Comment on Shell’s wins of transfer pricing tax dispute in Bombay HC
The aggressive approach of tax authorities and the earlier government in case of Vodafone and Shell led to erosion of confidence of global investors. In this context, the favourable decision of H’ble Bombay High Court in case of Shell India Markets Private Limited (‘Shell-India’), which has in substance followed its precedent set in the recent earlier judgement of Vodafone India concerning the issue of shares to Foreign Associated Enterprises (AE) has come as a major relief. The judgement has revalidated and clarified that the transaction of issue of shares by an Indian entity to its foreign AE does not partake the character of income in hands of the Indian entity and as such is not subject to the Transfer Pricing regulations as prescribed under Chapter X of the Income Tax Act. 1961.
In the present case, Shell India had issued shares to the foreign AE (‘Shell Gas BV’) at Rs. 10 per share in the financial year 2008-09, which the tax department had contested and had revised the valuation at Rs. 180 per share. The difference resulting from the revaluation of shares was treated as income in the hands of the Shell-India. The High court has in the present facts of the case, ruled that the issue of shares by Shell-India does not result in income in its hands and the difference in the purported valuation as derived by the TPO, is not covered within the purview of the Transfer Pricing regulations in India and as such is not subject to tax.
This judgement would bring in the much needed relief to the global investors and shall instill the confidence about the improving business climate in India. However, in case the CBDT decides to pursue appeal with the H’ble Supreme Court, the relief can be short lived. The CBDT and the new government’s commitment for reducing the litigation can use this judgement as an opportunity to issue clarification that the issuance of shares to foreign AE shall not result in any transfer pricing adjustment. Further this judgement is based on legal provisions prior to 2012 and the amendment made in 2012 covers capital account transactions such as issue of shares. As such, there is still ambiguity on whether the reporting of issue of shares, which is a capital transaction, needs to be complied with in Form no. 3CEB.
As the deadline for filing of the Transfer Pricing Compliances for corporate tax payers for Financial year ended 31 March 2014, which is 30 November 2014, is fast approaching, it is pertinent for the CBDT to consider both the judgements of the H’ble Bombay High Court and issue clarification in respect of reporting of transactions pertaining to issue of shares to Foreign AEs as well as whether the same will result in transfer pricing adjustment.