Business Economics & Services Team (BEST)
From Shell Shocked to Shell Delighted
The Bombay High Court decision on Shell -the US based oil major -should signal the right vibes to the foreign investors, who were agitated against the dilly dallying of the government in the Vodafone case. Many tax experts feel that the case is a standalone one and facts are different from Vodofone, though both cases are related to transfer pricing. But quite a number of people that BEST has talked to maintain that the case reinforces the Supreme Court judgement on Vodofone and may have some impact on the government thinking in this matter. In Vodofone case, the Revenue Department wanted to seek further legislative measures to over look the apex court's decision.
The facts of the case in brief are the following. Shell India markets Pvt Ltd issued 867 million shares to the overseas group company, Shell Gas BV in March in March 2009 at a face value of Rs 10 per share. The IT department challenged the transaction arguing that the share price could have been Rs 183 per share and accordingly valued the transferred share at Rs 18,220 crore and the taxable income was pegged at Rs 15,000 crore for the year 2008-9, which was subsequently raised by another Rs 3000. It may be noted that the Shell's total investment in India, through its subsidiary Shell India Markets Pvt Limited is only US$ 160 million, which is less than Rs 1000 crore.
The case was decided on the basis of implications of the transfer pricing mechanism, which is being increasingly addressed by the Indian Revenue department and the courts. Transfer pricing is the price at which a company sells its products to the parent or subsidiary company overseas. There is the principle of arms' length price, which in simple terms means that price of goods and services at which the company sells to its parent or group company should be equivalent to the price chargeable from a third party for the same goods or services.
The Revenue department claims that with liberalization, there has been increasing incidence of over invoicing or under invoicing prices which leads to considerable revenue loss. They have been approaching courts and legislative wings to plug the loopholes so that it may not lead to any revenue loss.
The Bombay High Court's ruling clearly says that transfer of shares will not amount to sale of goods and services and do not attract taxes under transfer pricing. Shell will be naturally happy about the decision and will be happy under the new dispensation to channelize more investment into India. Interestingly, there may be several companies, which must have sold the shares to the parent or group companies abroad and the same ruling will be applicable to them.
Everyone is waiting in bathed breadth what would be the reaction of the Revenue department. The department can file an SLP in the Supreme Court for quashing the order of the Bombay High Court. But the government has not still taken a view on the Vodofone case. In the last Budget, the Finance Minister had set up an empowered committee to look into the matter and the report of the committee is awaited. The tax experts feel that the next step of the government will grossly influence the decision it is going to take in the Vodofone case.
From Shell Shocked to Shell Delighted
The Bombay High Court decision on Shell -the US based oil major -should signal the right vibes to the foreign investors, who were agitated against the dilly dallying of the government in the Vodafone case. Many tax experts feel that the case is a standalone one and facts are different from Vodofone, though both cases are related to transfer pricing. But quite a number of people that BEST has talked to maintain that the case reinforces the Supreme Court judgement on Vodofone and may have some impact on the government thinking in this matter. In Vodofone case, the Revenue Department wanted to seek further legislative measures to over look the apex court's decision.
The facts of the case in brief are the following. Shell India markets Pvt Ltd issued 867 million shares to the overseas group company, Shell Gas BV in March in March 2009 at a face value of Rs 10 per share. The IT department challenged the transaction arguing that the share price could have been Rs 183 per share and accordingly valued the transferred share at Rs 18,220 crore and the taxable income was pegged at Rs 15,000 crore for the year 2008-9, which was subsequently raised by another Rs 3000. It may be noted that the Shell's total investment in India, through its subsidiary Shell India Markets Pvt Limited is only US$ 160 million, which is less than Rs 1000 crore.
The case was decided on the basis of implications of the transfer pricing mechanism, which is being increasingly addressed by the Indian Revenue department and the courts. Transfer pricing is the price at which a company sells its products to the parent or subsidiary company overseas. There is the principle of arms' length price, which in simple terms means that price of goods and services at which the company sells to its parent or group company should be equivalent to the price chargeable from a third party for the same goods or services.
The Revenue department claims that with liberalization, there has been increasing incidence of over invoicing or under invoicing prices which leads to considerable revenue loss. They have been approaching courts and legislative wings to plug the loopholes so that it may not lead to any revenue loss.
The Bombay High Court's ruling clearly says that transfer of shares will not amount to sale of goods and services and do not attract taxes under transfer pricing. Shell will be naturally happy about the decision and will be happy under the new dispensation to channelize more investment into India. Interestingly, there may be several companies, which must have sold the shares to the parent or group companies abroad and the same ruling will be applicable to them.
Everyone is waiting in bathed breadth what would be the reaction of the Revenue department. The department can file an SLP in the Supreme Court for quashing the order of the Bombay High Court. But the government has not still taken a view on the Vodofone case. In the last Budget, the Finance Minister had set up an empowered committee to look into the matter and the report of the committee is awaited. The tax experts feel that the next step of the government will grossly influence the decision it is going to take in the Vodofone case.
