Tax order goes against FM's FDI drive, says Shell India

Global petrochemical and energy giant Shell’s Indian arm will challenge the Income tax department’s transfer pricing order that has alleged underpricing of Rs 15,000 crore by Shell India while issuing shares to it’s sole parent Shell Gas BV in March, 2009, alleging that the order was based on incorrect interpretation.

“Taxing the money received by Shell India is, in effect, a tax on foreign direct investment, which is contrary not only to law but also to the spirit of the recent global trip by the finance minister,” Shell India Chairman Yasmine Hilton said.

Finance Minister P Chidambaram last month met with investors in Hong Kong, Singapore, Frankfurt and London in a push to attract investment to India as he looks to shore up the country’s finances and stave off a credit rating downgrade.

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Income tax department has charged Shell India of under- pricing a share transfer within the group by Rs 15,220 crore, and consequently evading taxes. The order relates to the issue of 8.7 crore shares by Shell India to an overseas company Shell Gas BV in March 2009. The shares were issued at Rs 10 a share, which the income-tax authorities contest and peg higher at Rs 183 a share instead.

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“Tax evasion (reports) are baseless and Shell India will challenge this order strongly and is evaluating all options for redress,” Anglo-Dutch oil major Royal Dutch Shell’s India unit head Yasmine Hilton said in a statement.

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An official in the Indian tax office with direct knowledge of the matter said the Shell case was a result of a “difference of opinion” on the valution of shares and that Shell had a right to contest it before a dispute resolution panel of the department.

At the centre is a 2009 equity injection involving Shell India and parent Shell Gas in which Rs 87 crore worth of shares were issued at a value of Rs 10 per share, stock which taxmen now claim was in fact worth Rs 183 per share.

The company said the valuation of the shares was undertaken by a certified independent valuer who assessed the value (in line with the foreign investment and exchange control laws) to be below Rs 10 per share and the issue was made at Rs 10 per share. The valuation certificates were filed with the regulatory authorities.

Transfer pricing refers to the practice of arm’s-length pricing of transactions among companies, which are part of a group and spread across different countries. The law seeks to ensure that fair prices are levied in cross-border transactions.

A Business Standard report, quotes tax experts as terming the valuation of the unlisted company as a grey area which would lead to litigation. “In a listed company, the valuation is based on Sebi formula, which is the average of six-month or two-week share price, whichever is higher..But in unlisted companies, the valuation can be based on fair market price, or book value, or returns on share based on a certification by an independent valuer, R S Loona, managing partner of Alliance Corp Lawyers, was quoted as saying in the report.

With inputs from Agencies