I-T dept loses Rs18,000-cr transfer pricing case against Shell India

The Bombay High Court today quashed the income tax department's tax order in its Rs18,000-crore transfer pricing case against oil major Shell India over alleged undervaluation of shares issued by their domestic subsidiaries to the parent companies abroad.

The I-T department had added Rs15,000 crore and Rs3,000 crore, respectively, to the taxable income of Shell India Markets Pvt Ltd, the Indian subsidiary of Royal Dutch Shell Plc, for the FY 2007-08 and FY 2008-09 in two transfer pricing cases.

The judgement follows two other similar cases involving transfer pricing involving British telecom giant Vodafone Plc, which were ruled in favour of the Indian subsidiary of Vodafone Group Plc, in which the I-T department had sought adjustments of over Rs4,500 crore last month.

A bench comprising justices M S Sanklecha and S C Gupte today pronounced the order on a petition filed by Shell India Markets.

Transfer pricing involves arm's length pricing for transactions between group companies based in different countries and the provision is used to ensure that a fair price- one that would have been charged to an unrelated party - is levied.

Shell India had issued 870 million shares to Shell Gas BV in March 2009 at Rs10 per share. However, the income tax department contended that the shares were grossly undervalued and it valued them at Rs180 per share. The department then added the difference to the taxable income of Shell India.

In a separate development this year, the income tax department issued a show-cause notice adding another Rs3,100 crore to Shell India's income for FY 2009 in another transfer pricing case. The company moved the Bombay High Court challenging the tax notice.

Shell says funding a subsidiary by issuing shares is a common practice among multi-national companies for capital infusion, which is a capital transaction not subject to transfer pricing rules.

The I-T department, however, argues that such deals are transfer pricing arrangements by which the shares issued are undervalued and hence the company is liable to pay tax on the income generated out of it.

The high court did not agree with the department and quashed its order and show-cause notice against Shell India.

Shell India termed it as a "positive outcome".