mac project.docx
Post on 12-Dec-2015
216 Views
Preview:
TRANSCRIPT
school of management and entrepreneurship
Transfer Pricing Dispute with Shell India
Managerial Accounting Project Report
ByAkshatPaliwalAnkita Gupta
Mansi MakhijaniTushita Goel1 2/25/2014
ContentsIntroduction................................................................................................................................2
What is transfer pricing?............................................................................................................3
How the case evolved?...............................................................................................................3
Introduction
Royal Dutch Shell Plc commonly known as Shell, is an Anglo–
Dutch multinational oil and gas company headquartered in the Netherlands and incorporated
in the United Kingdom.Created by the merger of Royal Dutch Petroleum and UK-based Shell
Transport & Trading, it is the second largest company in the world, in terms of revenue,and
one of the six oil and gas "supermajors".
As of January 2013, the largest shareholder of the company was Capital Research Global
Investors with a holding of 9.85% with BlackRockat second place with 6.89%
shareholding.Shell topped the 2013 Fortune Global 500 list of the world's largest companies.
Royal Dutch Shell revenue was equal to 84% of the Netherlands's $555.8 billion GDP at the
time.
It has minor renewable energy activities in the form of bio-fuels and wind. It has operations
in over 90 countries, produces around 3.1 million barrels of oil equivalent per day and has
44,000 service stations worldwide. Shell Oil Company, its subsidiary in the United States, is
one of its largest businesses.
Shell has a primary listing on the London Stock Exchange and is a constituent of the FTSE
100 Index. As of 6 July 2012, it was the largest company on the FTSE, with a market
capitalisation of £140.9 billion. It has secondary listings on Amsterdam and the New York
Stock Exchange.
Transfer pricing issue:
It relates to the issue of 870 million shares by Shell India Markets Pvt Ltd to its overseas
parent company Shell Gas BV in March 2009. The shares were issued at Rs 10/share, which
was contested by the income tax authorities in Mumbai. The income tax department
challenged the valuation methodology of Shell India and pegged the value of the shares at Rs
180/share instead, that were transferred to the parent company by about $2.5 billion. The
income tax department charged Shell India of under-pricing a share transfer within the group
by Rs 15,220 crore, and consequently evading taxes. Earlier this year, the tax authorities
added to the company’s liability by issuing a show-cause notice,demanding tax on the interest
the company would have earned,adding another Rs 3,100 crore to Shell India's income for
FY09, taking the total taxable income to about Rs 18,000 crore.
What is Transfer Pricing?
The Transfer Price is the price at which divisions of a company transact with each other. As
per rules, such transactions between group companies based in different countries should
apply an arm's length pricing. This is to ensure that a fair price - one that would have been
charged to an unrelated party - is levied. Transactions may include the trade of supplies or
labour between departments. When different divisions of a multi-entity company are in
charge of their own profits, they are also responsible for their own "Return on Invested
Capital". Therefore, when divisions are required to transact with each other, a transfer price is
used to determine costs. Transfer prices tend not to differ much from the price in the market
because one of the entities in such a transaction will lose out: they will either be buying for
more than the prevailing market price or selling below the market price, and this will affect
their performance.
How the case evolved?
The Bombay High Court, on Tuesday, ruled in favour of Shell.
Shell India moved to the Bombay High Court challenging the tax notice. Funding a
subsidiary by issuing shares is a common practice among multi-national companies, which
view this as a capital transaction and out of the transfer pricing bracket, it said. However, the
tax department argued that such a deal is a transfer pricing arrangement by which the shares
issued were undervalued and hence the company is liable to pay tax on the income generated
out of it. The High Court did not agree with the department, quashed its order and issued a
show cause notice against Shell India. The Shell India case is significant — the principle
being that issuance of shares by an Indian company to its foreign parent is not exigible to
transfer-pricing provisions, as there is no income arising therefrom.
Some More Companies like Shell:
The judgment comes in the wake of two similar transfer pricing cases, which were ruled in
favour of the Indian subsidiary of Vodafone Group Plc, in which the I-T department had
sought adjustments of over Rs.4,500 crore last month.
There are more than a dozen such cases in various courts all over India. Multinational
companies have been complaining that Indian tax authorities are arm twisting them to derive
more tax revenue. In the earlier Vodafone case, the I-T department had sought adjustments of
over Rs 4,500 crore Indian subsidiary of Vodafone Group Plc. With Nokia, the department
had slapped Rs 2,000 crore notice. Other companies that are facing such demands include
IBM and Cairn. So, Vodafone and now Shell's win is likely to be a big boost for all these
companies.
"This is a positive outcome which should provide a further boost to the government
initiatives to improve the investment climate," a Shell India spokesman said in an e-mail
statement.
top related