Shell India wins ₹17,920-crore transfer pricing case

After Vodafone, the Indian subsidiary of Royal Dutch Shell Group has escaped the taxman’s clutches on the transfer pricing front.

The Bombay High Court on Tuesday ruled in favour of Shell India, reaffirming the principle that no income tax implication can arise on a foreign parent’s funding of a local subsidiary through the issue of shares.

In a ruling, a Division Bench of the High Court deleted a transfer pricing adjustment of about ₹15,220 crore and ₹2,700 crore (for two different years) for Shell India, totalling ₹17,920 crore.

The High Court rulings in the Vodafone case earlier and the Shell India Markets case now clearly put to rest the tax controversy around capital infusion by foreign parents into their Indian units, say tax experts.

“We welcome the High Court decision. 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 the country’s investment climate,” a Shell spokesperson told BusinessLine .

Tax authorities had made a transfer pricing adjustment of ₹15,220 crore on account of issue of equity shares by Shell India Markets, a wholly owned subsidiary of Royal Dutch Shell Group, to its sole parent, Shell Gas BV, in March 2009.

For a fresh equity injection of ₹867 crore, shares aggregating to 86.7 crore were issued at ₹10 per share. However, the transfer pricing order valued the shares at ₹183 per share, leading to a transfer pricing adjustment of ₹15,220 crore.

Shell India had contended that the transfer pricing order was based on an incorrect interpretation of the tax regulations and was bad in law as the transaction was a capital receipt on which income tax cannot be levied.

Mukesh Bhutani, Managing Partner, BMR Legal, said the court’s decision is a welcome relief not just for Shell but for all MNCs that have faced problems with adjustment on shares issued. It follows the earlier judgment of Vodafone — the principle being that issuance of shares by an Indian company to its foreign parent is not liable to transfer pricing provisions as there is no income, he said.

Aseem Chawla, Partner, MPC Legal, said this is another instance where the Bombay High Court has not been persuaded by the revenue authorities’ stance on related-party transactions from the perspective of transfer pricing provisions.

“This judgment should send a clear message to revenue authorities and (they should) take it in their stride while adopting a constructive approach towards transfer pricing assessments,” Chawla said.

SP Singh, Senior Director at Deloitte in India, said the decision was welcome and along expected lines. “It will re-establish faith in the judicial system and may encourage investments into India,” he said.

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