India Court Rules in Shell’s Favor in $1.4 Billion Tax Dispute

The Bombay High Court yesterday ruled in favor of the Indian unit of Royal Dutch Shell Plc, Europe’s largest oil producer, in a $1.4 billion tax dispute, bolstering sentiment among overseas investors.

The Mumbai-based court set aside an order by the country’s tax department on about $160 million of equity infusions made by the Hauge, Netherlands-based company in its India unit, Shell India Markets Pvt. Shell made the investment in 2009 at 10 rupees (16 cents) a share, which the tax authorities claimed were underpriced and revalued them at 183 rupees a share attracting the claim and interest, the company said in an e-mailed statement today.

The ruling is a boost to efforts by Prime Minister Narendra Modi to attract foreign investments to the South Asian nation and turn it into a manufacturing hub. The verdict, along with one last month favoring Vodafone Group Plc in a similar dispute, set a precedent for other transfer-pricing cases with overseas companies including Nokia Corp., IBM Corp. and Sanofi Holding SA.

Transfer-pricing taxes are imposed on the rate at which companies trade products, services and assets with overseas units or domestic subsidiaries.

“The court ruling along with the government’s efforts to woo foreign investors will help in attracting more investments from overseas,” Rabindra Jhunjhunwala, Mumbai-based senior partner at law firm Khaitan & Co said in a phone interview. “This provides the necessary certainty to investors looking at India.”

The Bombay High Court said in the Vodafone verdict that the issuance of shares can’t be considered income. The tax authorities had alleged that the shares transferred by the Indian unit to its parent were undervalued to avoid paying tax.

The high court decision is a “positive outcome” which should provide a boost to the Indian government’s initiatives to improve the country’s investment climate, Shell said in the e-mailed statement today. “Shell has always maintained that equity infusion by a foreign parent company into an Indian subsidiary cannot be taxed as income.”

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