Transfer price notices receive AGs approval

Written by Indu Bhan | Indu Bhan | New Delhi, | Updated: May 16 2013, 07:50am hrs
Attorney general GE Vahanvati has endorsed the finance ministrys recent moves slapping income tax demands on companies for alleged undervaluation of shares in cross-border deals, saying the department was within its rights to scrutinise such transactions for violation of transfer pricing (TP) rules.

Shell India, the Indian arm of Royal Dutch Shell that received a $1-billion tax demand for alleged undervaluation of its shares while raising money from its global parent, had said earlier the move had no basis in law.

The development assumes significance as around 27 such deals are under the departments scanner including Shell India and Vodafone.

According to sources, the AGs legal opinion, which was sought by the law ministry in March, has been sent to the finance ministry, which wanted to know the legality of transfer pricing laws in such cases. Finance minister P Chidambaram has already approved the AGs report, it is learnt.

Kapil Sibal, who took additional charge of the law ministry on Monday, however, said he was not aware of the AGs opinion. As FE reported earlier, Sibal approved settlement through conciliation (subject to Parliaments approval) the tax dispute with Vodafone, which arose out of its $11-billion purchase of Hutchisons India operations in 2007. Former law minister Ashwani Kumar had termed such conciliation, mooted by the finance ministry, as illegal.

The AG had considered around 27 cases where TPOs have made transfer pricing adjustments under section 92CA of the Income Tax Act, 1961. Besides Shell and Vodafone, other cases include five companies of the Ruia-controlled Essar group, Microsoft India, HSBC Securities and Capital Markets India Pvt Limited, Standard Chartered Securities, Havells India and Bharti Airtel.

The tax authorities issued notices to several companies during 2012-13, citing undervaluing share sales to their associate companies.

Tax experts feel that such issues need to be resolved fast and the way forward, as in the Vodafone case, is conciliation. But conciliation seems to be case-specific. Such issues need to be quickly resolved. There is a disconnect between what the tax authorities and taxpayers feel, Shyamal Mukherjee of PricewaterhouseCoopers (PwC) said, adding that resolution could have taken place even before assessment orders were served on them.

Such issues do affect foreign investments as the environment needs to be more investor-friendly, they added.

Even some tax experts said that in some cases like Shell, it is to be seen whether transfer-pricing rules apply at all. Shell took an investment decision and there is no taxable transaction involved, experts feel.

In a transfer-pricing order in March, the revenue authorities had alleged that Shell India, the Indian arm of Royal Dutch Shell Plc, undervalued its shares when raising money from its global parent Shell Gas BV a few years ago. Shell sold 8.7 crore shares to its parent. The I-T authorities say that Shell undervalued the deal by Rs 15,220 crore, evading taxes. The price should have been Rs 187 per share and not Rs 10 per share, they added.

However, Shell India sued income tax authorities in the Bombay High Court, arguing it had received capital and did not earn any income, and only income can be taxed under tax laws.

In the case of the Essar group companies, which include Essar telecom Infrstructure, Essar Technology Park, Essar Power, Essar Construction and Essar Investments, the TPOs have assessed total value of shares at Rs 10,301 crores while the company estimates the value to be around Rs 2,298 crore.

Similarly, in the case of HSBC, the total value of shares assessed by the TPO is Rs 1,880 crore, while that by the company is Rs 945 crore.

This led to protests with Shell saying that this is a tax on FDI and termed the tax demand as absurd. We do need the right signal that India is going to be a stable fiscal, legal, tax regime. We are not going to have surprises along the way, Yasmine Hilton, the India head of Royal Dutch Shell, had told reporters in February.