New Delhi: The Indian arm of Royal Dutch Shell Plc , Shell India Pvt. Ltd, has been accused by the income-tax (I-T) authorities of underpricing an intragroup share transfer by Rs. 15,000 crore and consequently evading taxes, said a person familiar with the development.
Following the notice, which is one of the biggest transfer pricing orders by the I-T department, Shell India plans to challenge the assessment, added the same person, who did not want to be identified.
A spokesperson for the India arm confirmed receipt of the notice from the tax department.
A Shell India spokesperson said in an emailed response: “Shell India tax experts have indeed been in discussions with the Indian tax authorities on this issue over the past week and do not agree with their views. The tax officer has now made an assessment and passed an order. We will review the order and initiate consequent appropriate actions.”
A Royal Dutch Shell spokesperson didn’t immediately respond to Mint’s queries.
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.
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 (around Rs.50,635 crore today).
With multinational companies looking to expand their footprint in India, the issue of arm’s length pricing has come under increasing scrutiny of the transfer pricing wing of the I-T department. It also comes at a time when the government is struggling to meet its fiscal deficit targets on account of slowing revenue collections, especially on the corporate tax front.
Television channel ET Now had reported that “the income-tax order relates to the issue of 87 crore shares by Shell India to an overseas group entity, Shell Gas BV, 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 issue is being studied in detail. The legal counsels are being consulted whether to approach a court of law or the I-T department. There are a lot of infirmities in the order,” said the person cited above.
The company has the option of going to the dispute resolution panel or to the commissioner of I-T (appeals).
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.
Shell India told tax authorities its shares were valued at around Rs.7 and, therefore, the allotment of shares to the overseas group entity at Rs.10 each was at the market rate, according to ET Now.
“The transfer pricing officials challenged the manner in which the valuation was done using discounted free cash flow method,” it said. The valuation was higher than what had been shown, the channel added.
The tax department concluded the recent round of transfer pricing on 30 January for the period ended March 2009.
A Central Board of Direct Taxes spokesperson couldn’t be contacted.
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.
“After the conclusion of the audit cycle, the transfer pricing order goes to the assessing officer, who will consolidate other issues as well and come out with a comprehensive draft order,” explained Rohan Phatarphekar, India head (transfer pricing) at audit and consulting firm KPMG.
To avoid such disputes, the government notified advance pricing agreements (APA) last year. APA is an agreement between a taxpayer and the tax department on a transfer pricing procedure for a particular set of transactions entered into before the deal.
According to Rajat Kathuria, director and chief executive at Indian Council for Research on International Economic Relations, the case may turn into another long-drawn scrap that will discourage investors for a while.
“It will become another event which will worry an investor sitting on the fence. But, in the longer run, it is unlikely to deter investors from making investment decisions in the country,” he said. “The timing of this incident means that it will take a lot of time to fructify as they will most probably move court. I don’t think they (the government) could realistically anticipate the money to come this fiscal, if the idea is to bridge the fiscal deficit by this.”
Kathuria said that there is an urgent need to fast-track such processes. “The Vodafone case is still going on and this (Shell India) could be another such case. A fast-track solution to such problems will not hassle foreign investors,” he said. However, “demands of this magnitude do not come to closure very quickly”.