1. Outlook
32 December 2014 | Legal Era | www.legalera.in
Coming as they do at a
time when MNCs have been
complaining about arm-twisting
tactics employed by Indian tax
authorities to squeeze more
tax revenue out of them, the
two verdicts may well be the
beginning of the end of India’s
days of tax terrorism
-By Fatima Ansari

2. Outlook
33www.legalera.in | Legal Era | December 2014
After Vodafone, Shell Escapes
From The Jaws Of
Income Tax
The IT Department
had added `15,000 crore and `3,000 crore, to the taxable
income of Shell India Markets Pvt Ltd, the Indian subsidiary
of Royal Dutch Shell Plc, for FY 2007-08 and FY 2008-
09 respectively, in two transfer pricing cases. A Bombay
High Court bench of justices M S Sanklecha and S C Gupte
on a petition filed by Shell India Markets Pvt Ltd quashed
the IT department’s `18,000-crore transfer pricing orders.
Shell India Markets Pvt Ltd was represented by BMR Legal
managing partner Mukesh Butani who instructed senior
counsel Percy Pardiwala.
Here is a quick and easy gist of this pathbreaking tax
development.
What got the ball rolling?: Shell India Markets Pvt Ltd
issued 8.7 crore shares to its overseas parent company Shell
Gas BV in March 2009. The shares were issued at `10 a share.
What riled the Taxman?: As per the IT Department, these
new shares were issued to the parent company at an unduly
cheap price. They fixed the value of a share at `183 and
concluded that this violated ‘transfer pricing norms.’
Transfer Pricing?: ‘Transfer pricing norms’ require that all
parent-subsidiary dealings should take place at a fair price.
Transactions between group companies based in different
countries should apply an arm’s length pricing. This is to
ensure that a fair price - one that would have been charged to
an unrelated party - is levied.
The problem?: As tax authorities felt that the fair price of one
share should be `183 and not the paltry `10 at which they
were issued by Shell India Markets Pvt Ltd to Shell Gas BV,
Shell India was charged of under-pricing this share transfer
that took place within the group by `15,220 crore. To add to
this, earlier this year, the tax authorities had issued a show-
cause notice adding another `3,100 crore to Shell India’s
income for FY09 in another transfer pricing case, taking the
total taxable income to about `18,000 crore.
What Shell has to say?: Beleaguered Shell India moved the
Bombay High Court challenging these taxes. It argued 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. The parent
company Shell Gas BV had invested $160 million in Shell
India via this capital transaction to fund capital expenditure
and losses incurred by the downstream business in India.
The shares were issued against this capital transaction at a
face value of `10 per share as prescribed by Reserve Bank of
India guidelines. The IT department’s transfer pricing order
of January 2013 disregarded the RBI guidelines and had re-
valued it on “arbitrary assumptions’’, prompting a potential
tax liability.
What the Taxman said?: The tax department argued that
such a deal is a transfer pricing arrangement by which the
shares issued were undervalued and hence the company is
liable to pay tax on the income generated out of it.
The Court’s verdict: Issue of shares does not give rise to
income and, hence, shares issued by an Indian firm to its
overseas parent company are not taxable under transfer
pricing provisions. On the reasoning that as there is no
‘income’ to tax, there can be no income tax demand, the
Bombay High Court quashed the IT department’s tax demands
against Shell India.
Significance: This is the second such case in a month’s time
(earlier being the Vodafone tax victory for a similar issuance
of shares to its parent company, also in the Bombay HC) in
which the tax authorities have been defeated. Multinational
companies have been complaining that Indian tax authorities
are arm-twisting them to derive more tax revenue. Shell’s
victory, together with the Vodafone verdict, may help signal
to foreign investors that India’s days of “tax terrorism are
now over, that is if the Central Board of Direct Taxes refrains
from filing an appeal.
Disclaimer – Statements and opinions expressed in this
article are those from the editorial and are well researched
from various sources. The content in the article is purely
informative.
“In a Taxing Act, one has to look merely at what is clearly said. There is no room for any intendment. There
is no equity about tax. There is no presumption as to tax. Nothing is to be read in, nothing is to be implied.
One can only look fairly at the language employed.” - Rowlatt J.