As a result, the income tax department will not be able to make transfer pricing adjustments on the shares issued by Indian units to their overseas parents.
The cabinet came to the conclusion that the transaction between Vodafone and its Mauritius subsidiary was on the capital account and that there was no income to be chargeable to tax; therefore, applying any pricing formula was irrelevant.
In addition, the Cabinet agreed to accept “orders of courts/ITAT/DRP in cases of other taxpayers where similar transfer pricing adjustments have been made and the courts/ITAT/DRP have decided/decide in favour of the taxpayer”.
This decision is expected to facilitate tax compliance and reduce litigation on similar issues.
“This is a major correction of a tax matter which has adversely affected investor sentiment,” read Prime Minister Modi’s website.
Positive outlook
In line with recent efforts to create a more stable tax environment in India, the cabinet’s decision is expected to provide greater clarity and predictability for both taxpayers and tax authorities.
India has long been associated with an aggressive tax policy and lengthy transfer pricing disputes. This decision will come as welcome news to taxpayers who have found themselves embroiled in court battles.
The ruling is also bound to be beneficial for India’s economy. The government is aiming to “set at rest 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, and thereby improve the investment climate in the country”.
