After Vodafone, Shell wins $240m tax case

MUMBAI: After Vodafone, energy major Shell has won a transfer pricing case against the income tax department. Several global giants are involved in transfer pricing litigation with the government, whose stand has been criticized. Investors have been critical of the way the tax department has gone about slapping notices over the past few years.
“We welcome the Bombay high court decision.Shell has always maintained that equity infusion by a foreign parent company into an Indian subsidiary cannot be taxed as income,’’ a Shell spokesperson said. “This is a positive outcome which should provide a further boost to the Indian government’s initiatives to improve the country’s investment climate.”
The case was of a 2009-10 assessment by the income tax department in share transfers made from Vodafone India to its Mauritius group company. The judgment in the Vodafone case by the bench of Chief Justice Mohit Shah and Justice M S Sanklecha had paved the way for other MNCs which have Indian subsidiaries whose capital financial transactions were being brought under the income scanner by the I-T department, a senior lawyer said.
In the Shell dispute which landed in court last year, the tax authorities had issued an order which sought to increase the 2008-09 taxable income of Shell India Markets Private Ltd, a 100 % subsidiary of Shell, by $2.7 billion. Shell had invested $160 million in the company to fund capital expenditure and losses incurred by the downstream business in India. In March 2009, shares were issued against this capital transaction at face value of Rs 10 per share as prescribed by Reserve Bank of India guidelines.
Shell’s case was that the I-T department’s transfer pricing order of January 2013 disregarded the RBI guidelines and had re-valued it on “arbitrary assumptions’’, prompting a potential tax liability. The I-T order is based on ‘incorrect interpretation of India tax regulations’, Shell submitted in court.
When in January 2014 a similar adjustment was proposed by the income tax authorities to a 2009-10 transaction at $140 million on shares issued of $8million, with interest of $320 million attributed on 2008-09 transactions, the potential tax liability for 09-10, including interest was calculated at $240 million, Shell said in its petition challenging the I-T orders. The HC had restrained the tax department from taking any action in the interim.