In a move aimed at improving the investment climate in the country, the Union Cabinet on Wednesday decided to not challenge a Bombay High Court ruling that said Vodafone was not liable to pay a tax demand of Rs 3,200 crore in a transfer pricing case.

The Cabinet also decided to not appeal against similar verdicts in other cases against taxpayers.

The decision follows Attorney-General Mukul Rohatgi’s advice to the Income Tax Department to not appeal against the high court judgement.

Briefing reporters after the meeting, Union Minister Ravi Shankar Prasad, said: “ It sends out the message to global investors whose confidence in India was shaken in the past. Prime Minister (Narendra) Modi wants it to be known that his government will take decisions that will be fair, transparent and within four corners of the law.”

The Bombay High Court on October 10, 2014 ruled against the Income Tax Department’s demand to the company to pay additional income tax alleging that it had undervalued its shares in subsidiary, Vodafone India Services, while transferring them to the parent company in Britain in the year 2010.

“The Cabinet decision will bring greater clarity and predictability for taxpayers as well as tax authorities, thereby facilitating tax compliance and reducing litigation on similar issues,” it said.

The release further said: “The Cabinet came to this view as this is a transaction on the capital account and there is no income to be chargeable to tax... So applying any pricing formula is irrelevant.”

The Bombay High Court had in October last year ruled against the Income Tax Department’s demand to Vodafone to pay additional income tax, alleging that it had undervalued its shares in subsidiary, Vodafone India Services, while transferring them to the parent company in Britain in the year 2010.

Reacting to the Cabinet decision, EY National Leader-Transfer Pricing, Vijay Iyer, said: “This is a bold step by the government. It is a huge change in approach and clearly shows their commitment to avoid frivolous litigation. Investors would feel more assured that absurd adjustments would not be encouraged by the government.”