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The Bombay High Court has held in its landmark judgment today that issuance of shares by an Indian company to its foreign parent is not exigible to chapter X of transfer pricing provisions.

The controversy dates back to an early 2013 period wherein the tax administrations over react to such transfer pricing adjustments. A group of tax payers faced similar adjustments, causing nervousness in the minds of foreign multinationals, thereby adding to their challenges for doing business in India.

Vodafone and Shell amassed strength to invoke the extraordinary writ jurisdiction and decided to appeal to the Bombay High Court directly, bypassing ordinary appeals process.

Last November, the Bombay High Court in the first round of dispute sent the matter back to the dispute resolution panel (DRP), urging them to examine the preliminary issue of such transactions and in particular, if there was any income arising therefrom. The tax administration subsequent to high court order held on to its view and confirmed the transfer pricing adjustments, to which a second writ petition was filed.

In today’s order, the High Court has come to the conclusion that share issuance does not give rise to any income arising and hence, there can be no question of an adjustment.

Today’s judgment vindicates the taxpayer’s stands and lends clarity to the vexed question of applicability of the transfer pricing law to share issuance.

The timing of Bombay High Court verdict is significant given Prime Minister Modi’s visits to Japan and United States rolling red carpet for investors. Undoubtedly, this will improve investor’s sentiments and I hope that the government gracefully accepts the courts verdict and India puts an end to the controversy, which in the first place should not have arisen.

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