New Delhi: Following opposition by companies over the recent spate of transfer pricing orders, the government has sought the attorney general’s opinion on the scope and applicability of the income tax Act (I-T Act) over these transactions.
Finance minister P. Chidambaram on Wednesday told reporters the government is awaiting the reply of the attorney general and said that these cases are being approached in a “purely professional manner”.
Transfer pricing refers to the practice of arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price—one that would have been charged to an unrelated party—is levied.
The attorney general will look into whether chapter X of the income tax Act will be applicable to transactions where shares were issued by a subsidiary to the parent company.
In the past few weeks, a number of companies including Shell India received notices from the income tax department for underpricing their shares while issuing them to the parent firm. The companies contended that such share issuances do not fall under the ambit of transfer pricing as they do not affect the taxable income of the Indian company and reduce the tax payout to the government.
These aggressive tax demands have once again stoked fears among companies and tax consultants despite earlier assurances by the finance minister about a stable and certain tax regime.
“So far as Shell is concerned and the number of cases similar to that, there are orders that have been passed. There is the order of the tribunal in one. So what is the scope and interpretation of chapter X to a case of this nature where shares have been allotted by a subsidiary to the parent company?” said Chidambaram. “That question has been referred to the attorney general few days ago and we are awaiting the advice of the AG. We are approaching all these cases in a purely professional manner.”
The income tax department accused Shell India of under-pricing a share transfer within the group by Rs15,220 crore. Shell India had issued 87 million shares to an overseas group entity, Shell Gas BV, in March 2009 at Rs10 a share. The income tax department then challenged the valuation methodology of Shell India and pegged the value of the shares at Rs183 each.
Chidambaram also said the Cabinet will take a final call on the settlement of the Vodafone tax case. “As far as Vodafone is concerned, they had written to us proposing conciliation. We have written back saying that yes, your request will be considered by the competent authority. So the matter will go to the Cabinet,” Chidambaram said.
Vodafone International Holdings BV, a Dutch-registered unit, bought the Indian business operations of Hutchison Telecommunications International Ltd (HTIL) through the sale of a Cayman Islands-based firm called CGP Investments (Holdings) Ltd, a unit of HTIL.
Vodafone and Indian tax authorities went to court after the tax department said that capital gains tax is payable on this transaction in India. The Supreme Court in January last year ruled in Vodafone’s favour. But the government introduced retrospective amendments in last year’s budget making the transaction taxable.