MUMBAI Anglo-Dutch oil major Royal Dutch Shell's (RDSa.L) Indian unit will challenge a claim by the local tax authorities that a share sale to its overseas parent in 2009 was undervalued by $2.7 billion, the latest tax conflict involving a foreign company in India.
Shell India said on Monday that as part of its investment in the country Shell India Markets Pvt Ltd issued 87 million shares to parent Shell Gas BV at 10 rupees apiece in 2009.
Tax authorities have valued those at 183 rupees a share, proposing an adjustment in the value of the deal of 152 billion rupees ($2.7 billion), Shell said.
India has stepped up enforcement of tax collections as it looks to raise revenue to help plug its fiscal deficit.
But the Shell case comes at a time when India is still trying to settle a long-running $2 billion tax dispute with British mobile phone firm Vodafone (VOD.L) that has dented foreign investors' confidence in the country.
Vodafone, the largest corporate investor in India, has repeatedly clashed with Indian authorities over taxes since it bought Hutchison Whampoa's 0013.HK local mobile business in 2007. While India's Supreme Court backed Vodafone's position that it does not owe tax on the acquisition, a subsequent law change enabled India to impose such taxes on mergers retrospectively.
Shell said on Monday the transfer pricing order by the tax authorities was based on an "incorrect interpretation" of tax rules and was "bad in law" as the amount is a capital receipt on which income tax cannot be levied.
"Taxing the money received by Shell India is, in effect, a tax on foreign direct investment, which is contrary not only to law but also to the spirit of the recent global trip by the finance minister," Shell India Chairman Yasmine Hilton said.
Finance Minister P. Chidambaram last month met with investors in Hong Kong, Singapore, Frankfurt and London in a push to attract investment to India as he looks to shore up the country's finances and stave off a credit rating downgrade.
An official in the Indian tax office with direct knowledge of the matter said the Shell case was a result of a "difference of opinion" on the valuation of shares and that Shell had a right to contest it before a dispute resolution panel of the department.
If the difference in the share valuation is established then the company can be asked to pay taxes on the interest earned on $2.7 billion, said the official, who did not want to be named as he was not authorised to speak to the media.
He did not specify what the tax liability would be.
"There doesn't appear to be a mala fide intention here, but difference of opinion," he said.
News of the tax dispute with Shell came ahead of a visit to India later this month by British Prime Minister David Cameron. An Indian foreign office spokesman confirmed the trip on Monday.
India expects to raise $70 billion from corporate tax and $37 billion from individual tax payers in the current fiscal year that ends in March, according to finance ministry estimates. Net corporate tax collections for the first nine months were up 10.6 percent, compared with a 15 percent target.