Govt not to pursue Vodafone case; avoid appeals in tax cases

The government, seeking to back up its promise of a non-adversarial tax regime and reassure foreign investors, has decided not to appeal a high court ruling in favour of Vodafone Group Plc in a long-running tax dispute,.

Ravi Shankar PrasadMoreover it will not in future appeal cases that have been decided by appellate bodies in favour of the taxpayer, the cabinet decided on Wednesday.

Vodafone, the biggest foreign corporate investor in India, has been involved in a series of tax disputes since it entered the country seven years ago.

In the biggest of these, the government had changed direct tax rules retrospectively to demand about Rs3,000 crore in back taxes and penalties over its acquisition of Hutchinson's stake in what was Hutchinson-Essar.

The Bombay High Court had in October ruled in favour of Vodafone (See: Vodafone wins transfer pricing case in India), and later the attorney general had recommended the government refrain from appealing that ruling at the Supreme Court.

"Investors' confidence has been shaken in the past because of the very fluctuating tax policy," telecommunications minister Ravi Shankar Prasad told a news conference after the cabinet meeting.

"The government, led by the Prime Minister Narendra Modi, wants to convey a clear message to investors the world over that this is a government where the decisions will be fair, transparent and within the four corners of the law," he said.

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, or 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 PM's pet 'Make in India' programme.

In the last few weeks, both the Prime Minister and Finance Minister Arun Jaitley have expressed the government's keenness to ensure 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 Rs1,397-crore to VISPL's total income, alleging that the company had under-priced 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.''