The Vodafone Group has challenged an Income tax Department’s transfer pricing order that sought to bring Rs 1,300 crore to tax for undervaluation in the shares issued by Vodafone India Services to a Mauritius-based group company.

A writ petition challenging the jurisdiction of the transfer pricing officer has been filed before the Bombay High Court a few days ago, it is learnt.

This transfer pricing order, issued in February, relates to financial year 2008-09 and is essentially a consequential one on account of the nearly Rs 8,000-crore pricing dispute in 2007-08.

If the February order survives the legal challenge, then it could lead to the Vodafone Group coughing up as much as Rs 1,300 crore in taxes, interest and penalty, say tax experts.

Already, the Bombay High Court has completed hearing on the writ petition filed by Vodafone as regards the 2007-08 transfer pricing dispute. This petition had also challenged the jurisdiction of the transfer pricing officer.

The latest Vodafone move comes close on the heels of Shell India approaching the Bombay High Court with a writ petition challenging the Rs 15,000-crore transfer pricing adjustment sought to be made by the Income tax Department for a share undervaluation matter.

A number of Indian units of multinational companies and several Indian corporates have come under the scanner of the I-T Department for undervaluation of share sales made by them to their group entities abroad.

In 2012-13 alone, as many as 27 cases involving undervaluation of shares sold by Indian companies to their associated enterprises had been detected and subjected to transfer pricing adjustments, it is learnt.

These 27 cases include five companies from the Essar Group, HSBC Securities and Capital Markets, Firestone International, Shell India Markets, Standard Chartered Securities, Bharti Airtel, Vodafone India Services and Sonata Software.

The main issue is whether share subscriptions — being capital receipts — could be covered under transfer pricing rules.

“The stand taken by the transfer pricing authorities in connection with the share valuation issue of Vodafone and Shell is not in line with current Indian transfer pricing regulations.

The High Court can admit a writ for stopping tax authorities going beyond their jurisdiction and grant relief to the taxpayers,” said Ajit Tolani, Partner, Economic Laws Practice.

Meanwhile, the Central Board of Direct Taxes has announced the arm’s length tolerance band for international transactions as well as specified domestic transactions for the financial year 2012-13.

For wholesale traders, the tolerance band is one per cent of the transaction price. It is three per cent of the transaction price in all other cases.

Reacting to this announcement, Karishma Phatarphekar, Partner and Transfer Pricing practice leader, Grant Thornton India, welcomed the move to prescribe three per cent tolerance band for most transactions.

She, however, felt that the one per cent range for wholesale traders will dampen sentiments for them.

A slightly broader range would have been useful to determine arm’s length price, she said. (The Hindu)