With industry protesting the recent transfer pricing orders of the income-tax department, especially in the case of Shell India, the Central Board of Direct Taxes has started looking at the modalities for handling transfer-pricing cases.
The I-T department’s panel, which has been assigned with the job of drafting rules for foreign tax credit, is now looking at this area, said a senior finance ministry official, who did not want to be named.
“The committee will work out the modalities for handling such cases and submit it to the finance ministry,” said the official.
Transfer pricing is the value at which companies trade products, services or assets, including shares, between units in different countries.
The I-T department has charged Shell India, a wholly-owned subsidiary of the Netherlands-based energy company Royal Dutch Shell, with undervaluing share transfer within the group by Rs 15,220 crore (Rs 152.2 billion), and, thus, evading tax.
The order relates to the issue of 87 million shares by Shell India to its sole parent Shell Gas BV, in March 2009. Against a fresh equity injection of Rs 87 crore (Rs 870 million), shares aggregating to 87 million were issued at a value of Rs 10 per share. But the tax authorities value this at Rs 183 each.
"The share issuances were in accordance with the terms of the foreign investment policy, the prevailing exchange control regulation and the applicable corporate and related laws," the company earlier said in a statement.
Tax experts, in general, are of the view that the department’s notice in the Shell case and in other similar cases was not on the sound footing.
Shell India said the transfer pricing order was based on an incorrect interpretation of the Indian tax regulations and was “bad in law”, as this was a capital receipt on which income tax could not be levied.
Funding a subsidiary through issue of shares is a common practice in India and abroad.
The finance ministry is now in the process of devising clear guidelines for contentious transfer pricing cases, especially for handling the grey areas, the official added.
The company has argued that taxing the money received by Shell India was in effect a tax on foreign direct investment, which was contrary not only to law but also to the spirit of the recent global trip by finance minister P Chidambaram to attract further investment to India.