Background of the Case:
In the year 2009, Shell India issued 87.63 crores shares to Two of its parent companies at the par value of Rs. 10 each. Income Tax (IT) Department found a flaw in the valuation of shares and revalued the shares using DCF @ Rs. 183.
This case can cause the company approximately Rs. 15,000 crs. i.e. the single largest transfer price case ever in India.
IT Dept. View:
It was alleged that the undervaluation has amounted to underselling of an Indian asset which comprise the capital base of the country. The Transfer Pricing Officer (TPO) calculated this short receipt of Rs. 15,200 crore as a loan or receivable extended by Shell to its parent company and deemed the entire amount receivable as tax, adding to it tax on the annual interest that should have accrued to such a loan.
Shell's Claim:
1. The transaction is a capital receipt and not a revenue item and hence not taxable
2. Transfer Pricing (TP) adjustment cannot be maid for a balance sheet item
3. Even if the shares would have been issued @183 the excess would have been securities premium not chargeable not tax
4. TPO cannot characterize a subscription into a sale
5. Fresh issuance of shares is not an International Transaction under Section 92B
6. Transfer Pricing provisions do not provide for making a secondary adjustment i.e. first consider an issue of shares as an internal transaction and apply arms length price and then treat the difference as debt accruing interest
In my Opinion -
There are some basic questions that need to be looked into -
1. Whether the transaction is an issue of share or a sale of share
2. Should the TP adjustment be made
3. It is a capital receipt or a revenue receipt
4. Whether it is an international transaction within the meaning of Section 92B
Let us take this one by one -
Prima facie it is clear that the transaction is a FDI and not a sale of share. Since the company has made a fresh issue of shares it cannot be characterized as sell of shares.
Since it is an issue of shares the amount received is a capital receipt and therefore not chargeable to tax. Even if the company has issued it @183 the excess would have been securities premium not chargeable to tax. Now, if the transaction is not taxable in case it was issued @183 it cannot be taxable if issued @10.
If the view of IT department is taken to be correct this means that if an Indian company issues its shares to the public it is selling its asset and thus the amount received should be capital gain.
Now, whether such transaction is covered within the meaning of Section 92B. On a plain reading it can be considered that such transaction is covered by section 92B as this section includes both capital and revenue transaction. However the charging section i.e. Section 92(1) clearly states that any transaction which has an effect of reducing income. This means that capital transaction which is not taxable is not included here.
