Transfer pricing case: Bombay high court rules in favour of Shell India
Order relates to the issuance of 870 mn shares by Shell India to an overseas group entity, Shell Gas, in March 2009
Mumbai: The Bombay high court on Tuesday ruled in favour of the Indian subsidiary of Royal Dutch Shell Plc in connection with two transfer-pricing adjustments made by the income tax department of Rs.15,000 crore and Rs.3,000 crore for 2007-08 and 2008-09, respectively, to the taxable income of Shell India Markets Pvt. Ltd. Last month, the court had ruled in favour of the Indian subsidiary of Vodafone Group Plc in two similar cases of transfer-pricing adjustments of over Rs.4,500 crore made by the income tax department. The transfer pricing tax orders passed against Shell and Vodafone stem from the alleged undervaluation of the shares issued by the Indian firms to their parent companies. 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. The income tax order against Shell India relates to the issuance of 870 million shares by the firm to an overseas group entity, Shell Gas BV, in March 2009. The shares were issued at Rs.10 each, which was contested by the tax authorities in Mumbai. The income tax department challenged the valuation methodology of Shell India and pegged the value of the shares at Rs.180 apiece. It then added the difference to the taxable income of Shell India. In the second instance, earlier this year, the tax department issued a show-cause notice and subsequently an order to Shell India, adding over Rs.3,100 crore to its taxable income for fiscal 2009. The company challenged the decisions of the tax department in high court through a writ petition. Funding a subsidiary by issuing shares is a common practice among multinational companies, which they typically view as a capital transaction and out of the transfer pricing net. The income tax department, however, disputes this claim.
