(MENAFN- Live Mint) In a surprise move, the Income Tax Department withdrew its long-pending ₹8,500-crore transfer pricing case against Vodafone India Services Pvt. Ltd. on Monday. The commissioner of income tax filed a plea to drop the case before a bench led by Chief Justice B.R. Gavai, which permitted the department to do so.

According to the Supreme Court's website, the matter had been pending since 2016 and was last listed for hearing in April 2017, but had seen no progress since then.

The withdrawal comes days after the Supreme Court ordered union government to extend relief to Vodafone Idea Ltd on issues relating to its adjusted gross revenue (AGR) dues. On Monday the Supreme Court clarified its 27 October order, saying the government could reassess and reconsider Vodafone Idea's total adjusted gross revenue (AGR) dues as of FY17, including interest and penalties, and not just the additional AGR demand, delivering significant relief to the cash-strapped telecom company.

Mint's queries to Vodafone Idea over email did not elicit an immediate response.

2008 case

The tax case dates back to FY08, and arose from the sale of Vodafone India's Ahmedabad-based call centre business, formerly known as 3 Global Services Pvt. Ltd., to Hutchison Whampoa Properties (India) Ltd. as part of an internal restructuring.

Following the transaction, the Income Tax Department issued an order under Sections 143(3) and 144C(13) of the Income Tax Act, 1961, in October 2012, alleging that Vodafone had engaged in an undisclosed international transaction.

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The department claimed the deal involved the transfer of call options and intangible rights of commercial value to a related entity, qualifying it as an international transaction under Indian transfer pricing rules.

On this basis, the department sought to add ₹8,500 crore to Vodafone's taxable income, alleging that the sale had not been conducted at an arm's-length price-a principle that ensures that transactions between related parties reflect fair market value as if they were conducted between independent entities.

The department's position was later upheld by the Income Tax Appellate Tribunal (ITAT), which ruled in 2014 that the transaction had been structured in a way that bypassed India's transfer pricing framework. The tribunal held that the tax authorities had jurisdiction to examine the deal, and that Vodafone India had failed to justify the pricing of the transfer of assets and options.

The ITAT's ruling prompted Vodafone to approach the Bombay High Court, arguing that the transaction was entirely domestic in nature, involving two Indian entities, and therefore did not fall within the purview of international transfer pricing regulations.

Also Read | AGR dispute deepens as Vodafone Idea challenges dues

Vodafone maintained that no transfer of call options or intangible assets occurred during the sale, and that the transfer pricing officer (TPO) had overstepped his jurisdiction.

Bombay High Court ruling

In October 2015 the Bombay High Court sided with Vodafone, setting aside the ITAT's order and the consequential tax demand. The court observed that the sale of the call centre business was a domestic transaction between Indian entities, with no cross-border element. Therefore, it held, the authorities had no jurisdiction to treat it as an international transaction under the transfer pricing framework.

The bench concluded that the income tax department had overreached by invoking transfer pricing provisions in the absence of a cross-border component. Accordingly, the ₹8,500 crore tax demand was quashed.

In 2016 the department challenged the high court's decision before the Supreme Court, where the matter remained dormant for years before it was withdrawn on Monday.

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