A tax expert wishes that the Department of Revenue would allow a decision of the Bombay High Court to prevail in the Vodafone India transfer pricing litigation, and not escalate it to the Supreme Court.

“One hopes that no retrospective amendments are effected in Union Budget 2015 either,” says Sherry Oommen, Partner, Tax and Corporate Laws, at Kochi-based Nash Capital Partners.

Positive impact

The High Court ruling would have a positive impact on the overall tax environment in India and should encourage multinationals to infuse additional equity in Indian subsidiaries without hassles. Explaining the specifics, Oommen said that the case was looked at from two angles: one, whether transfer pricing provisions are applicable to the company’s issue of shares to its associated enterprise.

Two, do Indian authorities have the jurisdiction to tax a shortfall between the alleged fair market value of shares and their issue price.

The court examined the nature of the share issue and held that the ‘income’ arising from an international transaction is a condition precedent for application of transfer pricing provisions. The transaction on capital account or restructuring would become taxable to the extent it impacts income i.e., under-reporting of interest received, over-reporting of interest paid, or claim of depreciation.

Similar transactions

The court concurred with Vodafone’s view that neither capital receipts on issue of shares nor the alleged shortfall between the fair market value and the issue price of shares can be considered as income.

According to Oommen, the high court’s decision that the transfer pricing provisions should not be applicable to share capital infusion transaction is encouraging. This should have persuasive impact on tax disputes faced by other Indian taxpayers in respect of similar transactions.

Strictly speaking, transfer pricing provisions cannot be invoked for transactions which are in the nature of capital receipts and don’t have a bearing on the taxable income.

Oommen said that a transaction having a bearing on profits, income, losses or assets is an important pre-condition for attracting these provisions. But one involving issuance of additional shares by a foreign shareholder for infusing capital in the Indian subsidiary does not have any bearing on the latter’s income, he said.

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