Shell, Vodafone get fresh tax notices

More transfer pricing disputes in the offing

In fresh notices to Shell and Vodafone for allegedly undervaluing transactions with group companies, the tax department has added Rs 3,100 crore and Rs 3,000 crore, respectively, to their income in India. The adjustment translates into a tax demand of about Rs 1,000 crore each and the amount would go up further if interest and penalty is also levied.

The transfer pricing orders have been issued for the assessment year 2010-11. The two companies are already battling cases for similar demands for assessment year 2009-10. More such notices to multinational companies may be challenged in courts in the coming days, as January 31 was the last day for sending transfer pricing assessment orders this year.

The Bombay High Court on Thursday put a stay on the transfer pricing orders, asking the assessing officers not to take any further steps. The next hearing is on March 7.

Confirming the notices to these companies, a finance ministry official said the demand was made after careful consideration as after receiving flak from multinational companies last year the tax department was “very careful this time” in dealing with transfer pricing cases.

“We have received a show-cause notice from the tax department for financial year 2009-2010.  Shell holds the view that the funding of a subsidiary through equity injection is a capital receipt on which income tax cannot be levied,” said a company spokesperson.

The department, on the other hand, has raised the tax demand contesting valuation of shares transferred by Shell India to its parent company. It said had the Shell transferred the shares to an unrelated party it would have got a higher price. “There is a difference between issuing a share and selling a share. The case would have been different if Shell India had sold the shares to the parent company. You cannot levy tax on creation of shares,” said Amit Maheshwari, Partner, Ashok Maheshwary & Associates.

Last year also, the department had argued that under-pricing of shares led to a loss of over Rs 15,000 crore to the Indian subsidiary. Shell India issued 87 million shares to Shell Gas in March 2009 at Rs 10 a piece. The department contested this figure and said the shares should have been priced at Rs 183. It sent a demand order pegging Shell’s liability at Rs 5,000 crore.

Shell and Vodafone had moved the court after receiving show-cause notices from the tax department on January 22 and January 17, respectively. However, when the case came up for hearing on January 30, the tax department said it had already sent demand orders to the companies on January 29. The companies said they would challenge the orders upon receiving and sought “status-quo” on the issue till they file an amended petition.  

Of about 3,200 cases taken up for transfer pricing audit in 2012-13, an adjustment of Rs 70,000 crore was made in nearly 1,600 cases, against an adjustment of Rs 44,531 crore in 1,343 cases in 2011-12, representing an increase of 57 per cent.