“In a taxing Act, one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read in nothing is to be implied. One can only look fairly at the language employed.” The IT Department had added Rs. 15,000 crore and Rs. 3,000 crore, respectively to the taxable income of...
“In a taxing Act, one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read in nothing is to be implied. One can only look fairly at the language employed.”
The IT Department had added Rs. 15,000 crore and Rs. 3,000 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. Bombay High Court bench of justices M S Sanklecha and S C Gupte on a petition filed by Shell India Markets Pvt Ltd quashed the IT department's Rs. 18,000-crore transfer pricing orders. Shell India Markets Pvt Ltd was represented by BMR Legal managing partner Mukesh Butani who instructed senior counsel Percy Pardiwala.
Here is quick and easy gist of this path breaking tax development.
What got the ball rolling?
Shell India Markets Pvt Ltd issued 8.7 crore shares to its overseas parent company Shell Gas BV in March 2009. The shares were issued at Rs. 10 a share.
What riled the Taxman?
As per the IT Department, these new shares were issued to the parent company at an unduly cheap price. They fixed the value of a share at Rs. 183 and concluded that this violated 'transfer pricing norms.'
Transfer Pricing?
‘Transfer pricing norms' require that all parent-subsidiary dealings should take place at a fair price. Transactions between group companies based in different countries should apply an arm's length pricing. This is to ensure that a fair price - one that would have been charged to an unrelated party - is levied.
The problem?
As the tax authorities felt that the fair price of one share should be Rs. 183 and not the paltry Rs. 10 at which they were issued by Shell India Markets Pvt Ltd to Shell Gas BV, Shell India was charged of under-pricing this share transfer that took place within the group by Rs. 15,220 crore. To add to this, earlier this year, the tax authorities had issued a show-cause notice adding another Rs. 3,100 crore to Shell India's income for FY09 in another transfer pricing case, taking the total taxable income to about Rs. 18,000 crore.
What Shell has to say
Beleaguered Shell India moved the Bombay High Court challenging these taxes. It argued that, funding a subsidiary by issuing shares is a common practice among multi-national companies which view this as a capital transaction and out of the transfer pricing bracket. The parent company Shell Gas BV had invested $160 million in Shell India via this capital transaction to fund capital expenditure and losses incurred by the downstream business in India. The shares were issued against this capital transaction at face value of Rs. 10 per share as prescribed by Reserve Bank of India guidelines. The IT department's transfer pricing order of January 2013 disregarded the RBI guidelines and had re-valued it on "arbitrary assumptions'', prompting a potential tax liability.
What the Taxman said
The tax department argued that such a deal is a transfer pricing arrangement by which the shares issued were undervalued and hence the company is liable to pay tax on the income generated out of it.
The Court’s Verdict
Issue of shares does not give rise to income and, hence, shares issued by an Indian firm to its overseas parent company are not taxable under transfer pricing provisions. On the reasoning that as there is no 'income' to tax, there can be no income tax demand, the Bombay High Court quashed the IT department's tax demands against Shell India.
Significance
This is the second such case in a month's time (earlier being the Vodafone tax victory for a similar issuance of shares to its parent company, also in the Bombay HC) in which the tax authorities have been defeated. Multinational companies have been complaining that "Indian tax authorities are arm twisting them to derive more tax revenue. Shell's victory", together with the Vodafone verdict, may help signal to foreign investors that India's days of "tax terrorism" are now over, that is if the Central Board of Direct Taxes refrains from filing an appeal.
Disclaimer - The views expressed in this article are the personal views of the author and are purely informative in nature.