It’ll be a long road ahead for Shell in India. A day after its new country chairman Yasmine Hilton challenged the income tax department’s demand for Rs 15,000+ crore and claimed that the move is contrary to the spirit of finance minister P Chidambaram’s global FDI attraction mission, the FM has been briefed by the top direct taxation bureaucrat Poonam Kishore Saxena and the demand crystallised at the same figure as the signatory RS Shrivastava, additional commissioner, Mumbai, has claimed.
 
Sources said Saxena, in turn, had been briefed by Shrivastava’s boss, Sangeeta Singh, and Promila Bhardwaj, who as director-general, is India’s top income tax officer for international taxation matters.
 
The touchstone that has been used is of “arm’s length”, i.e., whether Shell in India would have sold its shares to a third party at the same price as it sold them to the parent, and if not, does the transaction under the scanner amount to a sweet-heart transfer or income circumvented from the Indian company.

Pooh-poohing the claim, Shell India on Monday had stated that “recent media reports on tax evasion are baseless and Shell India will challenge this order strongly and is evaluating all options for redress”.

The company had argued that Shell globally and in India complies with all applicable local regulations and laws and has also done so in this instance – in full compliance with the Shell Group Business Principles and its considered view is that the transfer pricing order is based on an incorrect interpretation of the Indian tax regulations and is bad in law as this is a capital receipt on which income tax cannot be levied. Funding of a subsidiary through issue of shares is common in India and globally.

"Taxing the money received by Shell India is in effect a tax on foreign direct investment (FDI), which is contrary not only to law but also to the spirit of the recent global trip by the finance minister to attract further FDI into India,” Dr Hilton, who has recently succeeded Vikram S Mehta, has stated.

The company’s spokesperson, Deepak Mukarji, has reminded that The Royal Dutch Shell group has over the last few years made significant investments in India. "Equity injection was used to finance these investments and to fund the ordinary business activities of Shell India. Shell Gas BV was the only parent of Shell India before this equity issue and continued to be so after the issue. A Rs 15,220 crore ($2.7 billion) adjustment has been proposed in the transfer pricing order of FY 08-09 of Shell India Markets Pvt Ltd (Shell India), a wholly owned subsidiary of the Royal Dutch Shell Group of Companies. This adjustment is on account of an issue of equity shares by Shell India to its sole parent Shell Gas BV, in March 2009."

"Against a fresh equity injection of Rs 87 crore (USD 160 million) shares aggregating to 8.7 crore, were issued at a value of Rs 10 per share. The share issuances were in accordance with the terms of the foreign investment policy, the prevailing exchange control regulation, the applicable corporate and related laws. The valuation of the shares was undertaken by a certified independent valuer who assessed the value (in line with the foreign investment and exchange control laws) to be below Rs 10 per share and the issue was made at  Rs 10 per share. The valuation certificates were filed with the regulatory authorities. The transfer pricing order has valued these at Rs 183 per share even though there are no provisions under the income tax law for such revaluation."

Hilton intends challenging the order and will be evaluating all options for redress.