Shell wins transfer-pricing tax dispute in Bombay HC

Good news for MNCs fighting similar cases

The Bombay High Court on Tuesday ruled in favour of Shell in a transfer-pricing order that sought to tax the energy giant’s 2009 investment in its Indian subsidiary. The order will have an impact on other multinationals fighting the tax department on similar grounds.

The income-tax department had sought to add Rs 15,220 crore to Shell India’s taxable income after Shell Gas invested in its local arm at Rs 10 a share. The tax department valued Shell India’s shares at Rs 180 apiece in January 2013 and charged it with undervaluing those to evade tax.

Calling it a tax on foreign direct investment, Shell India moved the Bombay High Court in April last year. The court rejected the tax department’s argument that the Shell case was distinguishable from Vodafone’s case, which won a similar reprieve in October.

“The Shell India case is significant. It follows the earlier Vodafone judgment — the principle being that issuance of shares by an Indian company to its foreign parent is not exigible to transfer-pricing provisions, as there is no income arising therefrom,” said Mukesh Butani, managing partner of BMR Legal, which represented Shell India.

The Bombay High Court judges, M S Sanklecha and S C Gupte, set aside the tax department’s order over jurisdiction and did not get into the valuation of the shares.

Transfer pricing is the value at which companies trade products, services and assets among units in different countries, a regular part of business for a multinational but a practice tax authorities feel is often exploited. The rules require all cross-border transactions among group companies to be valued as if those were with an unrelated company.

"The decision is a relief not just for Shell but for all multinationals that have faced adjustments on share issuance. The court felt the tax department clearly exceeded its jurisdiction to bring to tax a capital transaction," Butani added.

"Investors should welcome this bold intervention of the court. Hopefully, one of the tax thorns that troubled investors has been removed," said Gokul Chaudhri, leader of the direct tax unit at BMR & Associates.

When contacted, a finance ministry official said: "The order has to be studied carefully. After that, we will decide whether there is a need to file a special leave petition in the Supreme Court." He added a decision would be taken on merit.

The government has 90 days to appeal in the apex court. A view will be taken by the Central Board of Direct Taxes once the assessing officer sends his report to the chief commissioner. Sometimes, the matter is also referred to the law ministry and the process takes about two months.

In October, the Bombay High Court had ruled in favour of British telecom major Vodafone Group, saying it did not have to pay the extra Rs 3,200 crore tax demanded from the authorities. The government has not decided whether or not to appeal against the Vodafone judgment yet.

Tax experts welcomed Tuesday's verdict. "It confirms the concept that the arm's-length principle for determination of price of a transaction should be applied only when there is income, expense or interest involved," said S P Singh, senior director at Deloitte Haskins & Sells.

"The tax department must undertake a systematic study of recent decisions from various appellate authorities and issue instructions to avoid frivolous additions. It is necessary that administrative solutions are sought. This will call for substantial review of the process of assessment and dispute resolution," he added.
DISPUTES DIARY

Leighton India Contractors: Tax authorities slapped a notice on the company for subscribing to the shares of its Indian arm; it was a Rs 900-cr transfer-pricing dispute

IBM: The US technology major was asked to pay Rs 5,753 cr as income tax for under-reporting revenue for 2008-09

Nokia: Received a Rs 13,000-cr tax demand for transfer-pricing violations. The company has since moved court and shut its Chennai unit

Cairn India: Cairn Energy transferred shares of Jersey-based Cairn India Holding to Cairn India in 2006. The share transfer in India was valued at about Rs 26,000 cr. Authorities claimed this led to capital gains for Cairn UK Holdings taxable in India. The matter is still under consideration