The revenue departments transfer pricing adjustment (TPAs) order assumes that Vodafone and Shell have undervalued their shares in transactions to their respective parents abroad. The department reckons the amount undervalued is akin to loans given by Indian companies to overseas parents on which interest income could be attributed.
The tax department has taken the view that all cross-border transactions need to be on an arms length basis. Companies insist that no income can be attributed to capital transactions.
Past TPA orders to Vodafone and Shell had been even higher. In the transfer pricing orders issued to the two companies last year, the extra income from under-valuation of Shells shares were estimated at a whopping Rs 15,000 crore while it was Rs 1,300 crore for Vodafone. These orders pertained to FY09, while the latest ones relate to FY10. The amounts demanded as tax could go up further if interest and penalties are included.
Sources say in case of Shell, the figure for FY10 is much lower than the previous year's as the number of shares transferred stood at a mere 4 crore in FY10 as against 87 crore in FY09.
CBDT officials said special attention is being paid this year to make the adjustments reasonable as many companies had complained that FY13 additions were unreasonable.
The official spokesperson for Shell in India said: Shell holds the view that the funding of a subsidiary through equity injection is a capital receipt on which income tax cannot be levied. Shell has filed a writ in Court for a similar adjustment of the previous year FY 2008/09. The Court has stayed further proceedings. As the matter is now in Court, we cannot make any further comments.
A mail sent to Vodafone remained unanswered.
Last year, due to the alleged under-valuation of shares in FY09, Vodafone was asked to cough up Rs 460 crore, and Shell Rs 5,000 crore, as additional tax. This was challenged in the Bombay High Court by both the companies.
Shell's case will be up for hearing on February 24 while the Vodafone case has been referred to the dispute resolution panel (DPR), said an industry source.
Transfer pricing essentially is a way of valuing transactions between group companies at arm's length pricing (ALP) which would have been done in case of an unrelated party transaction. This helps in reaching a fair value of the transaction which can be taxed accordingly by the authorities of a country where the company has made profit through such a transaction.