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Shell wins multi-million dollar tax case in India over transfer pricing of shares
November, 20th 2014

On the heels of it losing a similar case against telecom major Vodafone, the IT department lost its Rs 18,000-crore transfer pricing cases against oil major Shell India at the Bombay High Court, which today quashed the department's tax order.

The tax sleuths had added Rs 15,000 crore and Rs 3,000 crore respectively to the taxable income of Shell India Markets Pvt Ltd, the Indian subsidiary of Royal Dutch Shell Plc, for the FY 2007-08 and FY 2008-09 in two transfer pricing cases.

The judgement comes in the wake of two similar transfer pricing cases, which were ruled in favour of the Indian subsidiary of Vodafone Group Plc, in which the I-T department had sought adjustments of over Rs 4,500 crore last month.

The order in favour of Shell India was passed today by a bench of justices M S Sanklecha and S C Gupte on a petition filed by Shell India Markets.

Transfer pricing tax orders of Income Tax against Shell and Vodafone pertain to alleged undervaluation of shares issued by their domestic subsidiaries to the parent companies abroad.

Transfer pricing refers to the practice of arm's length pricing for transactions between group companies based in different countries to ensure that a fair price ? one that would have been charged to an unrelated party ? is levied.

Shell India had issued 870 million shares to Shell Gas BV in March 2009 at Rs 10 per share. However, the Income Tax department contended that the shares were grossly undervalued and it valued them at Rs 183 (rpt Rs 183) per share. The department then added the difference to the taxable income of Shell India.

In a separate development this year, the Income Tax department had issued a show-cause notice adding another Rs 3,100 crore to Shell India's income for FY 2009 in another transfer pricing case.

Being aggrieved, the company moved the Bombay High Court challenging the tax notice.

Funding a subsidiary by issuing shares is a common practice among multi-national companies which view this as a capital transaction and out of the transfer pricing bracket.

However, the tax department argues that such a deal is a transfer pricing arrangement by which the shares issued are undervalued and hence the company is liable to pay tax on the income generated out of it.

The High Court did not agree with the department and quashed its order and show-cause notice against Shell India.

Welcoming the high court judgement, Shell India termed it as a "positive outcome".

"We welcome the High Court decision. Shell has always maintained that equity infusion by a foreign parent company into an Indian subsidiary cannot be taxed as income. This is a positive outcome which should provide a further boost to the government initiatives to improve the investment climate," a Shell India spokesman said in an e-mail statement.

Commenting on the Shell case verdict, Mukesh Butani, managing partner at law firm BMR Legal, which represented the British oil major in the case said, "The HC decision is a significant development and it follows the earlier judgement in the Vodafone case wherein it was ruled that in so far as transfer pricing principles are concerned the issuance of shares by an Indian company to its foreign parent is not eligible to transfer pricing provisions as there is no income arising therefrom.

"The High Court has held that the legal principle laid down by the Bombay HC applies in the Shell case and rejected the IT department's argument that the facts of Shell case were distinguishable from the Vodafone case," he said, adding the decision is a welcome relief not just for Shell India but for all MNCs who are facing the adjustment on share issuance.

It is significant to note that the court did not hesitate on exercising its extraordinary powers to issue a writ where alternate appeal remedy was available-- in this situation as the court felt that the tax department clearly exceeded its jurisdiction to bring to tax a capital transaction," Butani said.

Gokul Chaudhri of BMR said the high court decisively held that no transfer pricing or tax implications can arise on issue of shares by a subsidiary to its overseas shareholders.

Upholding the writ petition of Shell India the court brought to a close the controversy that arose in January 2013 and has since worried investors.

"This decision follows earlier decision of the court in similar circumstances for Vodafone India. Investors should welcome this bold intervention and clear thinking of the court. Hopefully one of the tax thorns that troubled investors has been removed. Acceptance of this decision by the government would be helpful to bring closure," Chaudhri said.

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