The Centre has wisely decided not to appeal a Bombay High Court order favouring Vodafone India in a case of alleged under-pricing of shares issued to its holding company in Mauritius. The timing is important — just days after Prime Minister Narendra Modi’s assurance at the India-US Business Summit of a tax regime that is predictable and removes the “excesses of the past”. The transfer pricing-related dispute was representative of such “excesses” during the UPA government’s tenure, causing serious damage to investor sentiment.
In 2009-10, Vodafone India had issued shares at a price far below what the revenue department saw as a “fair” market price based on the value of its assets here. The difference between the transaction price and the so-called fair arm’s-length price was treated as a “deemed loan” from Vodafone India to the holding company. This amount, along with interest, added up to a transfer pricing adjustment of nearly Rs 1,400 crore, which was taxable. This interpretation was, however, rejected by the high court, which held that only transactions resulting in actual generation of income can be taxed. Vodafone had only made a primary issuance of shares. Only capital gains from a subsequent sale of shares could have been brought to tax. The court’s ruling — that only real income can be taxed — is applicable to similar tax disputes involving alleged issuance of under-priced shares by subsidiaries of other multinationals like Shell, HSBC and IBM. By stating that it will accept the orders of lower courts favouring assessees in all such cases, the Centre has acted on Modi’s assurances.
Now, the government should resolve the dispute over Vodafone’s 2007 acquisition of Hutchison Essar’s telecom business in India. That had resulted in the actual transfer of assets and capital gains. But unfortunately, the law then did not permit offshore transactions purely of shares — the acquirer, seller and the company being bought were all incorporated overseas here — to be taxed. That, nevertheless, did not justify the move to retrospectively amend the Income Tax Act to tax Vodafone-Hutch-type transactions. While repealing the amendment now may not be feasible, the Modi government should still seek an out-of-court settlement that could entail, say, waiving the penalty and interest on Vodafone’s presumed original tax liability.