Global petrochemical and energy giant Shell’s Indian arm has challenged the income tax department’s recent order alleging tax evasion by way of undervaluation of shares issued to the company’s parent, Shell Gas BV, for equity infusion of R87 crore four years ago.
Yasmine Hilton, chairman, Shell India, on Tuesday termed the tax demand “absurd”. “Shell does not evade taxes. I cannot have our reputation tarnished that way. We will consult various parties in the matter,” Hilton told reporters.
According to the tax department, the value of 8.7 crore shares issued by Shell India to Shell Gas BV at R10 a piece in 2009 should have been higher by R15,220 crore (R183 a share) on which income tax was liable to be paid. Shell said the tax department’s move is bad in law as the transaction was a capital receipt on which income tax cannot be levied.
India has been aggressively enforcing its transfer pricing rules meant to prevent attribution of taxable income of multinational companies to other jurisdictions where the rate of tax may be low. If the authorities in other countries where the company has presence do not honour the Indian tax department’s decision, the income gets taxed twice. The Revenue Department in its 2011-12 audit has claimed income suppression of R44,532 crore ($8 billion) pertaining to transfer pricing, up 85% over the comparable figure in the previous year’s audit. Companies have been asked to pay nearly a third of this amount called ‘transfer pricing adjustment’ as tax.
Shell’s tax experts are in discussions with the authorities on this issue over the past week. “We want a robust investor-friendly policy framework and not unreasonable tax demands,” she said.
“To service the downstream business, we needed an equity injection in 2008 of $160 million. We have now received a tax request of $1 billion on this equity injection of $160 million. Somebody needs to explain this because I do not understand,” she said.
“The valuation of 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 R10 per share and the issue was made at R10 per share. The transfer pricing order has valued these at R183 per share even though there are no provisions under the income tax law for such revaluation,” the company had said in its earlier statement.
The company which has 70 fuel stations across the country, besides a major presence in the downstream business has not been able to make profits due to administered government pricing of retail fuel products. “We want a level playing field where the prices of fuel should be market-linked with no subsidies,” Hilton added.
The company wants to enter exploration (the upstream side of the business) and is looking for the right asset to have its material presence in the segment in the next five years.
“Lets have a robust investor-friendly framework. Do not create waves of fear among your investors by unreasonable tax demands or unreasonable statements. What signal does it send?,” she said.
Shell has one of the country’s two LNG re-gasification terminals at Hazira (in a joint venture with Total of France) and has set up a technology centre in Bangalore. With the rapid increase in domestic gas demand, Shell wants to exploit the LNG market. “We want to double the capacity to 10 million tonnes for Hazira in next 3 years time,” she said adding that the company would be investing close to $1 billion over the next two years to expand its LNG business. A floating 5 mt terminal is also expected to come up by 2014 with the option to expand it to 10 mt later.