SHELL INDIA : TRANSFER

OR TRANSCEND

Priya Tiwari

2/25/19 1
 CASE STUDY RELATES TO

405-(FIN)-INCOME TAX PART-

II- Income from Business or
Profession (MBA-IV)

302-(General Management)-
Enterprise Performance Management
(MBA-III)

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 CORPORATES’

Intriguing Question:
Whether Transfer Pricing
Adjustment be made when
issue of shares is a capital
account transaction?”

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 •What is the case?
•This is a case on Taxation

Transfer pricing filed by the

income tax dept. on Shell
India (A subsidiary of the
Royal Dutch Shell )

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 FACTS OF THE CASE
1. Transfer Pricing applies only in case of revenue items
and never in case of capital items as stipulated by
definition of Transfer Pricing given u/s 92.

2. It is fundamental principle of Income Tax law that,

capital receipts are not chargeable to tax and capital
expenditure cannot be claimed as deduction while
computing taxable income(subject to few exceptions)

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 •What is the case?
•For the Assessment Year 2008-2009
a) Shell India, the indian entity issued shares to its holding
company, Shell Gas B.V.
b) The issue price was Rs 10, whereas TPO pegged the
valuation of each share at Rs 180.
c) Due to increase in valuation, “Primary Transfer Pricing
Adjustment” of Rs 15000 crores was made in
computation of income by TPO.
d) Also, “Secondary Adjustment” was made amounting to
Rs 220 crores, treating the amount less received as loan
given by Shell India to its holding company…..On such
deemed loan, notional interest was calculated by TPO
and added to income.

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 •What is the case?
•For the Assessment Year
2008-2009
•He also held that the Tax payer
also promoted the brand held by
the Foreign Associated
Enterprise so is this free
lunch??-Naturally to this it must
have been compensated to the
tune of Rs 15,220 cr.
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 •What is the basis of this
calculation of Rs 18,000
cr ??
•Simple method Cost +

13% (i.e. Rs 18,000 cr

+13%)= Rs 20340 Crore

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 •What is the case?
•This is a case on Taxation

Transfer pricing filed by

the income tax dept. on
Shell India(A subsidiary of
Royal Dutch Shell Group
of Companies)

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 •Final
value on Tax to
be paid Rs 20340
Crore which is
termed as THE
TRANSFER PRICE
(OR Transactional
value)
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 •And what is the basis of
this13% profit
•Again Simple

•10.5% (Opportunity Cost

deployed by the tax payer)

•+ 2.5% for the Tax

Payer’s entrepreneurial
efforts
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 •The question is whether
Income Tax was right and
justifiable??
•What do Dispute Resol.

Panel has to say

•1.It applied retro-tax as

per Section 92CA(2B) of

the Income Tax Act 1961
•2.
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 •The question is whether
Income Tax was right and
justifiable??
•What do Dispute Resol.

Panel has to say

•what is being brought to tax is not share
premium but the cost incurred by the Petitioner
in passing on a benefit to its holding company
by issue of shares at a premium less than ALP

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 •The
question is whether
Income Tax was right and
justifiable??
•What do Dispute Resol. Panel

has to say
3.Transaction of Shares for the foreign AE
AMOUNTS TO capital or Revenue Gain which
is chargeable. It comes under “Income from an
International Transaction” under Section 56(1) of
the Act

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 •The
question is whether
Income Tax was right and
justifiable??
•What do Dispute Resol. Panel

has to say
Issue of share is not Taxable if
Petitioner itself submitted
Form 3-CEB, declaring the
ALP
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 •What did Shell India had to
say in defence?
•1.TPO had no jurisdiction in this case
bcause the transaction was not an
international.
•2. the income should arise from an

international transaction. In this case, no

income arises from issue of equity shares
as per Section 92(1)
•3.13% markup calculated on adhoc

basis-must be taken proper basis

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 •What did Shell India had to
say in defence?
•3.13% markup calculated on adhoc basis-must
be taken proper basis
•4.
Transfer Pricing when revenue income arises
out of international transaction. Since it is a case
of capital account transaction, T.P provisions
shall not apply.
5. A transaction is required to be reported
in Form 3CEB only when it falls within
the ambit of T.P provisions.
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 •Protagonist

•Shell India is the

Corporate house a victim
of Retro tax imposed by
the tax officials

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 •LOGICAL SEQUENCING
•Ihad used various Supreme
court sites and have made
serious attempts to make the
case more logical and
interesting with proper
ordering of the contents to
make student centric.

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 •My expectations
•1.Help students understand
the practical usage of
transfer pricing
•2. Understand what are the

various methods of
calculation
•3.What is Arm’s Length

price?
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 •My expectations
•4. What is Bright Line
method to determine
International Transactions
•5. How is the analytical mind

applied by the Tax

authorities/Corporate houses
to arrive at conclusions.

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 •Assignment Questions
Q1. Whether Transfer Pricing
Adjustment be made when issue of
shares is a capital account transaction?”
Q2. This will increase of foreign
investments in Indian firms from the
taxation point of view. Comment
Q3. Determine AO’s proper justification
in making the transfer pricing adjustment
in relation to Share Price Income incurred
by the tax payer?

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 •Assignment Questions
Q4.Do you think that the 13% markup
determined by the Dispute Resolution
Panel was based on scientific basis?
Or do you have any other method that
should have been adopted in the
above case? Or was there ever a
markup profit earned in the first place?

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 CAUSE EFFECT RELATIONSHIP
•What is a retro tax ?
• Tax that never existed
when the transaction
took place and is
imposed retrospectively!

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 CAUSE EFFECT RELATIONSHIP

•Just as a frustrated
married man due to his
low income gets aghast
when a stranger women
claims to be his first
wife!-RETROSPECTIVE
TORTURE
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 COMMENTS AND CONCLUSION
The Bright Line Test is not a method
to determine the AMP but only a tool to
determine Cost of service
•However issue of share price comes
under Tax on capital Transaction or
capital Gain Income for that Country
•Overall there is a huge open ended
view points that results in unnecessary
disputes

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 COMMENTS AND CONCLUSION
Valuation methodologies for determination of fair
value on which shares should be issued. The
taxability of such transaction by company
issuing shares.
Rules to regulate if shares are issued at less than fair
value, will such under more than fair value,
should it be treated as loan from overseas
company receipt be taxed along with interest (as
in Shell case)
If shares are issued at higher price , provision of
notional interest to be induced.

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 COMMENTS AND CONCLUSION

• Finally it is a classic example of Transfer

Pricing and income tax intricacies that result in
Foreign Investors loose their hearts and repose
no confidence because of the tax structures
WHICH ALSO NEEDS A CLEAN INDIA
PROJECT

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 Thanks Questions please

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