Vodafone ruling to bolster foreign investments, say tax experts

Tax experts have hailed the Bombay High Court ruling in the Vodafone share valuation case, stating that it would provide huge impetus for fast forwarding foreign investments into India.

All eyes are now on the Tax Department to see if it would prefer an appeal against the Bombay High Court judgment. The much talked about Shell India matter – which is similar to the Vodafone case – is also set to come up before the Bombay High Court on Monday.

With this ruling, it would now certainly be smoother for foreign companies to bring more capital into their Indian units, they said.

The main controversy in this Vodafone matter has been that the Income Tax Department felt that there has been an undervaluation of shares issued by the Indian company of a MNC (Vodafone in this case) to their parent or associates within the network.

The Income Tax Department contended that the quantum of undervaluation should be treated as deemed loan and the interest income on the deemed loan given to parent be taxable in the hands of the Indian company.

By noting that share issuance does not give rise to “income”, the Bombay High Court has ruled that transfer pricing regulations cannot be invoked by the Tax Department in such capital infusion cases. This is because “absent income” situations cannot be considered as an international transaction to trigger transfer pricing regulations.

Clearing the air Mukesh Butani, Managing Partner, BMR Legal, a law firm, said that Bombay High Court judgment vindicates the taxpayer’s stand. It also lends clarity to the vexed question of applicability of transfer pricing law to share issuance, he said.

“The timing of Bombay High Court verdict is significant given Prime Minister Modi’s recent visits to Japan and US rolling out red carpet for investors. Undoubtedly, this will improve investor sentiments,” Butani said.

Aseem Chawla, Partner, MPC Legal, said the Bombay High Court decision should help clear the air on several transfer pricing disputes being contested by tax authorities where items were essentially capital in nature and have become a subject matter of controversy.

Going by the past precedents, cases involving large quantum of money are routinely appealed by the tax authorities, said Vikas Vasal, Partner, KPMG In India.

However, keeping in view the pro-investment mindset of the current Government, the whole issue may be reviewed on merits and a more pragmatic view may be taken on this matter, Vasal said.

Vijay Iyer, Partner & National Leader—Transfer Pricing, EY, said this ruling is a huge relief for foreign investors who were being burdened with unnecessary transfer pricing controversy, litigation costs and compliance burden for bringing in foreign direct investment.

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