Shell India to challenge Income Tax order

Says transfer pricing order has no legal basis and Rs 15,220 cr tax is contrary to spirit of FDI

Shell India has contested an Indian government order on payment of tax stating that the transfer pricing order has revalued its share even though there is no such provision in the law.

A Rs 15,220 crore ($2.7 billion) tax demand has been proposed in the transfer pricing order of FY 08-09 of Shell India Markets Pvt Ltd (Shell India), a wholly owned subsidiary of the Royal Dutch Shell Group of Companies. This adjustment is on account of an issue of equity shares by Shell India to its sole parent Shell Gas BV, in March 2009. Against a fresh equity injection of Rs 87 crore ($160 million) shares aggregating to Rs 8.7 crore, were issued at a value of Rs 10 per share. "The share issuances were in accordance with the terms of the foreign investment policy, the prevailing exchange control regulation, the applicable corporate and related laws," said the company in a statement.

In a strongly worded statement, Yasmine Hilton, chairman, Shell group in India said, "Shell globally and in India complies with all applicable local regulations and laws and has also done so in this instance."

The company said the transfer pricing order is based on an incorrect interpretation of the Indian tax regulations and is bad in law as this is a capital receipt on which income tax cannot be levied. Funding of a subsidiary through issue of shares is common in India and globally. “Taxing the money received by Shell India is in effect a tax on Foreign Direct Investment (FDI), which is contrary not only to law but also to the spirit of the recent global trip by the Finance Minister to attract further FDI into India," said Hilton.

The valuation of the shares was undertaken by a certified independent valuer who assessed the value in line with the foreign investment and exchange control laws to be below Rs 10 per share and the issue was made at  Rs 10 per share. "The valuation certificates were filed with the regulatory authorities. As such the Royal Dutch Shell group intends challenging the order and will be evaluating all options for redress," it said.

The Royal Dutch Shell group has over the last few years made significant investments in India. The company said equity injection was used to finance these investments and to fund the ordinary business activities of Shell India. Shell Gas BV was the only parent of Shell India before this equity issue and continued to be so after the issue.