The Bombay high court’s ruling on Friday in favour of Vodafone in a transfer-pricing dispute was widely cheered by the industry and tax experts who said that the judgement would boost the government’s efforts to improve the business climate in India by reining in coercive tax demands.
The dispute, which captured attention due to the quantum of the tax demand — Rs 3,200 crore — and the parties involved, has been a long-standing grievance of the Indian industry, which says that discretionary powers by the department in determining transfer-pricing amount has affected vital transactions. The move is done to increase the tax collection by the department, the industry has said.
Friday’s ruling is expected to have a bearing on 26 similar cases involving large business groups including IBM, Shell India, Nokia, Sanofi and the Essar Group. The companies did not want to comment as the matter is sub-judice. “It would give a big relief and companies can get back to doing business, which is what the focus should be,” said the CFO of one of companies.
The case relates to the transfer of shares by Vodafone India to its group company registered in Mauritius under a rights issue. The department said that the price at which the share transfer was done was grossly undervalued and hence the transaction would amount to a transfer of benefit.
“The verdict will assist several other pending cases on the issue,” said Ferestha Sethna, partner, DMD, the law firm which represented Vodafone.
The transfer-pricing dispute and a retrospective legislation to bring old deals under the tax net has been cited as major hindering factors for foreign investment in India.
According to a senior official from the Aditya Birla group, the move is likely to pave the way for improved business. “It will encourage foreign investors to increase their presence here.”
Companies including the Tata Group typically have transactions among various subsidiaries in different geographies.
“We are hopeful this decision will go a long way in encouraging foreign investments,” said Chandrajit Banerjee, director-general, CII.