Case Law Details
Land Mark Judgment by Hon’ble Bombay High Court in case of Vodafone India Services Private Limited
In the instant case, the assesse has issued shares to its holding company at premium (INR 8591) amounting to INR 246.38 crores. The said transaction was reported in Form 3CEB, although assesse claimed TP Provisions are not applicable on income arising on such transactions. The case was referred by the Learned AO to TPO who determined that the shares should have been issued at its NAV (INR 53,775) and the difference was deemed as loan to assessee for should have charged interest @ 13.5%. He accordingly computed the adjustment for the shares premium at Rs. 1308 crore and the interest thereon at Rs. 88 crore. The assessee filed a Writ Petition challenging the jurisdiction of the TPO/AO to make the adjustment. The High Court directed the DRP to decide the assessee’s objection regarding chargeability of alleged shortfall in share premium as a preliminary issue. Upon the DRP’s decision, the assessee filed another Writ Petition. Hon’ble High Court held allowing the Petition:
“A plain reading of Section 92(1) of the Act very clearly brings out that income arising from a International Transaction is a condition precedent for application of Chapter X of the Act.”
Further, Hon’ble High Court stated that Share premium have been made taxable by a legal fiction u/s 56(2)(viib) of the Act and the same is enumerated as Income in s. 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. Reliance was placed on the decision in case of Cadell Weaving Mill Co. vs. CIT 249 ITR 265.
It was also held that by introducing Section 56(2)(viib), the intent of parliament was to to tax issue of shares to a resident, when the issue price is above its fair market value. In the instant case, the Revenue’s case is that the issue price of equity share is below the fair market value of the shares issued to a non-resident. Thus Parliament has consciously not brought to tax amounts received from a non-resident for issue of shares, as it would discourage capital inflow from abroad. Thus the writ was answered in favour of the assesse giving a major relief to the Non – Resident companies.
– Author Aditya Singhania and Nischal Agarwal
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FICCI comments on Vodafone judgement
New Delhi, 1 0 October 2014: FICCI is happy to note the positive determination made by Hon. Bombay High Court in a major transfer pricing tax issue of a large investor in India. Given that India has the largest number of transfer pricing disputes globally, quick resolutions are critical to build investor confidence. FICCI has repeatedly urged greater clarity on tax application on transfer pricing and taxing capital-raising based on share valuations.
We hope this judgment will be allowed to remain conclusive so that it can set the ground for fair taxation in this context and forthcoming judgments on similar cases will merit same logic thus soothing a key anxiety amongst all investors; this would help catalyze actualization of investment plans for India.
The amendment of section 56 , which is referred but relied on in the Bom HC subject judgment for a limited purpose, does call for a detailed study and critical analysis.Incidentally, there is a detailed commentary on the Taxmann webiste, worth a look into. Surprisingly, rather disappointingly and belying one’s normal expectation,in the latest (Tenth) Edition of Palkhivala’s Text Book,the mentioned amendment is, on a quick reference (to check closely),despite its intricacies and importance,not seen to have been commented on.Should that be so, may be,worthwhile inviting the kind attention thereto, of the eminent Advocate, Arvind P Datar, the present Editor of the Book.
Issue of shares at a premium is a matter of negotiation between issuer company and investor. In case of issue of shares to promoters, an issue at premium can be forward looking decision. Promoters may like to keep share capital low, reserves high so that book value of share is higher, earning per share is higher, dividend at higher rate ( on paid-up capital per share) can be declared, in future bonus shares can be issued. In future if company want to issue shares to other joint venture partners or to public, shares can be issued at premium. Share capital as well as share premium both are shareholders funds. Share premium can be used only for limited purposes one of such limited purpose is to issue free shares as bonus shares.
Some times when company is controlled by a group of associates, shares are also be issued at premium with a view to save fees payable to ROC on authorized capital, and to keep low capital with high reserves to improve cost of capital as low as possible.
Therefore, the revenue should not have a problem if shares are issued at premium, as a commercially prudent decision.
Strong capital base, higher book value of shares – low capital and higher reserves, higher earning and dividend per shares etc. are financial strength of company. It helps in raising funds by way of capital and borrowing both in future. Revenue must consider these aspects.
Securities premium is a capital receipt and not income. The provisions of S.56 treating excess of issue price above fair price as income is wrong, unjustified and appears to be ultra virse the Constitution of India. Readers may refer to my articles on this on taxmanagementindia.com by
CA Dev Kumar Kothari
The judgment of Bombay High Court is in context of TPA, s
Add-on
To furnish a helpful clue: The citation of the referred article is, – [2007] 165 TAXMAN 165 (ART) TRANSFER PRICING; and the subject of study (critique)therein is the itat decision in Aztec Software & Technology Services Ltd. v. Asstt. CIT.
It may be of interest to know about further developments since then, if any, in re. Aztec.
IMPROMPTU
To share a few random thoughts:
The arguments mainly advanced by the aggrieved assessee are not readily understood. For instance, one of the propositions canvassed is that , under the transfer pricing regulations,the concept of ‘income’ does not include any thing in respect of a ‘capital account transaction’. The court has accepted it, with the observation that, – “Therefore, absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income (Cadell Weaving Mill Co. vs. CIT 249 ITR 265 approved in CIT vs. D.P. Sandu Bros 273 ITR 1 followed)”.
Pending an insightful study, it will be worthwhile for tax lawyers / other experts to independently examine and ascertain,- why and how those cited cases, particularly Cadell’s case, seen to have been decided on an altogether distinct factual matrix and basically different issue,- that is not under the TP Regulations (TPR), – could apply on all fours to the given case.
By the way, certain other viewpoints since brought out through comments elsewhere (e.g websites of itatonline and ICL), if anyone were to so care and mind, may be looked up for useful hints.
Further,for a discussion of the not-so-unrelated proposition namely,whether or not ‘income’ as envisaged under TPR can be rightly construed to cover ‘loss’, the article published in Taxmann journal may be looked up.