11 October 2014
Share valuation dispute under transfer pricing provisions in India - is this the end of the battle?

In recent years, the Indian tax authorities have slapped tax demand notices on many multinational companies (MNCs), including Shell, Vodafone, IBM and Nokia, owing to transfer pricing adjustments for a difference in the valuation of shares issued by the Indian subsidiaries to their parent company. This clearly dampened the investment environment in the country and also further tarnished the image of the tax authorities as wanting to invent transactions to bring under the transfer pricing net.

Vodafone India Services Private Limited (the taxpayer), a wholly owned subsidiary of Vodafone Tele-Services (India) Holdings Limited (Vodafone Mauritius), issued equity shares of face value of INR 10 each at a premium of INR 8,509 per share in August 2008. This transaction was reported in Form 3CEB filed by the taxpayer as a matter of abundant caution, with a disclosure that it did not result in any income. The tax authorities invoked the transfer pricing provisions to compute the arm's length price at INR 53,775 per share, thereby computing the differential as transfer pricing adjustment. Accordingly, a transfer pricing adjustment of INR 13.97 billion was determined. While the matter went through the Dispute Resolution Panel route, finally it was challenged by the taxpayer in the Bombay High Court (HC).

The HC ruling was pronounced on 10 October 2014, wherein it examined the nature of the share issue transaction and ruled in favour of the taxpayer. The HC held that since there is no 'income' arising out of the 'share issue' transaction under general provisions of the tax law, transfer pricing provisions are not applicable. The objective of transfer pricing provisions is not to punish MNCs and/or associated enterprises from doing business inter se, nor replace the concept of Income or Expenditure as normally understood in the Income Tax Act, 1961. The HC has endorsed the principle that a 'capital receipt' cannot be taxed unless specifically provided for.

The verdicts for other cases are expected in the coming week. This is certainly a welcome move for MNCs that are facing the heat; however, the action of the revenue authorities on this verdict is awaited. Our detailed alert on the above judgment will follow shortly.

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