New Delhi: Shell India Pvt. Ltd, the Indian unit of Royal Dutch Shell Plc., will challenge an order by India’s income tax department that accused it of evading taxes by under-pricing an intra-group share transfer by Rs.15,220 crore, a top group executive confirmed on Monday.
“Recent media reports on tax evasion are baseless and Shell India will challenge this order strongly and is evaluating all options for redress,” Yasmine Hilton, chairman of the Shell Group of Companies in India, said in an emailed statement on Monday.
Mint reported on Saturday, citing a person who didn’t want to be named, that Shell India plans to contest the I-T department’s order. A spokesperson for the India arm confirmed receipt of a notice from the tax department, the report said.
The company has the option of approaching the dispute resolution panel or the commissioner of income (appeals) for contesting the order.
Transfer pricing refers to the practice of arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price—one that would have been charged to an unrelated party—is levied.
“Shell India’s considered view is that the transfer pricing order is based on an incorrect interpretation of the Indian tax regulations and is bad in law as this is a capital receipt on which income tax cannot be levied. Funding of a subsidiary through issue of shares is common in India and globally,” Shell India said in the statement. India has seen a sharp increase in disputes relating to transfer pricing, with the tax department adopting an aggressive stand while arriving at a price for the transaction. The transfer pricing assessment by the tax department for the year ended March 2008 saw the government raising claims to the tune of $9.5 billion.
“Taxing the money received by Shell India is in effect a tax on foreign direct investment (FDI), which is contrary not only to law but also to the spirit of the recent global trip by the finance minister to attract further FDI into India”, said Hilton.
This comes in the backdrop of the $2 billion tax dispute between Vodafone Group Plc and the Indian tax authorities, though the transactions are of a different nature.
Television channel ET Now reported on 31 January that “the income tax order relates to the issue of 87 crore shares by Shell India to an overseas group entity, Shell Gas B.V., in March 2009. The shares were issued at Rs.10/share, which has been contested by the income tax authorities in Mumbai. The income tax department has challenged the valuation methodology of Shell India and has pegged the value of the shares at Rs.180/share instead”.
The tax department concluded the recent round of transfer pricing on 30 January for the period ended March 2009.
“The share issuances were in accordance with the terms of the foreign investment policy, the prevailing exchange control regulation, the applicable corporate and related laws. 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. The transfer pricing order has valued these at Rs.183 per share even though there are no provisions under the income tax law for such revaluation,” Shell clarified in its statement. Apart from running the liquefied natural gas terminal at Hazira on India’s west coast, Shell India also has a presence in domestic fuel sales. The company has invested $1billion in India.