IT department withdraws long-running Vodafone tax dispute

In a significant development, the Income Tax Department on Monday withdrew its long-pending Rs 8,500-crore transfer pricing case against Vodafone India Services Pvt Ltd. The decision, which came as a surprise, effectively ends a dispute that has been ongoing for more than a decade.

The department’s counsel appeared before a Supreme Court bench headed by Chief Justice B.R. Gavai, seeking permission to withdraw the case. The court granted the request, bringing closure to one of India’s most prominent tax disputes involving a multinational telecom operator.

Case background

The origins of the case date back to the financial year 2008, when Vodafone India sold its call centre business, 3 Global Services, located in Ahmedabad, to Hutchison Whampoa Properties (India) as part of an internal restructuring exercise.

The Income Tax Department argued that the sale involved the transfer of call options and intangible rights to a related entity, which it classified as an international transaction under transfer pricing regulations. Based on this interpretation, tax authorities sought to increase Vodafone’s taxable income by Rs 8,500 crore, alleging that the transaction had not been conducted at arm’s length, as required under the law.

Legal proceedings

In 2014, the Income Tax Appellate Tribunal (ITAT) upheld the department’s stance, ruling that the transaction was indeed subject to transfer pricing scrutiny.

Vodafone, however, challenged this decision before the Bombay High Court, arguing that the transaction was purely domestic and involved no cross-border element. The company maintained that the Transfer Pricing Officer (TPO) had exceeded his authority, as the sale did not involve the transfer of any intangible assets or call options to a foreign entity.

In October 2015, the Bombay High Court ruled in favour of Vodafone, holding that transfer pricing provisions were not applicable to transactions carried out entirely within India. The court declared the tax demand invalid, providing substantial relief to the company.

Undeterred, the Income Tax Department appealed to the Supreme Court in 2016. The case was last listed for hearing in April 2017, but according to court records, there was little progress in the years that followed. On Monday, the department finally moved to withdraw its petition, formally ending the litigation.

Context and wider implications

The withdrawal comes just days after the Supreme Court provided significant relief to Vodafone Idea Ltd., a separate entity, in relation to its Adjusted Gross Revenue (AGR) dues. On 27 October, the court clarified that the Union Government could review and reassess Vodafone Idea’s total AGR liabilities for FY17, including interest and penalties, not only the additional AGR demand.

This clarification allows the financially distressed telecom operator to seek a reassessment of its dues, potentially easing its financial burden. The timing of the tax department’s withdrawal of the transfer pricing case has therefore drawn attention, given the broader context of the government’s efforts to resolve long-standing disputes with telecom companies.

The closure of the Rs 8,500-crore case underscores the government’s evolving approach towards tax certainty and the resolution of legacy disputes involving multinational corporations. Vodafone’s earlier experience with retrospective taxation had already sparked global debate over India’s investment climate.

By withdrawing this case, the government appears to be signalling a more pragmatic stance aimed at reducing litigation, improving investor confidence, and focusing on stable, forward-looking tax administration.