The Hon'ble High Court of Bombay has recently in the case of
an Indian unit of Royal Dutch Shell Plc, categorically held that
issuance of shares by an Indian Company to its foreign parent is
not exigable to transfer pricing provisions as there is no income
arising there from.
Transfer pricing practice has always been a topic of discussion
all over the world. Transfer pricing rules basically determines the
value at which companies trade products, services or assets between
two units across borders. The main objective of transfer pricing is
to ensure fair prices in cases of transaction between two groups of
companies situated in different countries.
BRIEF OVERVIEW OF THE JUDGMENT:
Shell India had issued 870 million shares to Shell Gas BV in
March, 2009, at Rs.10 a share. However, the Income Tax department
was of view that the shares were grossly undervalued, and it valued
them at Rs.180 a share. Thus the department added the difference to
the taxable income of Shell India.
Furthermore, the Income Tax department had issued a show-cause
notice adding another Rs.3,100 crore to Shell India's income
for 2008-09 in another transfer pricing case. Being aggrieved, the
company moved the Bombay High Court, challenging the tax
The tax authorities argued that the deal is a transfer pricing
arrangement by which the share issued are undervalued and hence the
company is liable to pay tax on the income generated out of it. The
tax authorities also asked for tax on the interest the Anglo-Dutch
Oil Company would have earned in cases of under priced transfer of
On the contrary the Shell Plc argued that the foreign
parent's equity infusion into its subsidiary is not liable to
be taxed, the same being Foreign Direct Investment which cannot be
taxed. Shell plc also denied the argument of the tax authority
saying that the price of the share was perfectly valued and not
The bench of Justices M. S. Sanklecha and S. C. Gupte
of the Hon'ble Bombay High Court decided on a petition filed by
Shell India Markets. The Court ruled in the favor of the Shell Plc
on the ground that, under the provisions of transfer pricing the
issuance of shares by an Indian Company to its foreign partner is
not taxable. The judgment has specified that
transfer-pricing laws cannot be imposed on shares issued to a
foreign parent. It has been the practice of multinationals to fund
its subsidiary by issuing shares, court viewed it as capital
transaction thus not covered under the rule of transfer pricing.
The court said by doing do the tax department has exceeded its
This judgment definitely gives a positive ray of hope in favor
of foreign investors seeking to invest in Indian firms from the
taxation point of view and also against the Department who are
vigorously pursuing claims against the foreign firms in India.
Sonal Shrivastava-Intern- 5th Year National Law
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Cummins Inc. is a foreign company, rendering services in respect of desktop/laptop software license and internet mail facilities to its Indian associated enterprises, i.e. CIL and CSSL which were paying IT charges provided by the taxpayer.
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