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Shell Victory Good News for all MNCs

Published on Tue, Nov 18,2014 | 18:52, Updated at Tue, Nov 18 at 21:34Source : |   Watch Video :

The Bombay High Court has ruled in favour of Shell in the transfer pricing-share valuation case. Mukesh Butani of BMR Advisors, who represented Shell in the court told CNBC-TV18 that today's order was based on the precedent of Vodafone ruling. Speaking about the events in the court, Butani said that the revenue department argued Shell case was not similar to Vodafone case because unlike Vodafone, Shell hadn't disclosed transfer of shares. Although Bombay HC followed principle set in Vodafone tax case, he feels that the tax department certainly has the right to appeal to the Supreme Court.

Below is the transcript of Mukesh Butani's interview with Menaka Doshi on CNBC-TV18.
Q: What the details in the verdict were because the written order is not out as yet so if you could just talk us through what the High Court bench had to say?

A: The High Court essentially followed the Vodafone decision in which case it was held that the tax department does not have jurisdiction in a situation where a engine company issue shares to its foreign parent and if there is a difference between the tax department and the tax payer in so far as valuation of those shares are concerned then those differences can not be bought under the transfer pricing law because in the first place the tax department erred in exercising its jurisdiction because at the end of the day it is a capital account transaction. So, today the Bombay High Court followed the said principle that it had laid down in Vodafone's case and held that it has to be followed in Shell's case as well.

Q: It was expected even though the benches were not the same the Vodafone decision was decide by the Chief Justices bench in the Bombay High Court. One justice was common to the Shell decision as well Justices Sanklecha. However it was expected that the Shell case would go the Vodafone case that is against the Tax department. Yet there is a twist here because the revenue department as you told me attempted to distinguish this case from Vodafone on four factual grounds. Very quickly and in very simple language if you can explain to us what the revenue department was attempting to do and why it failed?
A: Those were the four facts that the Tax department council brought out to the notice of the honorable bench today number one: unlike in Vodafone’s case Shell had not disclosed this as a transaction in its transfer pricing compliance. Number two: Shell had taken the rit route as an alternate to the plea that it had made to the dispute resolution panel whereas Vodafone had not taken that has a remedy under the alternate remedy. Number three: as a result of the manner in which shares were issued by Shell India to its overseas subsidiary there were multiple shareholders where as in Vodafone’s case there was only one primary shareholder.
So, the tax department brought this to the notice of the honorable court and argued that the facts are independent and hence the matter should be sent back to the dispute resolution panel. The High court negated that view of the tax department and said the facts may be different but the larger principle that has been laid down in Vodafone’s case still applies which is that you are simply dealing with an issue of share transaction and that is not dissimilar in any manner in Shell’s case and hence the said principles should apply.

Q: You iterated three distinctions that the revenue department attempted to make. Was there a fourth one that was material as well or can we skip it?
A: No, that was not a material distinction that has been brought out but these were the three material ones.

Q: The reason why I am asking you for so much technical detail is simply to try and understand whether the other almost dozen cases where the facts are similar if I may say not same would get similar relief now that both Vodafone and Shell have become precedents in terms of how the Bombay High Court views such transfer pricing tax attempts?
A: The answer is simply yes because we also did not have any doubt that the Bombay High Court’s verdict in Vodafone’s case simply stated that it is a case of an Indian company issuing shares to its foreign subsidiaries. The transfer pricing law is very clear that you can carry out a transfer pricing adjustment only if there is an income arising from an international transaction.
There can be no case of an income arising out of an international transaction just because there is a dispute in so far as the valuation is concerned. So, the Bombay High Court like in Vodafone’s case took a view on the preliminary question of jurisdiction and it did not bother itself to get into aspects of valuation. When the preliminary issue itself was decided against tax department the valuation aspects are secondary in my view.

Q: So all similar matters will benefit from the fact that Bombay High Court has yet again in the principle matter decided that such a situation is not a taxable event yet I want to add the one last twist which is as yet revenue has not appealed the Vodafone case to the Supreme Court. It could very well do so and the same could apply to Shell, so this may not be the ultimate decision, maybe on the penultimate decision?
A: That is for the government to decide whether they want to appeal against this decision or not but you are right they certainly do have the right to appeal this to the Supreme Court and then the Supreme Court will take a call.

Q: So as of now just to take a quick view away from you on what this means for several MNCs operating in India. They will find certain relief in being able to capitalise their Indian subsidiaries knowing that the Bombay High Court does not think that the valuation of that could become a transfer pricing dispute?
A: The tax payers, the multinationals and the tax experts had no doubt in their mind that an issuance of share transaction can never give arise to a transfer pricing adjustment even if there is a difference in the valuation as alleged by the tax department and as taken by the tax payer. But certainly, this puts to rest the entire controversy, bear in mind that all of these adjustments took place and they were subjected to jurisdiction in Mumbai, at least I am not aware of other multinationals who have faced similar transfer pricing adjustment in other jurisdictions but it puts to rest the controversy at least insofar as the Bombay High Court verdict is concerned unless the Supreme Court comes and reverses the Bombay High Court decision which I don't think is possible or there is some kind of an amendment to the law.


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