Finance Act 2012 retrospectively clarified the definition of ‘international transaction’ and expanded the ambit of transfer pricing regulations to cover Specified Domestic Transactions. In June 2013, the Central Board of Direct Taxes notified consequent amendments to income-tax rules and Form 3CEB. There are comprehensive details on the reporting of SDTs for FY 2012-13, as well as the additional international transactions enumerated in the definition.

The notification is way ahead of the statutory due date of November 30, 2013. Taxpayers have enough time to analyse their transactions and provide correct disclosures in Form 3CEB. The revised format requires the taxpayer to report international transactions in the nature of guarantee, purchase or sale of marketable securities, issue and buyback of equity shares, optionally convertible/ partially convertible/ compulsorily convertible debentures/ preference shares, business restructuring or reorganisations, and deemed international transactions under a prior agreement. The taxpayer should provide extensive details of transaction.

The revised format comes at a time when transfer pricing litigation is at its peak. Even after repeated assurances from Finance Minister P. Chidambaram of a fair tax regime, the transfer pricing assessments in cases such as Shell India and Vodafone reiterate the tax authority’s determined approach. Now, a detailed form seeking comprehensive information from the taxpayer is an indication of rigorous assessments in future.

Howsoever devoid of merit the adjustments may be on share capital transactions, the revenue authority seems firm not only on the past positions taken but also on more intense scrutiny. With the revised definition of international transaction and form 3CEB, the authority has managed to cover such transactions squarely under transfer pricing.

There is limited judicial guidance on share capital transactions, which are on the rise. However, in the case of Vijai Electricals Ltd, the Hyderabad Income Tax Appellate Tribunal categorically mentioned that investment in the share capital of subsidiaries outside India was not an international transaction and transfer pricing provisions did not apply as there was no income accrual. The ITAT, however, did not discuss the revised definition of international transaction.

In contrast, in a recent judgement in the case of Northgate Technologies Ltd, the Hyderabad ITAT observed that investment in the shares of a foreign subsidiary should be analysed from arm’s length perspective and prescribed the CCI (Controller of Capital Issues) guidelines for share valuation. The guidelines were prescribed by the Foreign Exchange Management Act for share valuation and reflects the judicial divide on the issue.

Revenue authorities are using various methods for adjustments on share capital transactions — that is, EBITA multiplier method, PE multiplier, discounted cash flow method and so on. The Chennai ITAT in the case of Ascendas (India) Pvt Ltd clearly laid down important propositions. First, the method for share valuation could be other than the methods allowed under section 92C (1) of the Act. Currently, as we also have “other method” prescribed by CBDT, the valuation of most of these transactions would fall under “other method”.

The tribunal’s second observation was that even though the valuation for sale/ purchase, issue/ subscription of shares follows other applicable laws, it is not decisive on the arm’s length nature of the transaction.

In this light, if we review the information required in the revised Form 3CEB, a taxpayer has to provide detailed information about the consideration, and the method used to derive such a consideration. Therefore, taxpayers now have to not only follow the other applicable laws for share capital transactions, but also ensure they comply with transfer pricing regulations.

In this uncertain environment, taxpayers should analyse in detail their past and future transactions related to litigious issues like share capital, business restructuring, guarantees and so on. The recently introduced Advance Pricing Agreement regime may be considered to avoid transfer pricing uncertainty.

Ankit Goel, Associate Director, contributed to the article

The author is Partner and Practice Leader, Transfer Pricing Services, Grant Thornton India LLP

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