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Business News/ Politics / Policy/  Don’t appeal Vodafone tax dispute ruling: AG to govt
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Don’t appeal Vodafone tax dispute ruling: AG to govt

The advice will also apply to similar cases involving companies such as the Indian arm of Royal Dutch Shell

The order in favour of Vodafone stems from a case in which the tax department accused Vodafone India Services Pvt. Ltd of under-pricing shares in a rights issue to the parent firm for fiscal year 2009-10.: BloombergPremium
The order in favour of Vodafone stems from a case in which the tax department accused Vodafone India Services Pvt. Ltd of under-pricing shares in a rights issue to the parent firm for fiscal year 2009-10.: Bloomberg

New Delhi: The government’s top lawyer has advised it to not appeal a Bombay high court judgement which ruled last month in favour of the Indian unit of Vodafone Group Plc. in a 3,200 crore tax dispute—advice that the government is likely to heed and which will send out a clear signal of its investor-friendly credentials.

The advice will also apply to similar cases involving companies such as the Indian arm of Royal Dutch Shell Plc. in a tax case that made waves internationally and was cited as one example of why it is difficult to do business in India. The Bombay high court ruled in favour of Vodafone on 10 October.

The order in favour of Vodafone stems from a case in which the tax department accused Vodafone India Services Pvt. Ltd of under-pricing shares in a rights issue to the parent firm for fiscal year 2009-10.

The Attorney General of India, Mukul Rohatgi, has told the government that it should not appeal the Bombay high court’s decision in the Vodafone transfer pricing case.

“The judgment of the high court is absolutely correct and we should accept the judgment and every matter need not be challenged to the Supreme Court. I have also concurred with the views of the chairperson of the Central Board of Direct Taxes," said Rohatgi.

When asked whether this is an attempt to become more investor friendly, he said “I think so."

Transfer pricing refers to the practice of arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price—one that would have been charged to an unrelated party—is levied.

The tax authority issued a show-cause notice to Vodafone India on 17 January before passing the order and adding 3,200 crore to its taxable income for the period in question.

A Vodafone spokesperson declined to comment on the grounds that his company has not received any official statement on the issue from Indian authorities.

Vodafone had welcomed the Bombay high court’s ruling.

“Vodafone has maintained consistently throughout the legal proceedings that this transaction was not taxable," a spokesperson for the British telecom firm had said then.

The case has been watched closely by overseas investors, who have been concerned about tax demands raised by the income tax department, alleging underpayment of tax.

Since it took office in May, the new government led by the Bharatiya Janata Party has assured foreign investors of fair tax treatment. Finance minister Arun Jaitley has promised to end the “tax terrorism" that critics have accused the previous Congress-led government of practising.

The advice by the government’s top legal adviser provides the government with an opportunity to demonstrate its willingness to provide a stable and non-adversarial tax regime, said Sudhir Kapadia, national tax leader in India at accounting firm EY.

“Once the government accepts the Bombay high court judgement as good law, it can ask its field officers not to initiate such tax proceeding and thus end such future tax disputes in one stroke," said Kapadia. “The government can also make a request to the courts where such cases are pending, holding that in view of it accepting the high court judgement, the appeal becomes infructuous."

More than 20 companies, including Bharti Airtel Ltd, two Essar Group firms, HSBC Securities, Patel Engineering Ltd and Havells India Ltd, are contesting similar transfer pricing tax orders, experts said.

Vodafone has also taken the tax department to court over two other transfer pricing tax orders that raised demands of 3,700 crore and 400 crore on Vodafone India. Both cases are pending in the Bombay high court.

The telecom firm and the government are also locked in arbitration over a 11,000 crore dispute related to the 2007 transaction in which Vodafone International Holdings BV, a Dutch unit of Vodafone, bought the Indian operations of Hutchison Telecommunications International Ltd.

The acquisition was made through the sale of a Cayman Islands-based firm called CGP Investments (Holdings) Ltd, a unit of Hutchison, in an $11 billion deal.

The Indian tax department estimated Vodafone’s liability at around 11,000 crore for not withholding a part of the amount as tax while paying Hutchison.

In 2012, the Supreme Court ruled in favour of Vodafone and held that the deal was not taxable in India. To counter this, the government introduced a retrospective amendment to laws to bring such indirect transfers of shares under the tax net.

It also introduced a validation clause that effectively made Vodafone liable to pay tax in India, sparking large-scale protests from the investor community.

Besides Vodafone and Shell, other multinational companies involved in tax disputes in India include International Business Machines Corp., Nokia Oyj, Sanofi SA and WNS (Holdings) Ltd.

Some of the cases are a fallout of the retrospective amendment introduced in the Union budget of 2012.

Finance minister Jaitley in his maiden budget speech in July said that his government would not retrospectively amend any tax law which may create fresh liability on companies.

He did not repeal the 2012 amendment, and maintained that the government has the sovereign right to undertake retrospective legislation, thus disappointing foreign investors.

Jaitley said at the time that a high-level committee under the direct tax department would scrutinise all fresh cases arising out of the retrospective amendments of 2012 in respect of indirect transfers and coming to the notice of the assessing officers.

“I hope the investor community both within India and abroad would repose confidence on our stated position and participate in the Indian growth story with renewed vigour," Jaitley said in his speech.

Shauvik Ghosh contributed to this story.

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Published: 27 Nov 2014, 12:40 AM IST
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