TP adjustment cannot be made in relation to issue of shares at a premium lower than ALP as it is not “income” – Bom HC


Vodafone India Services Pvt. Ltd vs. UOI (WRIT PETITION NO.871 OF 2014) (Bombay High Court) dated 10.10.2014

Background:

The Petitioner, Vodafone India Services Pvt. Ltd., is a wholly owned subsidiary of a non-resident company, Vodafone Tele-Services (India) Holdings Limited. The Petitioner issued 2,89,224 equity shares of a face value of Rs.10/- each at the premium of Rs.8,519/- per share to its holding company.  The Fair Market Value for the issue of equity shares was determined by the Petitioner in accordance with the methodology prescribed under the Capital Issues (Control) Act 1947. The Petitioner filed Form 3CEB alongwith return of income wherein the transaction of issuance of equity shares was declared as an International Transaction and also the ALP of the shares so issued, was determined. However, a note was appended to its Form 3-CEB report by the Accountant making it clear that the transaction of issue of equity shares did not affect the income of the Petitioner and was being reported only as a matter of abundant caution.

According to the AO and TPO, the Petitioner ought to have valued each equity share at Rs.53,775/- and on that basis shortfall in premium to the extent of Rs.45,256/- per share resulted into total shortfall of Rs.1308.91 crores. The short fall in the value of shares issued by the Petitioner to its holding company was also treated as a deemed loan by the Petitioner to its holding company. This deemed loan was sought to be charged with interest at 13.5% per annum amounting to Rs.88.35 crores.  Thus the total amount of Rs.1397,26,37,035/- was treated as transfer pricing adjustment for the FY 2008-09, relevant for the AY 2009-10.

A.O. passed the Draft Assessment Order under Section 143 read with Section 144-C(1) of the Act. This without dealing with the Petitioner’s principal contention that Chapter X of the Act would not apply to the issue of equity shares to its holding company. The Petitioner filed its objection to the draft Assessment Order with the DRP under Section 144C of the Act. So far as the issue of jurisdiction is concerned, the Petitioner filed Vodafone-III Petition (W. P. No.1877 of 2013) in this Court. After hearing the parties, on 29 November 2013, this Court passed an order accepting the view that a jurisdictional issue arises for consideration. Thereafter, on 11 February, 2014, the DRP passed the impugned order. By the above impugned order, it was held that the non- receipt of the premium to the extent not received, is an income arising from issue of shares. Thus, the impugned order holds that the AO has jurisdiction to invoke Chapter X of the Act.

Petitioner’s Contentions:

  • Chapter X of the Act is a special provisions relating to avoidance of tax. Section 92(1) of the Act which applies to the the present facts, directs that any income arising from an International Transaction should be computed, having regard to the ALP. Thus, the sine-qua- non, for application of Section 92(1) of the Act is that income should arise from an International Transaction. In this case, it is submitted that no income arises from issue of equity shares by the Petitioner to its holding company.
  • Chapter X of the Act is not designed to bring to tax all sums involved in a transaction, which are otherwise not taxable.
  • The issue of shares by the Petitioner and receipt of consideration of the same is a capital receipt under the Act. Capital receipts cannot be brought to tax unless specifically/ expressly brought to tax by the Act.
  • It is well settled that capital receipts do not come within the ambit of the word ‘Income’ under the Act, save when so expressly provided as in the case of Section 2 (24) (vi) of the Act (dealing with capital gains). 
Tax Authority’s arguments:
  • Section 92(1) of the Act is to be read with Section 92(2) of the Act. It is stated that a conjoint reading of two provisions would indicate that what is being brought to tax under Chapter X of the Act is not share premium but is the cost incurred by the Petitioner in passing on a benefit to its holding company by issue of shares at a premium less than ALP. This benefit is the difference between the ALP and the premium at which the shares were issued. 
  • The issue of Chapter X of the Act being applicable is no longer res integra as identical provision as found in Section 92 of the Act was available in Section 42(2) of the Income Tax Act, 1922 (1922 Act). 
  • Section 92(1) of the Act uses the word ‘Any income arising from an International Transaction’. This indicates that the income of either party to the transaction could be subject matter of tax and not the income of resident only. 
HELD:
  • The word income for the purpose of the Act has a well understood meaning as defined in Section 2(24) of the Act. 
  • The amounts received on issue of share capital including the premium is undoubtedly on capital account
  • Share premium have been made taxable by a legal fiction under Section 56(2)(viib) of the Act and the same is enumerated as Income in Section 2(24)(xvi) of the Act. 
  • However, what is bought into the ambit of income is the premium received from a resident in excess of the fair market value of the shares. In this case what is being sought to be taxed is capital not received from a non-resident i.e. premium allegedly not received on application of ALP. Therefore, absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income.  This is settled by the decision of this Court in Cadell Weaving Mill Co. vs. CIT 249 ITR 265 was upheld by the Apex Court in CIT vs. D.P. Sandu Bros. Chember (P) Ltd. 273 ITR 1
  • The impugned order seeks to widen the meaning of the word “Income” to include all incomings. This is sought to be supported by the intent/object of Chapter X of the Act, particularly the definition of International Transaction given in Section 92B of the Act. 
  • In case of taxing statutes, in the absence of the provision by itself being susceptible to two or more meanings, it is not permissible to forgo the strict rules of interpretation while construing it.
  • The reliance by the revenue upon the definition of International Taxation in the sub clause (c) and (e) of Explanation (i) to Section 92B of the Act to conclude that Income has to be given a broader meaning to include notional income, as otherwise Chapter X of the Act would be rendered otiose is far fetched
  • The other basis in the impugned order is that as a consequence of under valuation of shares, there is an impact on potential income. The reasoning is that if the ALP were received, the Petitioner would be able to invest the same and earn income, proceeds on a mere surmise/assumption. This cannot be the basis of taxation.

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