Modi walks the talk: Govt's decision to not appeal in Vodafone case is a landmark one

The government's decision yesterday to not appeal against the Bombay High Court's order favouring Vodafone in a transfer pricing case is a landmark one.

The case pertains to a Rs 3,200 crore notice slapped on Vodafone by the tax department alleging that the company had under-priced the shares of its Indian subsidiary when transferring them to its parent in 2009-10.

Transfer pricing norms stipulate that when assets are transferred between group companies in different geographies, the pricing should be done at an arm's length. In other words, the prices should be determined as if the asset transfer is happening between two unrelated entities. The tax department was of the view that Vodafone has violated this norm by underpricing the shares.

The company had moved the Bombay High Court against the tax notice. The court on 10 October ruled in favour of the company saying "there is no taxable income on share premium received on the issue of shares".

Yesterday, the government decided not to appeal against the high court order. Announcing the decision, Telecom Minister Ravi Shankar Prasad said the government's decision was aimed at avoiding fruitless litigations and convey a clear and positive message to investors globally that it would be "fair, transparent and within the four corners of law".

The decision to not file an appeal in the Vodafone case was taken at the highest level following advice by Attorney General Mukul Rohatgi. Rohatgi had advised the income department to accept the judgement of the Bombay High Court in the Vodafone case, a PTI report said.

The government's decision has been hailed by the investors and tax experts. The move is seen calming the frayed nerves of other multinational companies which are facing similar transfer pricing litigations.

Vodafone Counsel Anuradha Dutt has said the Cabinet’s decision is a positive move and will certainly help boost investment, according to a report on Moneycontrol. She was of the opinion that the Cabinet’s view could weaken the taxman’s argument in other transfer pricing cases.

Senior advocate Harish Salve also echoed the sentiment.

“I hope a larger message goes through to the tax department that their attempts to attack foreign companies as though they have some trophies to be won is not now being appreciated by the administration,” Salve was quoted as saying in the report.

Hailing the huge change in the government's approach, Vijay Iyer, national leader transfer pricing at Ernst and Young has told Mint newspaper, "Investors would feel more assured that absurd adjustments would be not be encouraged by the government."

That is exactly the government intention.

What would be more heartening for investors will be the fact that the decision marks a break from the UPA's legacy of indecision and policy paralysis.

This is also part of the NDA government's attempt to do away with all policy issues that rendered doing business in India difficult during the 10 years of the UPA regime.

Moreover, it also shows the determination of the Narendra Modi government to walk the talk. In the run up to the elections, BJP leaders had promised to end the "tax terrorism" that resulted in much heartburn among the international investors. This included transfer pricing notices slapped on over a dozen multinational companies, including Vodafone, HSBC, Standard Chartered, Shell, and also the retrospective tax amendment aimed at taxing asset transfer with retrospective effect. (A Rs 13,000 crore retrospective tax notice on Vodafone is under arbitration now.)

Only two days back had Modi promised the US investors that he will usher in a "a tax regime that is predictable and competitive". And he has taken a first major step towards it.