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In the past two months, the Bombay High Court has come out with two landmark judgments against tax authorities. The rulings, in transfer-pricing cases against Vodafone and Shell, are landmark because they have axed an "absurd" demand by the authorities - treating infusion of share capital as a transaction to be taxed. In no other country is this the case.
Tax authorities have made claims on the Indian arms of several companies for transferring shares to the parent at cheaper valuations.
While doing business in India might not become easier after the court rulings, tax experts and law firms believe now the government has an opportunity to show its commitment to improving business conditions in India by accepting the high court's judgments.
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Ketan Dalal, senior tax partner at PwC India, believes the original issue was a real stretch, as a transfer pricing adjustment requires income, which isn't applicable in the case of share capital infusion. "One hopes the government will accept the Bombay High Court's decision, which will put an end to the painful litigation and send a signal to investors that such stands by the tax department aren't encouraged by the government," he adds.
Rohan Phatarphekar, partner and head (global transfer pricing services), KPMG in India, feels the high court rulings might not be sufficient to be applicable to wider cases. "It would be helpful if the Central Board of Direct Taxes issues a circular on the lines of the high court ruling to provide guidance to field officers on this matter. This will help build consensus, provide certainty and ensure a consistent approach is adopted across all taxpayers," he says.
In recent times, taxation has preoccupied foreign companies in India far more than necessary. Thanks to a series of tax disputes with such companies, the business sentiment was hit in the past couple of years. Among several vexing taxation issues that need to be addressed is the retrospective amendment pertaining to transfer of business and the implementation of the General Anti-Avoidance Rules.
Mahesh Kumar at Nishith Desai Associates believes to boost taxpayer confidence, several systemic issues have to be addressed by the government. "Challenges faced by investors include ambiguous tax provisions, deviating from international standards, extra-territorial taxation, amendments aimed at overriding judicial precedents supporting taxpayers, retrospective changes, and disproportionate penalties. According to Kumar, what did not help matters were high-pitched assessments solely aimed at meeting revenue targets and disregard for tax treaties. This led to long-drawn and expensive litigation. The lack of effective advance ruling infrastructure and an aggressive and adversarial tax environment added to industry woes.
Though the government has taken steps to address some concerns, implementation hasn't been efficient. Ketan Dalal of PwC India, says: "For international investors, transfer pricing is a big issue and the advance pricing arrangement (a pact between the taxpayer and authorities to resolve potential transfer pricing disputes) has given them some comfort. But the huge pendency is causing concern. A total of 400-500 cases are pending under the advance pricing arrangement regime; only four have been cleared. Also the characterisation of income such as software is a problem."
Mahesh Kumar believes India needs to overhaul its tax structure, reduce tax and compliance costs, guarantee taxpayer rights and respect tax-treaty commitments. Also, a more professional and pro-investor attitude has to be ensured at lower levels of the tax department.
Going by signals from the government, it doesn't seem to be in favour of appealing against the high court rulings before the Supreme Court. This could be seen as a statement that the government means to walk the talk on making the tax structure in India simple.
THE TROUBLE WITH TRANSFER PRICING
What
Tax authorities had accused Vodafone India and Shell of under-pricing shares issued to their parent companies and demanded tax of Rs 3,000 crore and about Rs 18,000 crore, respectively. The Bombay HC struck down the claim against Vodafone on October 10, and against Shell on November 18
Why
The court has ruled transfer of shares does not fall under the purview of transfer pricing rules, as no profit is derived from the transfer. Considering the shares were allotted to the parent company and no profit was derived from trading in these, the court struck down the claims
Impact
Now, India is among the countries where transfer pricing rules don't apply to the transfer of shares. The rulings put an end to a long-standing dispute between foreign firms and Indian tax authorities, which hit the confidence of foreign investors
What Next?
Plenty of other tax-related bottlenecks continue to exist in India. Changes in tax policies foreign investors want to see include:
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Amendments aimed at overriding judicial precedent, as in the case of the amendment on transfer of business
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Leighton India Contractors: Tax authorities slapped a notice on the company for subscribing to the shares of its Indian arm - a Rs 900-cr transfer-pricing dispute
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IBM: The US technology major was asked to pay Rs 5,753 cr as income tax for under-reporting revenue for 2008-09
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Nokia: Received a Rs 13,000-cr tax demand for transfer-pricing violations
