The latest Transfer Pricing Adventure, a new angle ….
There has been much of a controversy
lately about the tax demands raised against the Multinational Shell, Vodafone,
etc. in the matter relating to under-pricing of shares issued by these
companies to its Associated Enterprises sitting in foreign countries. The
Income tax department has been struggling hard to uncover the impugned
transactions claiming them as deceptive, under the transfer pricing regulations
and provisions. There are some respected economists who are on one hand
constantly jabbering and babbling about how these actions on the part of the
I.T Dept. will discourage the future economic conditions FDI, etc. and on the
other hand forgetting completely that such approach is completely antithetical
as far as their bother about country’s economic interest is concerned.
The manipulative nature of the
transaction can be scrutinized by simple logic. For e.g., Shell India which is
engaged in business of exploitation / exploration of natural resources of India
has availed various kinds of licenses, permissions etc. from the Indian
Government for its such functioning. Now on one hand where it has all the
authority to extract this valuable crude given by India, can it just be allowed
to value it at such a petty price of Rs. 10/- per share being the price at which
ownership in the company is invited to its own Associated Enterprise sitting in
foreign Country. If yes, why not such shares unbiasedly issued to Indian
investors as well, at such price? Furthermore when MNCs of this level of
business like Vodafone, Nokia, etc. are using
the services, resources, facilities and infrastructure provided by the Indian
Government, it cannot be just freely permitted to indirectly transfer its
ownership just by using a manipulative legal mask and thereby abusing legal
provisions for personal benefit. This will then result in undermining of the
Indian infrastructure and so its wealth and be a catastrophe for the Indian
economy !
The whole ‘Transfer-Pricing’
regulations have been enacted to check on the improper transfer of benefits
arising in the country, to stake owners sitting in Foreign Countries, thereby
causing a loss to Indian Economy. Economists can’t take a narrow minded
approach about country’s economy harping about probable discouragement for
FDIs, simultaneously ignoring the current losses caused to the economy due to
such manipulative practices on part of MNCs. The income tax department, by
using the machinery provided to it, has been trying to apply a correct value to
the stake in such companies so that the benefit arising from Indian Resources’
utilization doesn’t get transferred to the foreign stake owners at a miserably
petty price. Such companies are not only sabotaging the intent for which the
whole transfer pricing regulations were enacted but by such deceptive forms are
also disturbing the country’s need and idea for FDI. The percentage FDI which
would have been otherwise induced at a particular value consequently came to be
brought about in the same proportion but for a lesser value due to such current
form. The concise nature of the definition of the term ‘International
transaction’ in the Transfer pricing provisions, doesn’t mention all the
nature and details of the transactions entered, taking benefit of which large
no. of taxpayers have omitted to report the International transactions. Therefore
for clarification purpose, section 92B of the Income tax was amended by
the Legislature in the last Finance Bill 2012 whereby transaction of Business
re-organization and Restructuring were also made to be included. This
insertion undisputedly applies to such Re-organizing and restructuring
transactions irrespective of the fact that it has a bearing on Profits, income,
losses or Assets of the Enterprise. This amendment being a clarification of the
intended Legislative purpose was inserted by way of Explanation to the section
92B with retrospective effect from 1.4.2002.
Some
Critics have also alleged that the instant scenario, if compared to a Bonus
Issue, clearly illustrates that the taxing action of the Dept. is rubbish!
But hello, the same logic cannot, by any stretch of imagination apply to the
current scenario !! Comparing
two totally diverse things as such is absolutely non-sensical. Although in a bonus issue, the benefit of
owning a stake in a company is passed for free, such issue is always made to
all the shareholders in an unbiased manner. Also there is no issue of new
capital but the existing ownership is further diluted into a larger no. of
shares, and no specific Associated Enterprise of the company has right to
subscribe to a bonus issue.
The reasonability of determinations of
price /value of assets transferred on the part of the I.T. Officials in
such transfer pricing cases depends on how they substantiate it and how
satisfactory and plausible it is found by the adjudicating forums. The Judicial
authorities are undoubtedly competent to decide the issue in a way that will
finally meet the ends of Justice from all perspectives.
Chartered Accountant
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