The Bombay High Court on Tuesday ruled that global oil major Shell is not liable to pay tax on the transfer pricing tax demand raised by the Income Tax department in 2009.
The I-T department had sought to add Rs 15,000 crore to the company’s taxable income after its parent Shell Gas invested in the shares of its local unit four years ago. While Shell invested in its Indian unit at Rs 10 per cent share, the I-T department had valued the shares at Rs 180 a share in January 2013 and charged Shell India with undervaluing share transfer within the group and evading tax. This is the second transfer pricing tax order passed against the I-T department after the Vodafone case.
The income tax order came under severe criticism from foreign investors who argued such demands will discourage foreign investment in India. The order will impact other cases where the multinationals are fighting against the tax department on similar grounds. Shell called it a tax on foreign direct investment and moved the Bombay High Court in April 2013.
Shell India said, “This is a positive outcome which should provide a further boost to the Indian government’s initiatives to improve the country’s investment climate.”
SP Singh, senior director, Deloitte Haskins & Sells LLP, said, “It establishes that additions without business, economic and legal logics will not have approval of the judicial process. It confirms the concept that arm’s length principle for price determination of a transaction should be applied when there is income, expense or interest involved.”
The court had last month ruled in favour of Vodafone in another transfer pricing case relating to undervaluation of share capital issued by Vodafone India Services Pvt Ltd to its Mauritius parent. The I-T department sought to bring the transaction of issue of share capital within the transfer pricing ambit and raised a demand of around Rs 3,200 crore. However, the court held that issue of shares does not give rise to any income and there can be no question of any adjustment.