After lengthy and painful litigations by Vodafone and Shell, the Essar Group is the latest to have moved the Bombay HC against the Tax Department in a transfer pricing dispute.
The issue involves the issuance of shares by three Essar Group companies – Essar Power, Essar Projects and Equinox Technology Parks – to their parent company. The I-T department has alleged undervaluation of shares at the time of issuance of shares. The Department, with the Discounted Cash Flow (DCF) method, computed the value of the shares as being higher and has deemed the difference between the DCF valuation and the value at the time of issue as ‘receivables’ accruing to the Essar Group companies and has sought to apply interest to this ‘income’.
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This transfer pricing dispute bears close resemblance to the issue confronting British telecom major – Vodafone, in the Rs 1300 crore and the Rs 3000 crore transfer pricing disputes and the Rs 15,000 crore Shell transfer pricing dispute, with the department alleging undervaluation at the time of issuance of shares by the bellwethers.
Aggrieved by this position of the department, Essar Group had moved the Dispute Resolution Panel (DRP), which had ruled in favour of the Department. Consequently, the Essar Group companies have now moved the Bombay HC, challenging the DRP order.
Essar which is seeking, through the petition, to restrain the Assessing Officer (AO) from passing a final order, has raised questions on the jurisdiction of the Department. Essar will be arguing that with the issuance of shares merely corresponding to capital infusion and with no revenue receipts, there can be no question of application of transfer pricing provisions.
Interestingly, in the Vodafone Rs 1300 crore transfer pricing dispute, the Bombay HC had remanded the matter back to the DRP with explicit directions for the panel to adjudicate on the same question of jurisdiction, with respect to capital receipts.
Essar is also likely to argue that ‘income’ as cited by the Department is, at best, notional in nature and that it falls outside of the scope of transfer pricing provisions. Essar is also likely to assert that the capital account transactions can be taxed only in rare cases of the law explicitly providing for the said transaction to be brought to tax.
Meanwhile, CNBC-TV18 reached out to the Essar Group. In an exclusive statement, Essar said: “The recent transfer pricing additions represent an industry issue and not a company specific issue. Essar has always complied with all applicable regulations and has done so in this case as well.”
The Bombay HC will now hear the matter on February 24.
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