A couple of days after Prime Minister Narendra Modi assured investors of removing uncertainty in tax policies, the government on Wednesday decided not to appeal in the transfer pricing case it lost to Vodafone in the Bombay High Court. The case relates to a dispute over a tax liability of Rs 3,200 crore arising out of differences in share valuation by the tax authorities and the company. The revenue department had earlier insisted on filing an appeal.
“The Union Cabinet has decided to accept the order of the High Court of Bombay in the case of Vodafone India. This is a major correction of a tax matter which has adversely affected investor sentiment,” an official statement issued after the Cabinet meeting said.
The decision will have a bearing on similar cases as the government has decided not to appeal on such cases in higher courts.
The statement said the Cabinet had decided “to accept orders of courts, Income Tax Appellate Tribunal and Dispute Resolution Panel (DRP) in cases of other taxpayers where similar transfer pricing (TP) adjustments have been made and the courts, ITAT or DRP have decided in favour of the taxpayer”.
The Bombay High Court had also ruled in favour of the Indian arm of oil and gas company Royal Dutch Shell in November 2014 in a transfer pricing dispute with the tax department in a case related to a share sale to its foreign parent in 2009.
The move has come close on the heels of the tax authorities sealing an agreement with the US to resolve transfer pricing issues related to mark-ups.
“Investor confidence was shaken in the past because of a fluctuating tax policy wherein views of investors and government were at loggerheads.The Modi government wants to convey a clear message to investors the world over that this is a government where decisions would be fair and transparent,” Telecom Minister Ravi Shankar Prasad said at a press conference after the Cabinet meeting.
Prasad said Finance Minister Arun Jaitley had held discussions with the Central Board of Direct Taxes, Attorney General Mukul Rohatgi and Solicitor General Ranjit Kumar, and it was found that the Bombay High Court opinion was right. “This fruitless litigation was avoidable in the past,” he added.
Keeping everything in view, he said he consciously advised the government that the high court ruling should not be appealed against.
Eminent lawyer Harish Salve said, “The income-tax department was being nothing short of adventurous. (It was) trying to impose its tax. One really wonders whether they even understand the basics of law when they come up with these kinds of demands.”
Vodafone welcomed the Cabinet's decision, saying stability and predictability in tax matters were important for the company and other long-term investors.
A Vodafone group spokesperson said, “We welcome the Indian government’s decision not to appeal the Bombay High Court ruling.”
The Cabinet move may remove uncertainty for foreign investors who have adopted a wait and watch policy before infusing further equity into Indian operations.
“The move will not only help the existing pending cases, but also help the companies waiting to infuse capital in the Indian subsidiary,” said Neeru Ahuja, tax partner with Deloitte India.
The high court in its October 10, 2014 order had given relief to Vodafone by ruling that it was not liable to pay the income tax demand. The court had said, “In our opinion there is no taxable income on share premium received on the issue of shares.”
The tax department had asked the company to pay additional income tax, alleging that it had undervalued its shares in subsidiary Vodafone India Services while transferring them to the parent company in Britain.
The transaction relates to the assessment year 2009-10. Transfer pricing relates to transaction prices between separate entities of multi-national companies.
The issue was that Vodafone India, a wholly owned subsidiary of Mauritian entity Vodafone Tele-Services (India) Holdings (Vodafone Mauritius), issued 289,224 equity shares of face value of Rs 10 each at a premium of Rs 8,591 per share in August 2008 to Vodafone Mauritius.
The tax authorities sought to tax this transaction by Vodafone India by applying transfer pricing regulations.
The primary ground was that Vodafone Mauritius subscribed to shares of Vodafone India at prices lower than the market price or fair price. Besides, the Indian tax authorities maintained that this difference in valuation was in fact a disguised loan and thus subject to transfer pricing regulations.
The tax authorities had issued a showcause notice to Vodafone India on January 17, 2014 and later passed an order asking it to pay an additional Rs 3,200-crore tax.
Vodafone India, on the other hand, contended that share premium is a capital receipt and not income — and hence not taxable.
On January 27, 2014, Vodafone had moved the high court challenging the tax department order and contended that its transaction on transfer of shares was not taxable under Indian tax laws.
Arun Chhabra, director, Grant Thornton Advisory, said, “The Cabinet decision sends out a very positive message that the government is serious about avoiding unnecessary litigation. This also lends credence to the government’s averments regarding a non-adversarial tax administration.”