It is not clear if many have been learned
Finance minister Arun Jaitley may not, in keeping with his stated position on the matter, appeal the Bombay High Court judgment in the Vodafone call-centre case—in both the transfer-pricing cases relating to Vodafone and Shell, the tax department did not go into appeal after losing the cases in the Bombay High Court. But more important, the question is what lessons the taxman has learned and what checks, if any, have been put in place to ensure such frivolous taxation does not take place in the future. To be fair to Jaitley, all the Vodafone cases predate this government, but it is important to keep in mind the sequence of events. After the taxman lost the Supreme Court case against Vodafone Plc in its purchase of Hutch’s India business in 2012—the infamous retrospective tax legislation was legislated to circumvent this—the taxman slapped another tax demand on Vodafone’s Indian arm, of R3,100 crore, this time pertaining to the purchase of the Indian call-centre that belonged to Hutch. The argument made by the taxman was that since the transaction was an international one, it was subject to the arms-length principle, and since this had not been applied, the taxman was within his rights to impute a value. Had the transaction been a local one, there would have been no transfer-pricing dispute since, prior to 2012, the Indian law did not have transfer-pricing when it came to sales/purchases of locally-owned firms—this emerged out of a 2012 Supreme Court judgment in favour of two Indian subsidiaries of GSK.
Vodafone, for its part, argued that since the sale was a local one, the concept of transfer-pricing did not apply, and the question of whether the valuation was arms-length was irrelevant. The taxman, however, argued that the transaction may have looked like a local one, it was in fact an international one since ‘it was pursuant to the share sale agreement with Vodafone International’—that is, had Vodafone Plc not bought Hutch’s India business in an overseas deal, its Indian subsidiary would never have bought the local call-centre that belonged to Hutch. This is what the Bombay High Court has ruled in favour of Vodafone, and said the transaction was a domestic one.
What finance minister Jaitley needs to do, apart from taking a call on whether or not to appeal the matter, is to put in place a set of procedures to ensure that such adventurism on the part of the taxman is kept to the minimum. While it may look harsh to penalise tax officers for cases they lose in a court case since rich firms typically tend to have higher-paid and more experienced lawyers, certainly the success/loss ratio of a tax official needs to be kept in mind while evaluating his/her performance. Equally, the income tax department also needs to have a formal system of evaluating the impact of tax demands that are being made, and perhaps come up with an analysis for tax officials to study on why certain cases failed and why others succeeded. Indeed, when various BEPS protocols get ratified, and the taxman gets more powers to tax international transactions or global firms operating out of India, these powers will have to be used even more carefully.
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