Signal to market: Govt won’t appeal pro-Vodafone tax order from HC

Arun Jaitley

Signalling a stable and investment-friendly regime to investors, the government on Wednesday decided not to appeal against the Bombay High Court order granting tax relief to Vodafone.

“The government will not appeal in Supreme Court the October 10 order of the Bombay High Court in the Vodafone case… We want to convey a clear and positive message to investors globally that we will be fair, transparent and within the four corners of law,” Telecom Minister Ravi Shankar Prasad told reporters after a Cabinet meeting.

According to an official statement, the Cabinet also decided to accept all other “orders of courts, ITAT (Income Tax Appellate Tribunal), DRP (Dispute Resolution Panel) in cases of other taxpayers where similar transfer pricing adjustments have been made and the courts, ITAT, DRP have decided or decide in favour of the taxpayer”.

The government’s decision, taken with a view to avoid “fruitless litigation”, will provide a breather to several multinationals which are engaged in similar tax disputes with the Income Tax department. Besides Vodafone, these companies include Shell, IBM and Nokia.

The decision was taken following the opinion of the Attorney General, CBDT chairperson and the Chief Commissioner (international taxation).

It comes at a time when the Narendra Modi government is wooing foreign investors for the success of its flagship programme ‘Make in India’. In the last few weeks, both the Prime Minister and Finance Minister Arun Jaitley have expressed the government’s keenness in ensuring a stable tax regime and doing away with complexities.

The official statement said the decision would bring greater clarity and predictability for taxpayers as well as tax authorities and put an end to the “uncertainty prevailing in the minds of foreign investors and taxpayers in respect of possible transfer pricing adjustments in India on transactions related to issuance of shares”.

The case pertains to 2009-10 and 2010-11, wherein Vodafone India Services Private Limited (VISPL), a wholly-owned subsidiary of Vodafone Teleservices (India) Holdings Ltd, Mauritius, issued shares to the parent company at a premium of Rs 8,509 per share. It received a consideration of Rs 246.30 crore from the parent company.

According to VISPL, this was an “international transaction”. However, the transfer pricing officer (TPO) made an addition of Rs 1,397 crore to VISPL’s total income, alleging that the company had underpriced the shares. The dispute resolution panel upheld the TPO’s decision.

However, the Bombay High Court in October 2014 quashed the TPO’s order and said the tax can be charged only on income and “in the absence of any income arising, the issue of applying the measure of arm’s length pricing to transactional value/ consideration itself does not arise.”

Prasad said the Cabinet was of the view that “this is a transaction on the capital account and there is no income to be chargeable to tax. So applying any pricing formula is irrelevant.”

Tax experts welcomed the move and said the decision showed the government’s commitment to a stable tax regime.