British telecom giant Vodafone had the transfer pricing tax dispute case against Indian Income Tax authorities. However, Bombay High Court ruled in its favour.

What is the case?

Income tax authorities had imposed Rs. 3,700 crore transfer pricing tax on Vodafone India over the capital gains made by the company after selling its call centre business to its Mauritius based subsidiary in 2008.

 Vodafone had argued that the IT Department has no jurisdiction in this case because the transaction was between the company and its subsidiary. It also mentioned that the transaction was not an international one so it does not attract any tax.

 IT Department had claimed that Vodafone’s Indian arm had deliberately sold its shares at a lower price (undervalued). These shares were sold to third party at market price making huge capital gains from the deal.

 What is Transfer pricing?

 Transfer pricing is referred to the fixing of the price for goods and services sold between related legal subsidiaries (entities) within an enterprise.

This is to ensure fair pricing of the asset transferred without any manipulation to reduce tax liability.

For example, if a subsidiary company sells goods to a parent company, then the cost of those sold goods is deemed as transfer price.

General Anti- Avoidance Rules (GAAR)

GAAR are imposed to tax transfer pricing transactions with retrospective effect. However, implementation of GAAR has been postponed because retrospective taxation generates negative sentiment among the investors.