IT Dept.’s action was a “blatant attempt to tax hypothetical or non-existent income.”

In a relief to Vodafone, the Bombay High Court, on Friday, ruled in favour of the Indian subsidiary of Vodafone Group PLC in the transfer pricing case.

The division bench of the Bombay High Court, headed by Chief Justice Mohit Shah, held that there was no question of imposing transfer pricing regulation, and that Vodafone India Services Pvt. Ltd. (VISPL) was not liable to pay the additional tax amount of over Rs.3,000 crore.

VISPL had challenged the Income Tax Department, and had argued that the share premium received on the issue of shares was never taxable.

Senior counsel Harish Salve had argued that the Income Tax Department’s action was a “blatant attempt to tax hypothetical or non-existent income.”

“The case relates to an imposition of tax by the tax office on VISPL, which issued shares to its foreign holding company. The foreign holding company was issued shares by VISPL on a price which was determined by a formula as per RBI guidelines. The shares were issued on a premium. The tax office said that they would disregard the RBI guidelines. According to them, the shares were undervalued and a higher premium should have been charged. The alleged shortfall in premium, according to tax office, was covered by transfer pricing and the Indian company, that is, VISPL, was liable to pay tax on the shortfall of premium,” advocate Anuradha Dutt, representing VISPL said.

VISPL had argued that the transfer pricing regulations were not applicable as there was no income from the transaction. Many other companies apart from Vodafone have also moved the court against similar transfer pricing orders and show-cause notices issued by the Income Tax Department.