INTRODUCTION

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 notice.

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 shares.

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 undervalued.

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 jurisdiction.

CONCLUDING REMARK:

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 University Odissa

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