Mumbai/ New Delhi: The Indian arm of Royal Dutch Shell Plc, which has been accused by the income tax authorities of underpricing an intra-group share transfer by 15,000 crore and consequently evading taxes, has filed a writ petition in the Bombay high court challenging the income tax order.

The petition filed on Wednesday will come up for hearing on 3 May.

Mint reported on 3 February that following the notice, which is one of the biggest transfer pricing orders by the income tax department, Shell India Pvt. Ltd planned to challenge the assessment.

“Shell confirms that it has filed a writ petition in the Bombay high court challenging the draft tax order. Shell has always maintained that it will continue to evaluate all options for redress available to resolve this tax dispute," the company said in an emailed statement.

A Central Board of Direct Taxes spokesperson didn’t respond to a phone call or to a message left on her cellphone.

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.

Companies such as Shell India and Microsoft India are some of the companies that have recently come under the tax department’s scanner for transfer-pricing related issues. Many are exploring legal options.

Amit Maheshwari, a partner at chartered accountants Ashok Maheshwary & Associates, said, “This is a very interesting and keenly watched case where the tax authorities have tried to tax FDI (foreign direct investment) coming into India by disputing its valuation under the transfer pricing provisions."

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.

Maheshwari said this case is a fallout of the retrospective amendments introduced in the Union budget of 2012 which included capital financing under the transfer pricing net.

Apart from running the liquefied natural gas terminal at Hazira on India’s west coast, Shell India has a presence in domestic fuel sales.

“The officer in this case has intelligently applied the provisions and challenged the very basis of valuation of shares and thereby concluding a significant under-valuation and resultant loss of interest. It’s also worth mentioning that India does not have thin capitalization rules as of now and it has to be seen how much water will it hold in the courts of law," Maheshwari added.

The so-called thin capitalization rules that exist in some countries determine how much of the interest paid on corporate debt is tax-deductible.

With multinational companies looking to expand their footprint in India, the issue of arm’s length pricing has come under increased scrutiny of the transfer pricing wing of the income tax department. It comes at a time when the government is struggling to meet its fiscal deficit targets on account of slowing revenue collection, especially on the corporate tax front.

Some tax experts, however, said transfer pricing rules may not apply to transactions related to capital infusion, as in the case of Shell.

“Any attempt to tax such a capital account transaction would generally be contested by the affected parties," Punit Shah, co-head of tax at KPMG in India, said. “This would only add to the huge number of litigations already pending on account of transfer pricing adjustments and will negatively impact the FDI flows into the country."

Such transfer pricing litigation is expected to increase, with the government narrowing the so-called ‘tolerance band’ for international and domestic transactions between two group entities to as low as 1% for some companies.

The tolerance band is the variation allowed between the arm’s length price arrived at by the income tax department and the actual price of the transaction between two group companies.

P.R. Sanjai in Mumbai contributed to this story.

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