Issuance of shares by Indian Company to its Foreign Parent Company would not trigger Transfer Pricing laws .

The Hon’ble Bombay has brought to a close the controversy that arose in January 2013, wherein the Tax Department  had contended that issue of shares by assessee to its non-resident AE at a price below the fair market value would give rise to income from an admitted international transaction and, thus, Indian Transfer Pricing provisions would be applicable on it.

In this regard, the High Court relied upon decision in the case of Vodafone India . It held that Transfer Pricing provisions would not be applicable on alleged undervaluation of shares issued to foreign parent company, as there was no income arising therefrom. The High Court deleted the Transfer Pricing adjustment and the consequential interest in respect of alleged undervaluation of shares issued by Shell India.

Previously, the Bombay High Court on October 10, 2014 in the case of Vodafone India Services (Supra) held that issue of shares by assessee to its non-resident AE at a price below the fair market value would not give rise to any income from an admitted international transaction and, thus, Indian Transfer Pricing provisions would not be applicable on it.

Thus in simple language, let us understand the impact of this ruling: 

X Services PVT LTD, a company registered in India, with its holding company based in US.  Now, this Indian company had issued shares to its parent company in the US, at a price which was less than the market value of the shares, as alleged  by the Tax Department.

Tax Department  had contended that issue of shares by the Indian Company to its parent company assessee to its non-resident AE at a price below the fair market value would give rise to income from an admitted international transaction and, thus, Indian Transfer Pricing provisions would be applicable on it .

The court has held the principle being that issuance of shares by an Indian company to its foreign parent is not eligible to transfer pricing provisions as there is no income arising therefrom. 

To Conclude : 

This decision is a welcome relief not just for Shell but for all MNC’s who have faced the adjustment on share issuance. It is significant to note that the court did not hesitate on exercising its extraordinary power to issue a writ where alternate appeal remedy was available – in this situation as the court felt that the tax department clearly exceeded its jurisdiction to bring to tax a capital transaction.