The Indian government announced that it has accepted a decision of the High Court of Bombay in a case concerning whether an alleged undervaluation of equity investments made by multinational entities into their Indian associated entities constituted “income” to the Indian taxpayer.
The tax authorities in several cases alleged that in instances of undervalued share investments made by multinational entities into their Indian entities, a transfer pricing adjustment was required and would be based on the difference between the actual issue price and the arm’s length price of the shares.
The tax authorities re-characterized such shortfalls as “deemed loans” purportedly advanced by the Indian entity to its overseas parent company and, accordingly, imputed notional interest in the hands of the Indian taxpayers.
In several high profile cases on this issue, taxpayers approached the High Court challenging the jurisdiction of the Transfer Pricing Officers in taxing such undervaluation as “income” in the hands of the taxpayers. For instance, the Bombay High Court concluded in a late 2014 decision that because the issuance of shares by an Indian entity to its non-resident related party is not a taxable transaction—i.e., it is not a transaction giving rise to taxable income—the transfer pricing mechanisms of Chapter X do not permit a transfer pricing adjustment to the valuation as assigned by the taxpayer to the shares.
The Indian government then announced that it accepts the order of the High Court of Bombay in another case involving this issue.
Read a January 2015 report [PDF 339 KB] prepared by the KPMG member firm in India: Indian government accepts the order of the High Court of Bombay in the case of Vodafone India Services Private Limited
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