IT notice to Shell India, Is it Tax on FDI

It’s pretty much definite that we all have heard of Vodafone case and constitute same a landmark in Indian Judicial System. Possibly Shell India case will be one such case too shaking the roots of FDI by probing in to the system.

The recent news is that Shell India had received a notice from Income Tax Department on tax evasion in the month of January and Shri. Prasenjit Bhattacharya representing Shell India said that they would challenge the notice.

To understand the case better let me just take you through the granny’s story of Shell India:

Decades ago an Royal Dutch Shell being an Anglo-Dutch multinational oil and gas company wanted to enter into the south Asian Countries. In India it incorporated a co. by the name Shell India Markets Pvt Ltd.  as an Indian Co. and was controlling Shell India (the Child) by Shell Gas BV (the parent) a foreign company. Shell Gas BV was holding 100% stake in Shell India. To intensify its business proceedings in India Shell India came out with issue of equity shares in the year 2009. And the stage was well set for the IT Dept. to make its entry when all of such shares were bought by Shell Gas BV(Foreign Co.) i.e. nothing but Foreign (In)Direct Investment of  Rs. 87 Crores , the area of conflict being that all such shares were issued at Rs. 10/Share (18 US Cents)  .  And here comes the twist in the story, the entry was late but it was the ultimate and latest thing that happened when IT Dept. sent a notice in Jan 2013 to Shell Gas BV depicting that the Shell India was undervalued in connection with the Equity issue in the March 2009 the shares issue to Shell Gas BV were issued at Rs.10/share, but the income-tax authorities peg the deal at Rs.183/share. Shri. Prasenjit Bhattacharya after consultation with Shri. Vikram Mehta (CEO Shell India) said on Monday 4^th of February that it would challenge a tax department notice which claims that it underpriced a sale of shares to an overseas group company by $ 2.7 Billion and claimed that “Recent media reports on tax evasion are baseless, and Shell India will challenge this order strongly and is evaluating all options for redress” and they dint reveal the amount of tax demand raised in connection to tax evasion.  The future is left with the decision of the one in the scorner’s seat. This case could go any way round, being a happy ending to either of the parties.

After reading the granny’s story of Shell you are expected to be left with following questions:

v  Will Shell India have an Happy ending in this case ?

            

             Possibly Yes! As the Shell said the adjustment was on account of an issue of equity shares by Shell India to its sole parent, Shell Gas BV, in March 2009 to finance investments and to fund business activities. Shell Gas BV was the only parent of Shell India before this equity issue and continued to be so after the issue, it said.  Rs 15,220 Crores ($2.7-billion) adjustment has been proposed in the transfer pricing order of FY-09 of Shell India Markets Pvt Ltd (Shell India), a wholly owned subsidiary of the Royal Dutch Shell Group of Companies.

             Adding on to the same Tax experts said the valuation of the unlisted company was a grey area and would lead to litigation, just like the Vodafone case. “In a listed company, the valuation is based on SEBI (Securities and Exchange Board of India) formula, which is the average of six-month or two-week share price, whichever is higher,” said R S Loona, managing partner of Alliance Corp Lawyers. “But in unlisted companies, the valuation can be based on fair market price, or book value, or returns on share based on a certification by an independent valuer.”

             And to the best of my knowledge "there are no provisions under the income tax law for such revaluation."

              Yasmine Hilton, chairman of Shell Group of Companies in India, said in a statement  “Taxing the money received by Shell India is in effect a tax on foreign direct investment, which is  contrary not only to law but also to the spirit of the recent global trip by the (Indian) finance minister to attract further FDI into India.”

                              One more common sense point is being that  “One can’t make money by mere purchase.”

v  Can IT Dept. make a global breakthrough against Shell India?

                                This part is still poised and kept suspense as Income tax authorities couldn't be reached by media for comment or IT Dept dint wanted to disclose the same now and wanted to keep its arguments awaited.

             We all have witnessed Income Department making retrospective amendments in revenue interest in the landmark Vodafone Case. As the amount of tax demand in this case too is high, I won’t be amazed if there are any such amendments in near future to bring Shell India under the lights of Tax demanded.

       Irrespective of the outcome the points of argument and the expected changes in the law will remain to be good things to learn. Please feel free to post your views, suggestions and recommendations in the comment box.

This Article has been posted by Raja Vardhan. He Can be reached at a.rajvardhan@gmail.com

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