Shell India won 18000-crore rupees tax dispute case against Income Tax department

The Bombay High Court on 18 November 2014 quashed the Income Tax department’s 18000-crore rupees tax order against oil major Shell India.

The ruling in favour of Shell India was passed by a bench of Justice M S Sanklecha and Justice S C Gupte on a petition filed by Shell India Markets.

The High Court held that the legal principle laid down by it in the Vodafone case in October 2014 also applies in the Shell case too and rejected the I-T department’s argument that the facts of the Shell case were different from the Vodafone case.

In the Vodafone case, the High Court had held that in so far as transfer pricing principles are concerned the issuance of shares by an Indian company to its foreign parent is not eligible to transfer pricing provisions as there is no income arising there from.

The Shell India Case
The case pertains to alleged under pricing of shares issued by Shell India to its parent company abroad.

In March 2009 Shell India had issued 870 million shares to its parent company Shell Gas at 10 rupees per share.

However, the IT department contended that the shares were grossly under-priced and it valued them at 180 rupees per share. The IT department also contended that the under-pricing of shares by the Shell India was covered by transfer pricing and hence it was liable to pay tax on the shortfall of premium.

As a result, IT department added the difference of 15000 crore rupees and 3000 crore rupees respectively to the taxable income of Shell India Markets Pvt Ltd for the Financial Year (FY) 2007-08 and FY 2008-09 in two transfer pricing cases.

In a separate development, the IT department issued a show-cause notice adding another 3100 crore rupees to Shell India's income for FY 2009 in another transfer pricing case.

To this, Shell India challenged the IT department’s show-cause notice in the Bombay HC. It challenged the IT department’s order maintaining that funding a subsidiary by issuing shares is a common practice among multi-national companies which view this as a capital transaction and out of the transfer pricing bracket.

Comment
A rash of high-value tax claims on foreign firms, including IBM Corp and Nokia Oyj, in last few years has sparked criticism that overly zealous tax authorities could undermine foreign investment in India.