A recent controversy faced by some taxpayers in India has been on whether transfer pricing (“TP”) provisions are attracted when shares are issued by an Indian company to its Associated Enterprise (“AE”) and whether issuance of shares at a price lower than the fair market value can result in a TP adjustment in the hands of the Indian company.
The Bombay High Court (“HC”) has pronounced today (10 October 2014) a much awaited and anticipated ruling on this matter in one of the taxpayers involved in litigation. The TP issue under consideration by the HC was whether the consideration for issue of shares to an AE should be computed based on the arm’s length price (“ALP”) and if the shares are issued for less than ALP can the difference be taxed as income in the hands of the taxpayer who issued the shares.
The HC in this case examined the nature of share issue transaction and ruled in favour of the taxpayer and held that since there is no ‘income’ arising out of ‘share issue’ transaction under general provisions of the tax law, TP provisions are not applicable. A detailed alert on the above judgment will follow shortly.
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