The Cabinet Committee on Economic Affairs on Wednesday decided not to appeal against the Bombay High Court judgement for Vodafone transfer pricing case and is not liable to pay tax demand of Rs3,200 crore raised by Income tax department. "The Government will not appeal the judgement of Bombay High Court in the Vodafone case," Telecom Minister, Ravi Shankar Prasad said after a meeting. "The Government wants to convey a clear and positive message to investors globally that it would be fair, transparent and within the four corners of law," Prasad added.
The Bombay High Court in its October 10, 2014 order had given a big relief to Vodafone by ruling that it is not liable to pay an income tax. However, the high court held that issue of shares does not give rise to any income and there can be no question of any transfer pricing adjustment. "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," the company said in the statement.
It held that the differential between the price at which shares were issued by Vodafone India and the valuation done by the tax department to be in the nature of a loan to the Mauritius-based parent company. In other words, equity was recharacterized as a loan. The tax department raised a demand of around Rs3,200 crore.
The decision of not filing an appeal in the Vodafone case was taken at the highest level following advice by Attorney General Mukul Rohatgi. It was learnt that Rohatgi had advised the income department to accept the judgement of the Bombay High Court in the Vodafone case. lawyer Harish Salve, who represented Vodafone said, "I am very happy with the verdict; very few countries can boast of such a judiciary. The verdict will boost people's confidence on the Indian judiciary."
On August 21, 2008, Vodafone India had issued 2,89,224 equity shares of Rs10 each at a premium of Rs8,500 per share. However, the transfer pricing officer revalued the shares at Rs53,775 per share. Based on arm's length pricing adjustment, the tax department held a total shortfall of Rs1,308.91 crore to be a deemed loan given by Vodafone India to its holding company. Periodical interest income was also held chargeable to tax in the hands of Vodafone India.
The I-T Department had asked the company to pay additional income tax alleging that it had undervalued its shares in subsidiary, Vodafone India Services while transferring them to the parent company in Britain. The transaction took place in financial year 2010.