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BMR wins for Shell, as BHC follows Vodafone transfer pricing precedent

The Bombay high court Tuesday ruled in favour of the Indian arm of Royal Dutch Shell on two transfer-pricing adjustments made by the income tax department - of Rs 15,000 crore and Rs 3,000 crore for 2007-08 and 2008-09, respectively - to the taxable income of Shell India Markets Pvt Ltd (SIMPL).

BMR Legal managing partner Mukesh Butani acted for Shell, instructed senior counsel Percy Pardiwala.

Butani said in an emailed statement:

The Shell India case decided by the Bombay HC is a significant development. It follows the earlier judgment of Vodafone insofar as principles are concerned - the principle being that issuance of shares by an Indian company to its foreign parent is not eligible to transfer pricing provisions as there is no income arising therefrom.

The High Court held today that the legal principle laid down by the Bombay HC applies in the Shell case and rejected the departments argument that the facts of Shell case were distinguishable from Vodafone’s case.

The said decision is a welcome relief not just for Shell but for all MNC’s who have faced the adjustment on share issuance. It is significant to note that the court did not hesitate on exercising its extraordinary power to issue a writ where alternate appeal remedy was available - in this situation as the court felt that the tax department clearly exceeded its jurisdiction to bring to tax a capital transaction.”

Last month, the court had ruled in favour of the Indian subsidiary of Vodafone Group in two similar cases of transfer-pricing adjustments of over Rs 4,500 crore made by the income tax department.

Transfer-pricing describes the practice of arm’s length pricing for transactions between group companies based in different countries to ensure that a fair price is levied.

The tax orders passed against Shell and Vodafone relate to alleged undervaluing of shares issued by the Indian subsidiaries to their parent companies.

The income tax order against Shell India relates to the issue of 870 million shares, at Rs 10 each, by the firm to an overseas group entity, Shell Gas BV, in 2009.

The income tax department challenged the valuation methodology and put the value of the shares at Rs 180 a share, adding the difference to the taxable income of Shell India.

In the other case, the income tax department issued a show-cause notice followed by an order to Shell India, adding over Rs 3,100 crore to its taxable income for the 2009 fiscal.

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