When Shell’s India chairman says the taxman’s latest demands on the company are “in effect a tax on foreign direct investment”, she is only voicing a sentiment that is increasingly being echoed in boardrooms of subsidiaries of MNCs located across the country. Going by the taxman’s allegations, Shell India sold 8.7 crore shares to its parent Shell Gas BV at R10 apiece in 2009 while the actual value of the shares should have been Rs 183 each. Apart from the fact that Shell India says it complied with all the rules on valuing the shares, there are several apparent problems in the manner in which the taxman has applied the transfer pricing rules under which Shell India is now being asked to shell out back taxes and penalties. For one, even if you assume the shares were undervalued, there can be no evasion of capital gains tax till the shares were sold by Shell Gas BV; two, since issuing shares to a parent firm cannot possibly be seen as the main business of Shell India, it’s not clear how transfer pricing charges can even be levied. More important, even if you assume the taxman has a reasonable response to these issues, the structuring of the sale could have been done differently with no tax payable, even going by the taxman’s calculations. Shell India, the taxman says, issued 8.7 crore shares at Rs 10 apiece and got R87 crore instead of the R1,592 crore it would have got had it issued them at the correct value. But since Shell India wanted just R87 crore from its Dutch parent, it could have issued 0.48 crore shares at R183 each and got the same R87 crore without attracting the taxman’s ire. So, where’s the under-pricing?
Since issuing of shares at par to global parents is the most common way by which local subsidiaries of MNCs bring in FDI, the Shell episode means almost all FDI transactions are in danger of being reinterpreted by the transfer pricing authorities. Even more disturbing, as FE has reported today, there has been a dramatic surge in transfer pricing