Shell, Vodafone: I-T dept likely to suggest SC appeal

Officials say decision, to be taken on merits, likely only after the finance minister's okay

The income tax (I-T) department appears keen on challenging the Bombay High Court verdict on the Vodafone and Shell transfer pricing cases in the Supreme Court, “purely on the merits” of the case.

The judges had struck down I-T department’s orders in both the cases, upholding the companies’ pleas. Officials told Business Standard the Central Board of Direct Taxes (CBDT) was likely to recommend a Supreme Court petition in both the cases, also to get more clarity.  

The procedure is that the assessing officer concerned will send a report to the chief commissioner of I-T in his circle, who will refer the matter to CBDT.  “The assessing officer will most likely suggest going for appeal. The board will take a final view after taking the opinion of the law ministry. When the law ministry had earlier given an opinion that such a transaction was taxable, how can it change its view now?” said an official, requesting anonymity.

Though there is no statutory requirement to take the finance minister’s approval before moving the supreme court in such cases, CBDT might do so, as these are high-profile cases involving not only big sums but the country’s reputation.

S P Singh, senior director at Deloitte, the professional services consultancy, hopes the government will decide otherwise. “The tax department might feel there are fundamental issues involved and they should go to the Supreme Court for clarity. But in view of the fact that the decision is based on sound legal and economic reasoning, it will be better not to file an appeal. This will provide tax clarity to investors and help invite foreign investment,” he said.

Government officials said the finance ministry might also consider amending the I-T Act in the next Budget, to address the issue. The amendments might be clarificatory in nature.

“This judgment is based on legal provisions prior to 2012 and the amendment made in 2012 covers capital account transactions such as issue of shares. As such, there is still ambiguity on reporting of issue of shares,” said Suresh Surana, founder of RSM Astute Consulting Group.

He said the judgment could be used to further the government’s commitment on reducing litigation, with a clarification that the issuance of shares to foreign associated enterprises shall not result in any transfer pricing adjustment.  Finance ministry officials said the decision would be taken on the case’s merits and the department would not hold back from filing the appeal merely because it might get bad publicity.

Earlier this month, CBDT had directed senior officers to ensure appeals were filed only on the merits of a case, not only on the tax effect involved. Though the volume involved in these cases is huge (an addition of about Rs 18,000 crore to taxable income of Shell and Rs 4,800 crore for Vodafone), the department’s argument is that only one high court has given this ruling and it would be better to get clarity from the apex court.

On Tuesday, the Bombay High Court had struck down the tax department’s demand on Shell India, about a month after it decided in favour of Vodafone in a similar case, involving transfer of shares between associated companies. It said cross-border share transactions can’t lead to income. The government contention was the companies undervalued the shares in question and got deemed capital gains.

Though the government had argued before the high court the facts of the Shell case were different from Vodafone’s, officials said if it was decided to appeal to the SC, it would do so for both cases, as these were similar.

“It’s too early to say about an appeal in the case of Shell, as we have not seen the order. The Vodafone order is under examination,” said a senior finance ministry official.  Officials said in both the cases, certain technical issues were not properly considered by the high court. A similar argument was given by the department in 2012, when it had amended the law with retrospective effect to tax indirect transfers by Vodafone, after the SC had decided in favour of the company. “We had a weak case and it could not be argued properly,” felt another tax official.

The government has 90 days to file an appeal before the apex court. The internal government processes usually take about two months. The Vodafone verdict had come on October 10.

TAX DISPUTE

• In Vodafone and Shell tax cases, the judges had struck down I-T department’s orders, upholding the companies’ pleas
   
• Officials say in both the cases, certain technical issues were not properly considered by the high court
   
• Officials say the finance ministry might also consider amending the I-T Act in the next Budget, to address the issue
   
• The volume involved in these cases stands at about Rs 18,000 crore to taxable income of Shell and Rs 4,800 crore for Vodafone