If a non-resident company holding shares of an Indian company sells the shares to its non-resident associated enterprise outside India, whether TP provisions would still apply? Whether the price charged for such transfer would have to be justified using ALP? Whether both the companies would have to maintain documentation and also obtain an accountant’s report?
Analysis of arguments:
It may be argued that none of the methodologies prescribed in the Indian transfer pricing regulations are relevant for undertaking a valuation for transfer of shares. Hence in such a case it may be possible to contend that transfer pricing provisions are not applicable.
On the contrary, taking a more conservative approach, transfer pricing provisions should normally apply to a transaction involving transfer of shares of an Indian enterprise by one non-resident enterprise to its non-resident associated enterprise. This is because capital gains arising from such a transfer would be classified as income arising from an international transaction. In view of this, the price charged for such a transfer should be justified using ALP and the corresponding documentation & accountants report should be maintained by both the parties.
Further, with effect from April 1, 2003, 100% tax exemption has been granted to long term capital gains arising from the transfer of the shares of a company listed on the BSE-500 Index of the Mumbai Stock exchange or another recognizable stock exchange in India. Thus, in the event the shares of the Indian entity transferred by one non-resident to another non-resident are listed on the specified stock exchange, it may possible to contend that transfer pricing regulations do not apply to long term gains arising out of s ...