The Indian government on January 29 explicitly instructed tax officials to apply the rational behind the Bombay High Court’s decision in Vodafone to all tax cases.
Tax officials must follow the principle “that the premium on share issue was on account of a capital account transaction and does not give rise to income and, hence, not liable to transfer pricing adjustment,” the Central Board of Direct Taxes said in a letter.
The decision comes the day after Telecom minister Ravi Shankar Prasad announced that the Indian government will not appeal the Bombay High Court’s decision in Vodafone, and that it has accepted the Court’s conclusion that transfer pricing laws can not be used to tax an Indian subsidiary’s issuance of shares at a premium to its overseas parent.
“In view of the acceptance of the [Vodafone] judgement, it is directed that the ratio decidendi of the judgement must be adhered to by the field officers in all cases where this issue is involved,” the Central Board of Direct Taxes said.
At least 27 Indian subsidiaries have received tax assessments because of the transfer or issuance of undervalued shares to related companies. Included are local units of Shell, Essar, HSBC Securities, Standard Chartered Securities, Havells, Patel Engineering, and Bharti Airtel. The disputes are in various stages of litigation, and are now likely to be resolved.
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