The Bombay High Court ruled in favor of an Indian subsidiary of Royal Dutch Shell in a November 18 tax case, striking another blow to the Indian tax department’s theory that the transfer or issuance of undervalued shares by an Indian company to an overseas related party should trigger a transfer pricing assessment.
While a copy of the judgement in is not yet available, Shell’s counsel, Mukesh Butani of BMR Advisors, told CNBC-TV18 that the court followed its precedent in the October 10 ruling in Vodafone.
As in Vodafone, the court concluded that the tax department does not have jurisdiction to tax an international transaction that does not generate income, and thus the tax department can not apply the transfer pricing laws when a company issues allegedly undervalued shares to a foreign parent, Butani said.
Butani added that unless India’s tax department appeals the Shell or Vodafone cases to the Supreme Court, the decisions should resolve a number of similar pending disputes.
While it is unknown how many Indian subsidiaries are currently battling tax assessments based on the theory that the issuance of undervalued shares gives rise to a transfer pricing assessment, 27 companies received such a tax assessment as of April 2013, according to former Finance Minister Palaniappan Chidambaram.
Butani said that all the pending cases he is aware of are subject jurisdiction in Mumbai.
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Related MNE Tax article:
UPDATE (11/27/2014): The Bombay High Court’s decision in Shell is now available: see, Shell India Markets Pvt. Ltd. vs. Union of India and ors
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