India's Tax Department Raises £367m Demand from Vodafone in Transfer-Pricing Case

India's income-tax department has raised a fresh demand from UK telecom major Vodafone over a lawsuit relating to the sale of shares by a local subsidiary.

The tax department, which has been in a major dispute with the company over the transfer pricing case, has demanded 37bn Indian rupees ($599m, £367m, €435m) in unpaid dues and interest for assessment year 2008-2009, excluding penalty.

Vodafone filed a lawsuit in Bombay High Court on the matter in September, but the court dismissed the plea and sent it back to the tax authority's dispute resolution panel for a final assessment. The department made its final assessment on 18 December.

"Vodafone disagrees with the panel decision relating to the transfer pricing order which Vodafone received in December 2011. Vodafone maintains there is no tax payable on this transaction and the company will file an appeal before the tax appeal tribunal as soon as possible," the company said in a statement.

Vodafone has 30 days to pay up or appeal the demand, a tax official told India's Live Mint.

The latest tax demand is in addition to the 4bn rupee-tax violation notice for assessment year 2009-2010 received by the company in October.

The company had been in dispute with the tax department over a 112bn rupee transfer pricing case related to its takeover of Hutchinson Essar's Indian assets in 2007.

Transfer Pricing Case

Transfer price is value at which divisions of a company transact with each other. In principle, a transfer price should match what the seller would charge an independent, arms-length customer.

In the case under review, the UK company's local unit, Vodafone India Services Pvt. Ltd, sold shares to a Mauritius-based group company at 8,519 rupees per share.

The tax department later determined the value of the shares at 53,775 rupees per share, and sought to tax the difference as part of Vodafone India's income.

Tax deductible payments, which can involve interest on loans, share sales, dividends and royalties, made between subsidiaries controlled by multi-national companies are a standard tax dodge.

The latest tax demand from Vodafone is likely to impact foreign investors' sentiment about India, which has been labelled as 'not investor-friendly' by many analysts.

Vodafone maintained its stance that it continues to have constructive discussions with the Indian government regarding options for conciliation. The company has been one of India's largest investors over the last five years. It has spent more than £12.8bn in building its business in the country since 2007.

It has been claiming it is one of the country's largest taxpayers, having given more than £1.7bn in 2012/2013 in direct and indirect contributions to Indian public finances.

In the face of rapacious accounting practices, some so-called source countries around the world, such as India, are altering their domestic tax laws to get some jurisdiction back.