In a move that will likely soothe investors’ frayed nerves, the government on Wednesday decided not to appeal a Bombay High Court ruling in favour of Vodafone in a Rs. 3,200-crore tax dispute over a share transaction involving a local subsidiary.
IT minister Ravi Shankar Prasad said the government wants to avoid “fruitless litigation”.
The decision would have implications for companies such as Dutch oil major Shell, which had got a favourable ruling in a similar case from the Bombay High Court.
Vodafone is also involved in a separate arbitration to settle a long-rung “retrospective tax” dispute of `11,200 crore imposed for its acquisition of Hutchison’s mobile assets in India in 2007.
The income tax department had placed a Rs. 3,200 crore demand on Vodafone charging one of its local arms — Vodafone India Services Private Ltd — of under-pricing share sales to its parent.
In October, the Bombay High Court ruled that Vodafone was not liable to pay tax on this “transfer pricing” case.
Transfer pricing is the value at which companies trade products, services or assets among various arms in different countries.
According to tax avoidance rules, these transactions need be carried out on an “arm’s length” basis — in a manner that it involves an unrelated company.
Prasad said finance minister Arun Jaitley has held discussions with officials of the Central Board of Direct Taxes, Attorney General, Solicitor General and it was found that the Bombay High Court opinion was right.
Vodafone’s repeated run-ins with taxmen had stoked fears about India’s high-handedness in dealing with foreign investors.
In 2012, the government changed laws to impose taxes on older corporate deals such as Vodafone’s acquisition of Hutchison Whampoa’s telecom assets in India. While the Centre has said India will not bring on fresh cases of retrospective taxes, there is still some anxiety among multinational corporations.
“The Cabinet decision will set at rest the uncertainty prevailing in the minds of foreign investors and taxpayers in respect of possible transfer pricing adjustments in India, and thereby improve the investment climate,” Prasad said. On Monday, Prime Minister Narendra Modi promised a predictable tax system and an end to red-tape to make India a favoured investment destination in meetings with top industrialists alongside US President Barack Obama.
“We welcome the Indian government’s decision not to appeal the Bombay High Court ruling. Stability and predictability in tax matters are important for long-term investors,” a Vodafone group spokesperson said.