Navneet Singal
Vodafone India Services Pvt Ltd. (VISPL) vs. UOI (Bombay High Court), Pronounced on: October 10, 2014
Decision/Conclusion:
Neither the capital receipts received by the Petitioner on issue of equity shares to its holding company, a non-resident entity, nor the alleged short-fall between the so called fair market price of its equity shares and the issue price of the equity shares can be considered as income within the meaning of the expression as defined under the Act.
Fact of the Case:
- The assessee, an Indian company, issued equity shares at the premium of Rs.8591 per share aggregating Rs.246.38 crores to its holding company. Though the transaction was reported as an “international transaction” in Form 3 CEB, the assessee claimed that the transfer pricing provisions did not apply as there was no income arising to it.
- The AO referred the issue to the TPO without dealing with the preliminary objection. The TPO held that he could not go into the issue whether income had arisen or not because his jurisdiction was limited to determine the ALP. He held that the assessee ought to have charged the NAV of the share (Rs. 53,775) and that the difference between the NAV and the issue price was a deemed loan from the assessee to the holding company for which the assessee ought to have received 13.5% interest. He accordingly computed the adjustment for the shares premium at Rs. 1308 crore and the interest thereon at Rs. 88 crore.
- The AO passed a draft assessment order u/s 144C (1) in which he held that he was bound u/s 92-CA (4) with the TPO’s determination and could not consider the contention whether the transfer pricing provisions applied.
- 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 objection regarding chargeability of alleged shortfall in share premium as a preliminary issue.
- Upon the DRP’s decision, the assessee filed another Writ Petition.
HELD by the High Court allowing the Petition:
Objective of Transfer Pricing Provisions:
A plain reading of section 92(1) of the Income-tax Act, 1961 (the Act) very clearly brought out that “income” arising from an International Transaction was a condition precedent for application of Chapter X of the Act. Transfer Pricing provisions in Chapter X of the Act were to ensure that in case of International Transaction between AEs, neither the profits were understated, nor losses overstated. They did not replace the concept of Income or Expenditure as normally understood in the Act, for the purposes of Chapter X of the Act. The objective of Chapter X of the Act was certainly not to punish Multinational Enterprises and/ or AEs for doing business inter se. Arm’s length price (ALP) was meant to determine the real value of the transaction entered into between AEs. It was a re-computation exercise to be carried out only when income arose in case of an International transaction between AEs. It did not warrant re-computation of a consideration received/ given on capital account.
Income under section 2(24) – whether includes capital receipt?
It could not be disputed that income would not in its normal meaning under the Act include capital receipts unless specified. The amount received on issue of shares was admittedly a capital account transaction not separately brought within the definition of Income, except in cases covered section 56(2)(viib)3 of the Act. Therefore, absent express legislation, no amount received, accrued, or arising on capital account transaction could be subjected to tax as income. Parliament had consciously not brought to tax amounts received from a non-resident for issue of shares, as it would discourage capital inflow from abroad. Neither the capital receipts received by the tax payer on issue of equity shares to its AE, a non-resident entity, nor the alleged shortfall between the so called fair market price of its equity shares and the issue price of the equity shares, could be considered as “income” within the meaning of the expression as defined under the Act. A transaction on capital account or on account of restructuring would become taxable to the extent it impacts income, i.e., under reporting of interest received or over-reporting of interest paid or claim of depreciation, etc. It was only that income which had to be adjusted to the ALP. The issue of shares at a premium was a capital account transaction and not income.
Notional income v. Real income
Reliance by the Revenue upon the definition of International Taxation in sub clauses (c) and (e) of Explanation (i) to section 92B of the Act to conclude that Income had to be given a broader meaning to include notional income, as otherwise Chapter X of the Act would be rendered otiose/ meaningless, was held to be farfetched.
Provisions of Chapter X – whether charging or machinery provisions?
In the absence of a charging Section in Chapter X of the Act, it was not possible to read a charging provision into Chapter X of the Act4. Chapter X of the Act was a machinery (computational) provision to arrive at the ALP of a transaction between AEs. The substantive charging provisions were in sections 4, 5, 15 (Salaries), 22 (Income from house property), 28 (Profits and gains of business), 45 (Capital gain) and 56 (Income from other Sources). Even income arising from International Transactions between AEs had to satisfy the test of Income under the Act and had to find its home in one of the above heads, i.e., charging provisions.
Revenue’s reliance on section 92(2) of the Act
Section 92(2) of the Act dealt with a situation where two or more AEs entered into an arrangement whereby, if they were to receive any benefit, service or facility, then the allocation, apportionment or contribution towards the cost or expenditure had to be determined in respect of each AE having regard to the ALP. It would have no application in VISPL’s case where there was no occasion to allocate, apportion or contribute any cost and/ or expenses between the tax payer and the AE.
Revenue’s reliance on section 56 of the Act
Income from other sources Although section 56(1) of the Act would permit including within its head all income not otherwise excluded, it did not provide for taxing a capital account transaction of issue of shares as was specifically provided for in section 45 or section 56(2) (viib) of the Act and included within the definition of income in section 2 (24) of the Act.
(Author is a AGM – Direct Taxation with GMR Energy Group, Bangalore and can be reached at navneet.singal@gmail.com )
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Comments posted on mthe Related HERE TP adjustment cannot be made on issue of shares at a price lower than ALP or FMV are of relevance, hence require to be taken a note of.