India not to appeal against Bombay High Court order; Vodafone welcomes govt move in tax case

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Vodafone-IndiaThe Narendra Modi government has decided not to appeal against a Bombay High Court ruling that Vodafone India is not liable to pay Rs 3,200 crores in additional tax in a transfer pricing case.

"The Cabinet has decided not to appeal to the Supreme Court against the Bombay High Court order of October 2014. We examined the order, discussed it with A-G...and found that the Bombay HC order was correct. There was no charging section in chapter 10 and hence the tax cannot be levied," said Shankar Prasad, Telecom Minister.

"The Union Cabinet chaired by the Prime Minister Narendra Modi, in a major decision, has decided to accept the order of the High Court of Bombay in the case of Vodafone India Services Private Limited (VISPL) dated 10.10.2014. This is a major correction of a tax matter which has adversely affected investor sentiment," said Cabinet in a statement.

The Cabinet decision will bring greater clarity and predictability for taxpayers as well as tax authorities, thereby facilitating tax compliance and reducing litigation on similar issues. This will also set at rest the uncertainty prevailing in the minds of foreign investors and taxpayers in respect of possible transfer pricing adjustments in India for transactions related to issuance of shares, and thereby improve the investment climate in the country.

The Cabinet came to this view as this is a transaction on the capital account and there is no income to be chargeable to tax. So applying any pricing formula is irrelevant.

"We welcome the Indian government's decision, not to appeal the Bombay High Court ruling. Stability and predictability in tax matters are important for long-term investors such as Vodafone," said Vodafone Group spokesperson.

Few days ago, the Supreme Court of India (SCI) has asked to the Bombay High Court (HC) to decide the appeal of Vodafone India Services on merits and without being influenced by its earlier judgement in 2012 on the deal between Vodafone and Hutchison. The SCI bench headed by Justice AR Dave gave directions after Vodafone's senior counsel Harish Salve informed it that the tax tribunal had ruled in favour of the income tax department and the company has already appealed to the HC.

"The tribunal has given us what we wanted today". In view of this, it will be open to the HC to decide the matter on merits and uninfluenced by any observations made in the impugned judgment, the Bench said in its order," argued Solicitor General Ranjit Kumar before bench.

The SCI decision come after the Income Tax (IT) department filed a special leave petition in the Supreme Court to review and consider certain facts pertaining to the taxable income of Vodafone India Services in 2007-08. However, the department had approached the SCI to bring on record the facts which have come to light after the apex court's judgment in the Vodafone in a case related to Rs 8, 500-crore transfer-pricing tax dispute in 2012.

The case relates to the transfer pricing order regarding the sale of the operator's call centre business to Hutchison Whampoa Properties India Limited and the assignment of call options to Vodafone International Holdings BV in 2007. Earlier, India's Attorney General Mukul Rohatgi had advised the Income Tax Department to accept the judgement of the Bombay High Court in the Vodafone case. The High Court had in its October 10, 2014 order handed a big relief to the Vodafone India provider by ruling that it is not liable to pay the income tax demand of Rs 3,200 crores.

The Income Tax Department had asked the company to pay additional income tax alleging that it had undervalued its shares in the subsidiary, Vodafone India Services while transferring them to the parent company in Britain.The transaction took place in the financial year 2010. The High Court. had said, "In our opinion there is no taxable income on share premium received on the issue of shares."

The tax authority had issued a show cause notice to Vodafone India on January 17, 2014 and later passed an order asking it to pay an additional Rs 3,200 crore tax. Ten days later Vodafone moved the High Court challenging the tax department's order. It contended that its transaction on transfer of shares were not taxable under Indian tax laws.

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