Bombay high court on Tuesday ruled that oil major Shell India was not liable to pay income tax in a long pending Rs 18,000-crore dispute. This is expected to ease foreign investors’ concerns about tax predictability in India, and boost the country’s investment climate.
The judgement by a division bench was in many ways similar to the October 10 verdict in the Vodafone tax dispute, which also related to transfer pricing.
Shell India Markets Pvt Ltd had issued 867 million shares to its parent Shell Gas BV in 2008-09 at Rs 10 per share. The I-T department claimed that the shares should have been valued at Rs 183 each.
It further claimed that this undervaluation of Rs 173 per share (total value Rs 15,000 crore) was a disguised value transfer to the parent company, and imposed a tax demand on the same.
In 2009-10, the I-T department imposed another tax demand for an alleged Rs 3,000 crore undervaluation of shares issued to the parent.
Transfer pricing is the price at which divisions of a company transact with each other. The law states that this should be an arm’s length price, defined as the price the company would have charged a third party for the same goods or services. Issue of shares is, however, not governed by transfer pricing laws.
Shell welcomed the verdict.
“Shell has always maintained that equity infusion by a foreign parent company into an Indian subsidiary cannot be taxed as income. This is a positive outcome which should provide a further boost to the Indian government’s initiatives to improve investment climate,” it said in a statement.
The court said issue of shares does not give rise to income and, hence, there can be no case for applying transfer pricing rules.
Although the Income tax department did not comment, a senior tax official said a decision to appeal would be taken by the Central Board of Direct Taxes. “We have not yet decided on the Vodafone case as we still have time of two months. If the CBDT decides to file an SLP(special leave petition) in the Vodafone case, then there will be a similar decision in the Shell case also.” CBDT chairperson Anita Kapur, when contacted by Hindustan Times, refused to comment.
Tax experts welcomed the ruling saying that it confirms what was delivered in the Vodafone case; that transfer pricing is on capital account and not taxable.