Oil giant Shell has won a multimillion-dollar court battle against India's tax authorities, a victory that analysts see as a positive signal to wary foreign investors whom the Modi government is trying hard to attract.
The Mumbai High Court ruled on Tuesday in favour of Shell's India unit, over a dispute in which the Indian tax authorities accused the Shell subsidiary of under- pricing shares it had issued to its parent company by about US$2.5 billion (S$3.2 billion) in February last year.
The tax department claimed tax on the interest that the parent company would have earned after it revalued the share price.
Mr Mukesh Butani, a lawyer for Shell India, said the court ruled in its favour "on the grounds that issuance of shares by an Indian company to its foreign parent was not taxable".
He added in a statement that the court felt the tax department "clearly exceeded its jurisdiction".
Hailing the court decision, tax experts said it brought clarity and was a step in the right direction to allay concerns of foreign investors about the country's tax laws.
The government has not said whether it will appeal.
"It sends a positive signal. It creates more stability and certainty in the investment climate. This has resolved the issue to some extent," said tax expert Uday Ved.
"The new government said it would not have an adversarial tax regime… but there has always been a gap in policy and administration. One would have to see what steps the administration would take next. Certainly, it (the ruling) is in the right direction," he added.
Prime Minister Narendra Modi, in the run-up to the general election that he won in May, had accused the previous government of pursuing "tax terrorism", mainly after a retroactive tax law spooked investors.
Since coming to power, the Modi government has tried to improve the investment climate and allay investor concerns on a variety of issues including taxation, promising far more simplified rules and setting up a panel to decide on cases attracting the retroactive tax.
But doubts remain over whether the government, which is also in need of revenue, will rein in the tax department.
Foreign firms have accused the tax department of going after them unfairly.
Last month, the department lost a similar court case against Vodafone. It had accused the firm of underpricing shares in a similar transfer between the India unit and its British parent company, and avoiding paying taxes amounting to about 30 billion rupees (S$630 million). The government has not said if it intends to appeal.
The tax department still has several high-profile cases pending, including those against HSBC, IBM and Nokia.
Experts believe that for a start, there will be no fresh cases against foreign companies on transfer pricing, which refers to the cost of goods and services sold by a parent company to its subsidiary in another country or vice versa. "There is a lesser chance of the government contesting it (the ruling). The finance minister has said that the government will not pursue a vindictive policy against foreign companies and will go on the merits of the case," said Mr Rishi Sahai, managing director of Delhi-based consultancy Cogence Advisors.
While the Modi government has taken steps to attract foreign investments, foreign investors remain wary of a variety of issues such as those related to land acquisition and labour reforms.
"There is a little bit of change... but it takes time for the money to come in," said Mr D. H. Pai Panandikar, president of RPG Foundation, a private think-tank.
This article was first published on November 20, 2014.
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