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
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.