Professional Documents
Culture Documents
Important Instructions
1. The subject will be evaluated on the basis of following 3 components
Total 100 30
B. Thematic Presentation
C. Case Studies
Case Study -1
Transfer pricing -Vodafone
Transfer pricing is referred to the setting of the price for goods and services sold between
related legal entities within an enterprise. This is to ensure fair pricing of the asset
transferred. For example, if a subsidiary company sells goods to a parent company, the
cost of those goods is the transfer price. The case dates back to financial year 2007-8 involving
the sale of Vodafone India Services Private Ltd., the call centre business of Vodafone, to
Hutchison, and the tax authorities demanded capital gain tax for this transaction. The Income
Tax department had demanded that Rs.8,500 crore be added to the company’s taxable
income. Vodafone has repeatedly clashed with the authorities over taxes since it bought
Hutchison’s mobile business in 2007. Vodafone acquired the telecom business of
Hutchison in India to enter the Indian market. And the British company is also fighting another
case with the tax authorities relating to this transaction. In this current transfer pricing case,
Vodafone argued in the High Court that the Income Tax Department had no jurisdiction
in this case because the transaction was not an international one and did not attract any tax.
The dispute on transfer pricing surfaced after the Income Tax Department issued a draft
transfer pricing order in December 2011 and added Rs. 8,500 crore to Vodafone’s taxable
income for the sale of the call centre business. In 2013, the Income Tax Department issued
a tax demand of Rs. 3,700 crore to Vodafone India. However, the IT tribunal stayed the
demand during the proceeding of the case and asked Vodafone to deposit Rs. 200 crore by
February 15, 2014. It complied with the order. However, Vodafone argued that the sale of
the call centre business was between two domestic companies and the transfer pricing
officer had no jurisdiction over the deal. On Thursday, Vodafone India did not issue any
elaborate statement. It said: “Vodafone welcomes today’s decision by the Bombay High
Court.” The tax authorities are likely to challenge the decision in the Supreme Court. In
October 2015, Vodafone won a transfer pricing case having an additional demand of
Rs.3,200 crore from the tax authorities in the Bombay High Court. “The High Court has
reversed the decision of the tax tribunal that the recasting of the framework agreement
between taxpayer and Indian business partners was to be regarded as a transfer of call
options by assessed to its Parent entity merely because the latter was a confirming party. The
tribunal, in so holding had rejected taxpayers contention that Supreme Court in its own case
had already settled the issue in its favor,” Arun Chhabra, Director, Grant Thornton
Advisory said while commenting on the case.
In a major relief to British telecom major Vodafone in the transfer pricing case, the Bombay
High Court on Thursday ruled in its favor, setting aside a tax demand of Rs. 3,700 crore
imposed on Vodafone India by the income tax authorities. This is likely to benefit
multinational companies such as IBM, Royal Dutch Shell and Nokia that face similar tax
demands. The division bench comprising SC Dharmadhikari and AK Menon said in an oral
order that relying upon the earlier Supreme Court judgment, the court is of the view that
there is no transfer of the 'call options' and hence the transaction is not falling within the
purview of transfer pricing.
Question:
The court decision came as Vodafone challenged the order of the Income Tax Appellate
Tribunal which held last year that it structured the deal with Hutchison Whampoa
Properties, a company based in India, to circumvent transfer pricing norms, though it was
an international transaction wherein there was no arm’s length dealing between the
related entities. Discuss whether the court decision will favor Vodafone Company’s reputation?
Case study -2
Started in 1965, ChemCo is a leading manufacturer of car batteries in the U.K. market. Since
then, it has been under the charge of Mr. Jones, the founder-owner of the firm. In 2000, the
company decided to go for a diversification by expanding the product line. The new product
was batteries for fork-lift trucks. At the same time, Mr. Marek was appointed the Senior Vice
President of marketing in the company. However, soon after its successful diversification into
fork-lift batteries, the sales in this segment began dropping steadily. Mr. Marek wanted to
introduce some radical changes in the advertising and branding of the new business but the
proposal was turned down by the old-fashioned Mr. Jones.
At this juncture in 2002, the firm is losing heavily in the fork-lift batteries business and its
market share in car batteries is also on a decline. Mr. Jones has asked Mr. Marek to show a
turnaround in the company within a year. What steps should Mr. Marek take to take the
company out of its troubles?
Some of the facts on the case are:
Situation Analysis:
Company
Established player in car batteries
Losing heavily in fork-lift truck batteries
Old fashioned owner resistance to change
Competition
Low priced competitors
Foreign competitors gaining market share
Customers
High quality product, but low end customers care more about price than quality
Problem
Mismanaged product diversification in a price sensitive market.
Question
What is the best alternative for the company to cope up with the existing problem?
Criteria for evaluation of alternatives are as follows:
Case Study -3
Stemar associates deals with sports items. Recently in 2017 they have set up a manufacturing
facility. The abstract of the capital budget and the actual cash flow in the first two years are
given below. PCA has estimated the subsequent two years cash flow. The estimate life of the
project is four years. Initial cash outlay is 134,000 Rs.
2 50,000 40,000
3 70,000 50,000
4 70,000 50,000
Questions
1. Calculate year wise NPV and year wise IRR for budgeted figures considering 10%
discounting rate.
2. calculate year wise NPV and year wise IRR for the first two years’ actual cash flow and next
2 years’ projected cash Flows.
3. Give your opinion on the basis of above calculation that whether the project is beneficial for
the company or not, if cost of capital is 9%?