The authorities have said Vodafone India Services Private Ltd under-priced shares issued more than four years ago to a Mauritius-based unit of Vodafone Group Plc by nearly 13 billion rupees and were liable to pay tax on the differential.

Vodafone, which said in February it had received the so-called transfer-pricing order from the tax office on the share transaction, had challenged it at the Bombay High Court saying share subscriptions did not fall within the scope of transfer pricing rules in India or internationally.

Transfer pricing is the value at which companies trade products, services or assets between units. Indian rules require all cross-border transactions between group companies to be valued at arm's length -- or at the same value as if the transaction was with an un-related company.

The British mobile operator did not immediately comment after the court order on Friday.

The government has stepped up its tax demands against international companies to raise revenue as it struggles to cut its spending and avoid a credit rating downgrade.

In April the government said that 27 overseas and Indian companies underpaid taxes in the last fiscal year that ended in March, after they sold shares to their overseas units too cheaply.

Vodafone, the largest corporate investor in India, has repeatedly clashed with the Indian authorities over taxes since it bought Hutchison Whampoa's mobile business in the country in 2007 and was held liable for the capital gains tax which the authorities say is owed on the deal.

The transfer pricing dispute is separate from the more than USD 2 billion tax demand on that deal. The Bombay High Court on Friday asked the tax authorities' Dispute Resolution Panel to give its verdict within two months.


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