On Wednesday, Attorney-General Mukul Rohatgi asked the income tax (I-T) department to desist from an appeal against the ruling and the finance ministry is likely to accept the advice. The same approach is likely to be taken in the case of Shell and others facing similar demands.
The tax department had made an addition of Rs 17,920 crore and Rs 4,831 crore to the taxable income of Shell and Vodafone, respectively. At a tax rate of 30 per cent, this could have given revenue of about Rs 7,000 crore for the two financial years for which showcause notices were served.
Another Rs 2,100 crore could come from five Essar group companies and Rs 300 crore from HSBC Securities & Capital Markets, as an addition of Rs 7,000 crore and Rs 935 crore to their income, respectively, had the tax department's orders to treat infusion of share capital as taxable income was sustained. Several other companies face similar demands.
In 2012-13 alone, 27 cases of undervaluation of share sale by Indian companies to their associated enterprises were detected and subjected to transfer pricing adjustments. In the previous years, too, the department had made such additions to the income of Indian arms of multinational companies. According to experts, the tax demand in most of these cases would not be more than Rs 100 crore in a particular year but the total revenue forgone could be substantial as demands are for multiple years.
"It (tax forgone by the government by not appealing) could be pretty huge," said Vijay Iyer, partner, EY.
"I have asked the department to accept the judgment," Rohatgi had said.
It was learnt that tax department officials wanted to file an appeal to get clarity on the issue at an all-India level and avoid future questions from the office of the Comptroller and Auditor General.
On January 27, Vodafone moved the Bombay HC challenging the I-T order and contended its transaction on transfer of shares was not taxable under Indian law. The HC verdict had said there was no taxable income on the share premium received on issue of shares.