By Eric Bellman
NEW DELHI-- Royal Dutch Shell PLC's victory in a high-profile
tax case in India poses a conundrum for a new Indian government
seeking to woo foreign investment but also in need of revenue.
On Tuesday, the Bombay High Court ruled in favor of Shell after
Indian authorities sought to tax money paid to transfer shares of
the oil producer's Indian arm to its parent, company and tax
officials said. The court has yet to release its written
judgment.
If the administration of Prime Minister Narendra Modi decides
not to appeal the ruling, it could help reassure companies that tax
policies in India--long cited as a reason that foreign firms stay
away--will become more predictable.
Transfer-pricing has been a tax headache for international
companies around the world in recent years.
Some governments, including the European Union, have been
cracking down on multinational companies, accusing them of
manipulating the way they record transactions between different
international arms so that their units in high-tax countries show
less profit, or even losses.
A senior government official said tax authorities would study
the court's ruling and "take a decision on merit" about whether to
ask the country's Supreme Court to review the case.
Tax officials had argued that Shell mischaracterized a 2009
share transfer from its Indian unit to the parent to avoid taxes on
more than $2.5 billion that India says should be considered income.
Shell said it valued the deal properly.
"Shell has always maintained that equity infusion by a foreign
parent company into an Indian subsidiary cannot be taxed as
income," said a Shell spokesman. "This is a positive outcome, which
should provide a further boost to the Indian government's
initiatives to improve the country's investment climate."
Tuesday's ruling made it clear that transfer-pricing laws don't
apply to the issuance of shares to a foreign parent, said Mukesh
Butani, managing partner at BMR Legal Advisors, who represented
Shell. "This ruling now lays down the principle in no uncertain
terms," said Mr. Butani. "It is certainly helpful to all the other
such cases" that are pending before Indian courts, he added.
Executives of international firms have complained that in recent
years Indian tax authorities have appeared to be targeting the
biggest foreign investors in the country.
Among the international companies that have made big bets on
India and then ended up struggling with large, surprise tax bills
in the country are Vodafone Group PLC, Nokia Corp., Mondelez
International Inc., HSBC Holdings PLC, General Electric Co. and
AT&T Inc.
Vodafone is India's second-largest phone company in terms of
subscribers, but has been stuck in international arbitration to
resolve a multibillion-dollar tax dispute with India for years.
Indian tax authorities slapped a $2 billion bill on Vodafone's
2007 purchase of a controlling stake in an Indian phone company.
India's highest court said in 2012 that Vodafone didn't owe taxes
on the deal. The Indian Parliament then passed a retroactive law to
impose them.
In a separate transfer-pricing case against Vodafone in which
authorities had wanted 36 billion rupees ($583 million), the Bombay
High Court recently ruled in favor of Vodafone.
Nokia was also charged with avoiding billions of dollars in
taxes for allegedly wrongly claiming exemptions for software
exports. Nokia denies the claim, but Indian courts have still
frozen its assets in India, which kept Nokia's big factory in the
southern city of Chennai from becoming part of the sale of Nokia's
handset business to Microsoft Corp.
Confusing and often conflicting tax laws and unpredictable
enforcement of them is one of the main reasons India underperforms
in rankings related to ease of doing business. In the World Bank's
ease of doing business ranking this year, India came in as number
142 out of 189.
Prime Minister Modi won national elections in the spring after
campaign pledges to make it easier to do business in India and his
party vowed to end what it dubbed "tax terrorism."
The prime minister is trying to trigger a surge of investment in
Asia's third-largest economy through his "Make in India" campaign,
but some executives say they need to see more evidence that he will
rein in heavy-handed tax authorities before they invest billions in
India.
While the Modi administration has announced some important
economic reforms, observers are still waiting for proof that the
tax regime has changed. Since taking office in May, the government
has said it has a sovereign right to tax retroactively, though it
wouldn't ordinarily do so.
Whether tax authorities choose to appeal cases they have lost,
like the one against Vodafone and the one against Shell, could be a
good indicator of whether they have been tamed, analysts say.
Shefali Anand contributed to this article.
Write to Eric Bellman at eric.bellman@wsj.com
Corrections & Amplifications
The last name of Mukesh Butani was incorrectly given as Bhutani
in an earlier version of this article.
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