Transfer pricing laws of India are frequently invoked by Indian income tax department these days. The main reason for the same is to enrich government exchequers with additional revenues.
One such transfer pricing order has been received by Shell India that alleges that Shell under priced its shares to the extent of Rs 15,000 crore while issuing shares to it’s sole parent Shell Gas BV in March, 2009.
Shell India has alleged that the order was based on incorrect interpretation of Indian transfer pricing laws. In fact, Shell believes that taxing the money received by Shell India is, in effect, a tax on foreign direct investment. Shell believes that this is not only in violation of Indian law but also giving a bad signal to the international FDI community.
Considering the tax evasion reports as baseless, Shell India is now planning to challenge the order of income tax authorities strongly and is evaluating all options for redress. The company is confident of its stand as the valuation of the shares was undertaken by a certified independent valuer who assessed the value to be below Rs 10 per share and the issue was made at Rs 10 per share. Shell claims that such valuation is in accordance with the foreign investment and exchange control laws. The valuation certificates were also filed with the regulatory authorities.
At Perry4Lawand Perry4Law’s Techno Legal Base (PTLB) we believe that the transfer pricing laws and valuation of the unlisted company needs further clarification from our legislature. Otherwise, litigations would keep on surfacing unnecessary.
In a listed company, the valuation is based on Securities and Exchange Board of India (SEBI) formula, which is the average of six-month or two-week share price, whichever is higher. 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.