Another blow to the I-T Dept in its endeavour to recover taxes on transfer of shares between Indian subsidiaries of foreign multi-nationals
In another blow to the Indian government and Income Tax (I-T) Department's hopes of recovering additional taxes from multi-national companies, the Bombay High Court on Tuesday ruled in favour of Shell India Markets Plc, a subsidiary of Royal Dutch Shell Plc.
The I-T Department had levied a tax amounting to Rs3,000 crore to the company's tax liabilities. Vodafone fought and won a similar case earlier.
Transfer pricing practices have been in focus all over the world, with multi-nationals transferring shares of international subsidiaries to parent companies and even sometimes into entities registered in tax havens. In India, the I-T Department's adversarial stance against multinationals like Vodafone and Shell has been blamed for flagging foreign investor confidence in the country.
Transfer pricing involves the transfer of shares of a company registered in India, in this case Shell India, to a foreign holding company or parent company, in this case, Royal Dutch Shell Plc.
The general principle is that the pricing of these shares should be in line with market prices of the shares. However, Shell had paid only Rs10 per share to the Indian subsidiary. This transfer of shares had taken place in 2009. Shell has argued, as had Vodafone, that such transfers of shares for channelling investments into subsidiary companies was a common practice and taxing the transfer would amount to taxing foreign investments into India.
The Bombay HC had read the law such that, the arm's length principle in transfer of shares should apply only when income, expense or interest is involved and not for other cases.
How the government and the I-T Department respond to the judgment will be crucial. If the I-T Department agrees to go by the Bombay HC order, some believe that it may help the case for higher inflows from foreign institutional investors (FIIs) and even foreign direct investment (FDI).
The Modi government has long pitched itself as business friendly and that it would not indulge in 'tax terrorism'. It remains to be seen how far this case goes, both, the Vodafone and Shell cases will have a bearing on the perception of the Tax regime in India.
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