November 11, 2014 | By Keith Martin in Washington, DC

INDIA lost a round in court over whether taxes can be triggered when a foreign parent company makes a capital contribution to its Indian subsidiary in exchange for shares. The Bombay High Court said no in October in a case involving Vodafone.

India has been asserting the right to tax multinational corporations that make capital contributions in exchange for shares in Indian subsidiaries to the extent the shares are worth more when issued than the contributed capital.

The tax authorities claimed that share issuances by Vodafone India Services to its offshore parent in August 2008 led to income in the next two years.

Vodafone subscribed to 289,244 shares in Vodafone India for 8,000 rupees a share that the Indian authorities said were worth 50,000 rupees a share. Indian authorities hit the telecom company with a 13 billion rupee transfer pricing adjustment. They said the difference in value must have been paid by the parent company, but then loaned back to the parent so that Vodafone 

India should be reporting continuing interest on the loan. They imputed a 13.5% interest rate. The tax authorities said this added about $490 million to the subsidiary’s income for the two years.

The court said the share subscription was fundamentally a capital contribution that does not give rise to income.

Shell is challenging a transfer pricing adjustment of 152.2 billion rupees ($2.86 billion) with which it was hit after an equity subscription by Shell Gas BV in Holland in shares of Shell India.