New Delhi: India has decided not to appeal a high court’s ruling in favour of the Indian unit of Vodafone Plc in a tax case in the Supreme Court, in a move that should reassure foreign investors, especially those unnerved by a retrospective tax legislation introduced by the previous government as well as a spate of tax-related litigation the tax department embarked on in that period.

On Wednesday, while taking this decision, the Union cabinet also decided not to appeal adverse lower court rulings in similar transfer pricing cases, a move which will bring respite to other companies, such as the Indian arm of Royal Dutch Shell Plc., that are involved in disputes with the tax department.

“Investors’ confidence has been shaken in the past because of fluctuating tax policies where the investors’ view and the government’s view was completely at loggerheads. The government led by Prime Minister Narendra Modi wants to convey a clear message to the investor world that this is a government where the decisions would be fair, transparent and within the four corners of the law," said Ravi Shankar Prasad, minister of communications and information technology.

“We welcome the Indian government’s decision not to appeal the Bombay high court ruling. Stability and predictability in tax matters are important for long-term investors such as Vodafone", said a Vodafone group spokesperson.

The decision, taken by the cabinet on Wednesday, removes uncertainty in respect of possible transfer pricing adjustments in India on transactions involving multinational corporations (MNCs) and their Indian subsidiaries. It will also result in less litigation.

The cabinet’s decision follows advice given by the attorney general of India, Mukul Rohatgi, who advised against appealing the Bombay high court judgement in the ₹ 3,200 crore tax case involving Vodafone.

The Bombay high court on 10 October ruled in favour of Vodafone India Services Pvt. Ltd. The company was accused by the tax department of under-pricing shares in a rights issue to the parent firm in 2009-10.

Funding a subsidiary through this route is a common practice among MNCs, which typically view this as a capital transaction. However, the income-tax department had issued notices to many firms including Shell India Pvt. Ltd, Vodafone India, HSBC Securities and Capital Markets (India) Pvt. Ltd and Standard Chartered Securities (India) Ltd during the tenure of the Congress-led United Progressive Alliance for selling shares to their parents at allegedly lower prices.

This, the tax department claimed, made them subject to adjustment of income under transfer-pricing norms. The tax department’s aggressive move had drawn widespread criticism from investors who felt that these transactions were not taxable.

Transfer pricing refers to the practice of arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price—one that would have been charged to an unrelated party—is levied.

Shell declined to comment.

The government’s decision is expected to provide a fillip to India’s image as an attractive investment destination. Modi, while addressing the India-US Business Summit earlier this week, assured investors of a predictable and competitive tax regime and promised to remove uncertainties in tax laws.

Vijay Iyer, national leader transfer pricing, EY, described the cabinet’s decision as “bold". “It is a huge change in approach and clearly shows a commitment to avoid frivolous litigation. Investors would feel more assured that absurd adjustments would be not be encouraged by the government."

Spectrum price

In another decision, the cabinet also paved the way for the sale of 3G spectrum in a coming auction by approving a reserve price of ₹ 3,705 crore per megahertz (MHz) of spectrum in the 2100MHz band, used exclusively for 3G services in the country.

The spectrum is required by telecom companies for high capacity voice and high speed data services over the mobile phone.

The price is 36% higher than the one recommended by the Telecom Regulatory Authority of India earlier this month.

On Tuesday, the department of telecommunications deferred the auction by a week to 4 March from the earlier 25 February due to delay in the cabinet approving the 3G spectrum reserve price.

In its meeting on 5 January, the cabinet cleared the proposal to auction 5MHz of 2,100MHz band spectrum in 17 circles, with the reserve price and other details to be decided later.​ In the same meeting, the panel cleared the reserve prices for spectrum in the 800MHz, 900MHz and 1,800MHz bands that will go on sale in the coming auction. The cabinet approved a base price of ₹ 3,646 crore per MHz for the 800MHz spectrum band, ₹ 3,980 crore per MHz for 900Mhz band airwaves, and ₹ 2,191 per MHz for the 1,800MHz band.

The auction, which is expected to raise as much as $10 billion for the exchequer, will be the fifth such sale of airwaves needed by telecom firms to offer wireless data and mobile services in the country. The government is likely to get more than a quarter of this amount in this fiscal year itself as the winning bidders will have the option of paying 25-33% up front, depending on the band, and the remaining after a two-year moratorium in 10 annual instalments.

“The estimated revenues from the auction of 2,100MHz Band are ₹ 17,555 crore of which ₹ .5793 crore is expected to be realized in the current financial year," a statement from the government on the cabinet’s decisions said. Apart from a single block of 5MHz spectrum in the 3G band of 2,100MHz, the government will sell 103.75MHz in the 800MHz band, 177.8MHz (in 17 circles) in the 900MHz band and 99.2MHz (in 15 circles) in the 1,800MHz band.

Most of the spectrum going on sale is already in use by telecom operators. The telcos have it till November this year, when the 20-year lease for the airwaves expires. This means that much of the spectrum will see aggressive bidding by the operators to ensure they can continue their business in many of the circles where they operate.

Many of the telcos are also rolling out 3G services on the 900MHz band which is far more efficient and cost effective as it needs lesser investment in networks by the operators.

The cabinet committee of economic affairs also cleared HDFC Bank Ltd’s proposal for issuance of equity shares of ₹ 10,000 crore to non-resident Indians/foreign institutional investors/foreign portfolio investors subject to aggregate foreign shareholding not exceeding 74%.

The cabinet also approved pharma firm Lupin Ltd’s proposal to increase the aggregate limit of investment FIIs and their sub-accounts registered with Securities and Exchange Board of India can make, from 33% to 49%. The approval is likely to result in foreign investment of approximately ₹ 6,099 crore.

The cabinet committee on economic affairs (CCEA) decided to provide financial support to Jute Corporation of India Ltd to offset losses incurred due to minimum support price operations. The assistance will be on a continuous basis, starting with ₹ 55 crore for 2014-15 and ₹ 52 crore, ₹ 49 crore and ₹ 47 crore, respectively, in the following years. The CCEA also kept unchanged the mandatory requirement of jute packaging for 90% of food grain and 20% of sugar produced in the country in a bid to support jute mills and the livelihood of jute cultivators.

Sayantan Bera and Vidya Krishnan contributed to this story.

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