New Delhi: The Tax Department on Thursday asked its field officers not to pursue transfer pricing cases similar to Vodafone's, a move being seen as a major relief to multinationals fighting such cases involving tax demands of thousands of crores of rupee.
Cairn Energy, Shell and IBM are among at least a dozen companies fighting transfer pricing cases in India.
Seeking to reassure global investors and reduce tax litigations, the Central Board of Direct Taxes (CBDT) has sent out instructions to all its divisions to adhere to the spirit of the Bombay High Court judgement in the Rs 3,200-crore Vodafone tax case in favour of the company.
Yesterday, the Cabinet had decided not to appeal against the court ruling which had set aside the tax demand on Vodafone.
"In view of the acceptance of the (Vodafone) judgement, it is directed that the ratio decidendi (or the reasoning) of the judgement must be adhered to by the field officers in all cases where this issue is involved," CBDT said in the communication.
Scottish explorer Cairn Energy faces a potential tax demand on an alleged Rs 24,500 crore of capital gains it made when in 2006 it transferred all its India assets to a new company, Cairn India, and got it listed on stock exchanges. However, no tax demand has been raised so far.
But the tax department had however barred it from selling its residual 9.8 percent stake in Cairn India during pendency of the case.
The CBDT instruction stated that the Bombay High Court that held that the premium on share issue in case of Vodafone was on account of a capital account transaction and does not give rise to income and hence, not liable to transfer pricing adjustment.
The communication was sent to all Principal Chief Commissioners of Income Tax (CCsIT), Directorates General of Income Tax and CCsIT.
After a meeting of the Union Cabinet, the government decided "to accept orders of Courts/ITAT/DRP in cases of other taxpayers where similar transfer pricing adjustments have been made and the Courts/ ITAT/ DRP have decided/decide in favour of the taxpayer".
Transfer pricing is the practice of arm's length pricing for transactions between group companies based in different countries to ensure a fair price - one that would have been charged to an unrelated party.
The government wants to convey a clear and positive message to investors globally that its decisions would be "fair, transparent and within the four corners of law", Telecom Minister Ravi Shankar Prasad had said.
In the Vodafone case relating to the 2010 transaction, 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.