, Mauritius in two tranches — one on July 16, 2009, at R7,110 and another on January 24, 2010, at R6,447 each. VISPL has argued these are capital transactions and do not attract Section 92(1) of the Income Tax Act — it is only if the transactions come under Section 92(1) that the next question: of arm’s length pricing — come into effect.

This is where the amendment to the Finance Act of 2012 comes in. As the amendment says, “the current definition of International Transaction leaves scope for its misinterpretation... it is therefore, proposed, to amend Section 92B of the Act... to clarify that the international transaction shall include a transaction of business restructuring … irrespective of the fact that it has bearing on the profits, income, losses or assets… This amendment shall take place retrospectively from April 1, 2002.”

With this retrospective amendment in place, the taxman has determined that instead of getting R392 crore, VISPL should have earned R2,999 crore more since each share was actually worth R60,445.

Add in the interest costs, and the transfer pricing order states that a total of Rs 3,434 crore needs to be added to VISPL’s income for FY10.

In Shell India’s case, there are two types of adjustments, one for the work done by the company in India and one for share transactions of the type Vodafone did. Shell India sold 4.78 crore shares to Shell Gas BV on December 24, 2009 at par value of R10 per share. Given the profits of the company, the valuation report put the share’s value at R2.79 each and Shell India sold them at R10 each. The taxman rejected this saying it did not capture the brand value of Shell or the future business projections – it has a licence for 2,000 petrol pumps and is making big investments on the promise of possible deregulation of the sector, making it the only MNC in India with a license to run gas stations.

Like Vodafone, Shell India too argued the taxman has no jurisdiction as issuing of shares does not add to Shell’s income and is therefore not an international transaction. Shell India has also argued that there is absolutely no difference in its shareholding pattern after the share issue and that the shares were issued primarily to infuse capital.

Once again, the Finance Act of 2012 comes to the rescue and the transfer pricing order makes the same point as in the case of Vodafone. And in the case of Shell, R851 crore have been added to its income by raising the value per share to R187.96 on the basis of this transaction. All told, R3,137 crore has been added as transfer pricing adjustment for FY10, which includes R1,903 crore interest on the short receipt of R15,200 crore associated with FY09 share transaction.

Tax News : Transfer pricing income adjustments decline 14% in 2013-14

We also bring to you latest news from Tax in India. Below is the article published in one of the News Tabloid in India.

After a 54% jump in transfer pricing (TP) adjustments to Rs70,000 crore last year, additions to the income of companies conducting international transactions has dropped by over 14% to Rs60,000 crore in FY14.

A financial ministry official told FE that data collated after the completion of the latest round of audit pertaining to assessment year 2010-11, shows that TP adjustments have fallen mainly because the orders this year have taken into account concerns raised by the MNCs after some high-pitched adjustments last year.

The official added that additions to the income of companies in those cases have been much less than last year. The heavy TP addition cases in FY13 included those of Shell, Vodafone, Microsoft and Maruti.

In case of Shell involving share transfers to the related entities, TP additions have been only about Rs3,500 crore in the current audit as compared to Rs15,000 crore in FY13 audit. For Vodafone, the adjustments for assessment year 2010-11 has been around Rs3,100 crore.

Vodafone and Shell were accused of undervaluing their shares in transactions to their respective parents overseas, and legitimate tax has to be paid on that. Both have disputed this view.
The official said in the cases which are under litigation, additions have been substantially less as compared to the previous years, and in some of the new ones, no adjustments have been made at all this year.

Some 3,600 cases were taken up for TP audit in FY14 and additions have been made in about half of them. Business recast has emerged as a new issue in the TP orders in the current round.
The TP office also questioned R&D investments in India by Microsoft and Maruti last year, and made significant adjustments to their income — Microsoft was charged with understating income during FY06 and FY09 by R5,135 crore and Maruti was disallowed FY09 expenses worth R448 crore.
The IT department, however, has taken a number of steps since then to improve the TP framework as these adjustments were termed as one of the factors spooking investor sentiments. “Special care has been taken to keep TP orders reasonable,” said the official.