India’s National Democratic Alliance (NDA) government sent a strong signal to foreign investors by announcing that it would not appeal against the October 2014 decision by the Bombay High Court to absolve Vodafone India Services Private Ltd (VISPL) of its transfer pricing tax demand.

The tax demand pertains to 2009-10 and 2010-11 when VISPL issued shares and received an infusion of capital from its parent company. The revenue authorities raised a tax demand alleging that the company had underpriced the shares. The high court ruled that a tax can be charged only on income and “in the absence of any income arising, the use of applying the measure of arm’s length pricing to transactional value/consideration itself does not arise”.

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NDA’s attorney general, Mukul Rohatgi, had earlier advised the tax authorities not to appeal against this judgement. The revenue authorities have now asked field officers not to pursue transfer pricing cases similar to VISPL’s; they have been directed to adhere to the reasoning of this judgement in all cases where this issue is involved.

The government has also decided to accept all other orders of courts, the Income Tax Appellate Tribunal and Dispute Resolution Panel in cases where similar transfer pricing adjustments have been made and rulings have been in favour of the tax payer. The government appears keen to dispel any uncertainty felt by foreign investors, regarding the country's tax regime. All eyes will be on whether the forthcoming union budget for 2015-16, which is set to be announced at the end of February, takes measures to eliminate the threat of retrospective taxation that still exists in law.

There are 27 companies in total accused by the Indian government of underpaying tax in 2011/12, including banks HSCB and Standard Chartered. Anglo–Dutch oil and gas company Shell looks set to be one of the first of these to benefit from the government's decision. It won a favourable ruling in the Bombay High Court in November 2014. 

Other companies, including computer and software multinationals IBM and Microsoft, are at various stages of litigation and could see their cases resolved through negotiation. But, the NDA government is careful in stating that such issues will be handled on a case-by-case basis: “Many cases are sub-judice right now. Many cases are in arbitration. So every case has to be handled on its merits,” stated the minister of state for finance, Jayant Sinha. 

N Chandra Mohan is an economics and business commentator based in New Delhi