Scope Of Transfer Pricing With Respect To Transfer Of Shares

Scope Of Transfer Pricing With Respect To Transfer Of Shares

Transfer prices are defined as ˜the prices at which an enterprise transfers physical goods and intangibles or provides services to associated enterprises™[1]. Whenever a transaction takes place between two entities, whether related or unrelated, a price has to be fixed. This fixing of prices for transactions between associated enterprises is known as transfer pricing. The concept of transfer pricing was incorporated into the Income Tax Act, 1961 by the Finance Act 2001 based on the report submitted by an ˜Expert Group on Transfer Pricing™, set up by the Central Board of Direct Taxes (CBDT). But there has always been an uncertainty as to what transactions are covered by transfer pricing.   Recently, transfer pricing orders were issued to the Indian subsidiaries of Royal Dutch Shell and Vodafone as they had underpriced the value of shares issued to group companies. The tax authorities have estimated that the value of shares were underpriced to the extent of Rs. 15,220 crore by Shell India Markets and Rs. 1300 crore by Vodafone India Services.

The critical issue which arose in these two cases is whether transfer pricing would be applicable to transfer of shares. This issue was elaborately dealt in the case of M/s. Vijay Electricals vs. ACIT, where the tribunal analyzed the following questions of law.

Whether capital investments made are ˜international transactions™ within the meaning of provisions of section 92B of the Act.

As the Section heading itself shows, it is a provision dealing with Computation of income from international transactions. The opening part of Section 92 says that any income arising from an international transaction shall be computed having regard to the arm™s length price. Further, a reference is to be made to Circular No. 14 dated 22.11.2011 where one could realize that section 92B(1) is applicable only when ˜income is chargeable™.

 The expression ˜income arising™ in the opening words of section 92 postulates that income has arisen under the substantive charging provisions of the Act. If by application of the provisions of section 45 read with section 48, which are integrally connected one with the other, income cannot be said to arise, section 92 does not come to the aid of the Revenue even though it is an international transaction. Section 92 obviously is not intended to bring in a new head of income or to charge tax on income which is not otherwise chargeable under the Act[2].

The Authority for Advance Ruling in the case of Amiantit International Holding Ltd.[3], held that in a case where income was not chargeable at all transfer pricing provisions of section 92-B(i) of the IT Act would not apply.

Thus, it was held by the Tribunal that investment in share capital of the subsidiaries outside India as the transactions are not in the nature of transactions referred to section 92-B of the IT Act and the transfer pricing provisions are not applicable as there is no income.

Even assuming that transfer pricing is applicable to transfer of shares or capital investment, the scope of its applicability is limited to the extent of issuance of shares to its group companies abroad at an underpriced value only and it doesn™t include any other aspect.

Another critical problem which shall be faced is with respect to the methods in determining the arm™s length price.  Comparable Uncontrolled Pricing method will be the appropriate method since the other methods mostly deals with the profit aspect. Even complexities may arise while computing the arm™s length price by Comparable Uncontrolled Method because the price of share depends upon various factors and it becomes too difficult while comparing the same. Even though the RBI had issued the methods to compute the value of shares, it has become obsolete as companies no longer practice the same.

Thus, transfer pricing isn™t applicable to share transactions as per the judicial decisions and even if it is applicable, it is likely to cause hardship to the assessees and the public at large.


[1] Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration, OECD, 1995

[2] Dana Corporation RE, 321 ITR 178 (AAR)

[3] 322 ITR 678 (AAR)

Tags: Finance Act 2001Income Tax Act 1961IndiaRoyal Dutch ShellTaxation in Indiatransfer pricingVodafoneVodafone India

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