Transfer Pricing Order-Valuation Shell India

Global petrochemical and energy giant Shell's Indian arm is gearing up to challenge a recent transfer pricing order by the income tax department order that has alleged underpricing of Rs 15,000 crores by Shell India while issuing shares to it's sole parent Shell Gas BV in March, 2009. ET NOW was the first to report the income tax department order on Jan 31st, 2012. " Shell India will challenge this order strongly and is evaluating all options for redress", the company said in a statement issued on Monday. "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", added Dr. Yasmine Hilton, Chairman, Shell Group of Companies in India.

" 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," the company said. " The company might challenge the jurisdiction of the transfer pricing officer on the issue of shares and exercise the option of filing a writ petition at the high court," a source familiar with the case told ET NOW.

The income tax department has challenged the valuation methodology used by Shell India for the issue of shares, but Shell claims that " there are no provisions under the income tax law for such revaluation." Leading Supreme Court lawyer and tax expert Harish Salve has been approached by Shell to evaluate options for challenging the order. In an exclusive interaction with ET NOW, Harish Salve said, " I have received a request for advice and i will meeting them ( Shell India) shortly but i am concerned at what is going on.On one hand, we have a Finance Minister who is sensibly reaching out to foreign investors. We have heard some stories about inflows but i am given to understand, not a farthing of this has gone into building capital in India. We have had a complete dry run, Indian corporates are sitting on piles of cash and foreign investors are not bringing in capital. The Finance Minister is trying to reverse the trend. I don't know whether the income tax department has taken upon itself to wage war on foreign investors."

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 company presented before tax authorities that its shares were valued around Rs 7 only and therefore allotment of shares to the overseas group entity at Rs 10 each was at market rate. The transfer pricing officials challenged the manner in which the valuation was done using discounted free cash flow method. The tax officials have alleged that the company has taken erratic EBITDA growth projections to arrive at a depressed value of its shares," a source in the know had told ET NOW earlier.

" Such orders may give wrong signals to international investors . All MNC's doing business with India will be concerned as pricing the issue of shares to parent entities is well-regulated by RBI and a purely commercial call," said leading chartered accountant TP Ostwal of TP Ostwal & Associates.

Transfer price refers to the actual price at which a transaction takes place between two related parties, usually belonging to the same group. Multinational and transnational firms use transfer pricing to allocate revenue between different divisions. India has a high incidence of disputes relating to transfer pricing because it is often difficult to arrive at a price that is agreeable to both the I-T department and the companies involved.

Date: 5th February, 2013