Finmin going to SC will send out a negative signal
The Bombay High Court striking down the taxman’s R18,000 crore income adjustment to Shell India’s income, on top of a similar order for the R4,800 crore case against Vodafone India, comes as a big relief. Not just to the 25-odd companies in the tax net—R7,000 crore has been added to the incomes of 5 Essar Group firms—but to most firms bringing in investment into India. If a foreign firm has to infuse capital into an existing subsidiary, the only way this can be done is through the Indian subsidiary issuing shares to the parent. In the Shell case, the taxman had said the shares issued at the par value of R10 were actually worth R183 each. Apart from the issue of how the shares were to be valued, itself a contentious issue, the larger point was about whether capital transactions were even subject to income tax. In both Vodafone and Shell, and presumably the same logic will be applied to the other companies as and when their cases come up, the court never got into the issue of valuation, but ruled that capital transactions cannot be said to lead to income. That the taxman will not be able to question FDI flows has to be a big relief for investors.
The big question, then, is whether the finance ministry will challenge the Bombay High Court judgments in the Supreme Court. Under the normal course of things, it will since, if no appeal is made, the CAG can always say this was a potential revenue loss to the government. The difference, this time around, is finance minister Arun Jaitley’s statements about having a non-adversarial tax regime and allowing existing retrospective tax cases—the taxmen applied retrospective tax amendments in these cases as well—to be decided by various courts. If Jaitley challenges the order, it will send out a signal of business as usual, of the taxman being in control of things. Indeed, on November 7, a CBDT circular asked taxmen not to go for ‘high-pitched assessments without proper basis’ and it also said ‘senior officers have been directed to ensure that appeals are filed only on the merits thereof and not merely on the tax effect involved’. With Vodafone/Shell being cases where the taxman’s case has little merit—also, the taxman wins just 12% of cases in the Supreme Court and about a fifth in the tribunals and the high courts—this is a good example of the rubber meeting the road. Watch this space!