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Indian government decides not to appeal Bombay High Court ruling in Vodafone case

The Indian government will not appeal the Bombay High Court (HC) ruling which concluded Vodafone was not accountable for a 3,200 crore ($525 million) tax demand.

The HC ruled in favour of Vodafone on the share issue transaction dispute, which arose in 2010, in October last year.

“I think this is a very welcome and pragmatic step by the Indian Government,” said Sanjay Sanghvi, partner at Khaitan & Co. “This is a testimony of their commitment and assurance of having a non-adversarial tax regime in India.”

The government’s decision follows advice from Attorney General of India Mukul Rohatgi in November not to appeal the ruling. Prime Minister Narendra Modi chaired the Union Cabinet meeting which made the decision.

This development will also be a relief to other large multinationals such as IBM, Nokia and Shell, which have similar cases awaiting verdicts.

“The Cabinet decided to accept the order of the High Court of Bombay in WP No. 871 of 2014, dated 10.10.2014 and not to file SLP against it before the Supreme Court of India, and accept orders of Courts/ IT AT/ DRP in cases of other taxpayers where similar transfer pricing adjustments have been made and the Courts/ IT AT/ DRP have decided/decide in favour of the taxpayer,” said a government press release.

Taxpayers and advisers are optimistic that the decision is an indication that the Indian government is becoming friendlier and less combative towards foreign companies.

“It’s a big and welcome step by the government to restore the investor confidence,” said Maulik Doshi, transfer pricing partner at Sudit K Parekh & Co. “The finance minister, Arun Jaitley, has, from time to time, reiterated the government’s resolve to make the tax regime non-adversarial in India. This is a step in that direction.”

This aim is reflected in the government press release about the decision, which said the decision should bring “greater clarity and predictability for taxpayers as well as tax authorities” and, in turn, facilitate compliance and reduce litigation. “This will also set to 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.”

“One would hope that such an approach, of not dragging the things only for the sake of keeping stand of revenue authorities (devoid of merits) alive, is only a beginning,” said Sanghvi, who hopes to see more positive developments towards a non-adversarial and investor-friendly tax environment in the country.

The decision is not, however, a sure-fire sign that the government or tax authorities will become more lenient in other areas of tax.

“This would also mean a somewhat less aggressive transfer pricing regime but only in terms of such obnoxious and illogical adjustment,” said Doshi. “I do not see any change in the government’s position on issues such as marketing intangibles, management fees, royalties and higher mark-ups. This move is, however, significant given that in normal course, all adverse orders – especially when the quantum involved is high – are appealed by the government.”

Taxpayer reaction

“I think not appealing in the Vodafone case is the first positive action by the government. In the past, generally, not appealing to higher court in high value tax matters has been unprecedented...so I would take this as a definite positive step from the Government,” said Jitendra Grover, global head of tax at Aricent. “It is difficult to say at this stage whether this is the start of an era of "less tax litigation" but certainly it clarifies the mood and intentions of the new government at present. More of this 'good intention' needs to come out in the upcoming government budget by the end of February before we draw any conclusions.”

“This is a very significant development indeed because it marks a clear departure from the revenue’s former policy of taking almost every adverse High Court decision (from its perspective) to the Supreme Court and thereby allowing the uncertainty to continue. What the tax authorities attempted to do in the cases of Vodafone, Shell and others was really unnecessary. Going forward, I sincerely hope that the Ministry of Finance comes up with a mechanism so that the authorities are prevented from carrying out such adventurous assessments in the first place,” said Subhankar Sinha, senior vice president and head of tax South Asia at Siemens.

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