BOMBAY — Royal Dutch Shell (IW 1000/2) has won a lengthy court battle against Indian tax authorities, marking a significant victory for multinationals involved in taxation wrangles in the country.
The Bombay High Court ruled in favor of Shell, whose Indian unit had been accused of underpricing shares issued to its parent firm by about 180 billion rupees ($3 billion).
The company had challenged a demand by Indian authorities for tax on the interest that would have been earned.
The judges on Tuesday quashed the income tax department order, a move Shell welcomed.
"This is a positive outcome which should provide a further boost to the government initiatives to improve the investment climate," the company said in a statement Wednesday.
The amount demanded by Indian tax authorities was not immediately known, and Shell did not disclose the figure.
The government has not said whether it will appeal the ruling.
The tax claim was one in a string imposed by Indian authorities on foreign firms including HSBC, IBM and Nokia.
These suits, too, are now most likely to be resolved in a fashion similar to the Shell case, experts say.
The ruling "shows there are viable legal remedies for investors in India," said Girish Vanvari, co-head of tax at KPMG in India. "This restores confidence to a great extent."
'Uneven & Capricious'
Foreign companies allege that Indian tax laws are sometimes applied in an uneven and capricious manner, making it difficult to do business in the country.
A court ruled in October in favour of Vodafone India, which had been engaged in a $490-million tax battle with authorities after they accused the company of also underpricing its shares in a rights-issue to its British parent Vodafone Plc.
Vodafone,however, is still battling a more than $2-billion tax demand over its $10.7-billion purchase of Indian mobile operations in 2007 from Hong Kong-based Hutchison Whampoa.
Uncertainty about India's regulatory climate has dampened foreign investment interest at a time when the country urgently needs funds to upgrade its dilapidated roads, rails and other infrastructure and spur economic growth.
Vikram Dhawan, equities director at Mumbai's Equentis Capital, called the Shell ruling "a very positive development."
But Dhawan said the Indian government now had to remove ambiguities surrounding inward investment "if more of such suits that hurt investor sentiment are to be avoided."
Foreign investors have been disappointed that Prime Minister Narendra Modi, who came to power in May promising to boost growth, has not yet repealed a 2012 law that allows officials to tax companies retroactively.
So-called transfer pricing -- the value at which companies trade assets between units in different countries -- has become a major legal issue in India and in other countries.
Tax authorities often contend that companies set the prices for transferring assets for their own gain.
Legally, prices for cross-border transfer of assets are supposed to be carried out as if the transactions involved separate companies.
By Aditya Phatak
Copyright Agence France-Presse, 2014