TP Case of Shell

HC decides TP issue of undervaluation of shares in favour of shell; follows ratio of Vodafone's case

November 19, 2014

 

On November 18, 2014 the Bombay High Court held in favour of Shell India on the issue of applicability of Transfer Pricing provisions in case of issue of shares. In this regard, the High relied upon decision in the case of Vodafone India Services (P.) Ltd. v. Union of India [2014] 50 taxmann.com 300 (Bombay). It held that Transfer Pricing provisions would not be applicable on alleged undervaluation of shares issued to foreign parent company, as there was no income arising there from. The High Court deleted the Transfer Pricing adjustment and the consequential interest in respect of alleged undervaluation of shares issued by Shell India.

Previously, the Bombay High Court on October 10, 2014 in the case of Vodafone India Services (Supra)held that issue of shares by assessee to its non-resident AE at a price below the fair market value would not give rise to any income from an admitted international transaction and, thus, Indian Transfer Pricing provisions would not be applicable on it.

BMR Legal acted as the briefing counsel on the tax litigation and transfer pricing issues for Shell. Mr. Percy Pardiwala, Senior Advocate, argued on behalf of Shell with the assistance from the BMR's Legal team.

Mukesh Butani, Managing Partner, BMR Legal stated as under:

 a)  "The Shell India case decided by the Bombay HC is a significant development. It follows the earlier judgment of Vodafone insofar as principles are concerned - the principle being that issuance of shares by an Indian company to its foreign parent is not eligible to transfer pricing provisions as there is no income arising therefrom.

 b)  The High Court held today that the legal principle laid down by the Bombay HC applies in the Shell case and rejected the Department's argument that the facts of Shell case were distinguishable from Vodafone's case.

 c)  The said decision is a welcome relief not just for Shell but for all MNC's who have faced the adjustment on share issuance. It is significant to note that the court did not hesitate on exercising its extraordinary power to issue a writ where alternate appeal remedy was available - in this situation as the court felt that the tax department clearly exceeded its jurisdiction to bring to tax a capital transaction."

Gokul Chaudhri, Leader, Direct Tax, BMR & Associates LLP stated as under:

"The Bombay High Court has decisively held that no transfer pricing or tax implications can arise on issue of shares by a subsidiary to its overseas shareholders. Upholding the writ petition of Shell India the court brought to a close the controversy that arose in January 2013 and has since worried investors. This decision follows earlier decision of the court in similar circumstances for Vodafone India. Investors should welcome this bold intervention and clear thinking of the court. Hopefully one of the tax thorns that troubled investors has been removed. Acceptance of this decision by the Government would be helpful to bring closure."

Section 80C- Bank term Deposit Limit increased to Rs. 1.50 Lakh

Section 80C- Bank term Deposit Limit increased to Rs. 1.50 Lakh

 

NOTIFICATION NO.  63/2014, Dated: November 13, 2014.

S.O. 2906(E). In exercise of the powers conferred by clause (xxi) of sub-section (2) of section 80C of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby makes the following amendments to the the Bank Term Deposit Scheme, 2006, namely:-

1. (1) This scheme may be called the Bank Term Deposit (Amendment) Scheme, 2014. (2) It shall come into force on the date of its publication in the Official Gazette.

2. In the Bank Term Deposit Scheme, 2006, in para 3, in clause (1), for the words "one lakh rupees" , the words "one hundred and fifty thousand rupees" shall be substituted.

[F.No.142/09/2014-TPL]

(Raman Chopra)
Director (TPL-II)

Note: The principal Scheme was published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (ii),vide number S.O. 1220(E) dated the 28th July, 2006 and subsequently amended by notification number S.O. 2127(E), dated 13th December 2007

Bank branch audit panel

Draft Bank Branch Auditors’ Panel for the year 2014-15 has been hosted at http://www.meficai.org/DraftBankBranchAuditorsPanel_2014_15.html. 

Company Law Settlement Scheme (CLSS) further extended

Ministry has, on consideration of 2014) upto31st December. 2014.
Ci requests received from various stakeholders, has decided to extend the Company Law Settlement Scheme (CLSS rcular NO 44/2014 DAted 14.11.2014 

FD in Court- NO TDS

No TDS liability of bank under sec. 194A on interest accrued on FD made by litigant on directions of Court

November 13, 2014[2014] 51 taxmann.com 253 (Delhi)

IT: Where litigant deposit FD with the bank on directions of Court, he ceased to have any control or proprietary right over those funds. Although FD was drawn in the name of the Registrar General, he was neither the recipient of the amount credited to that account nor the interest accruing thereon. There was no assessee to whom interest income from the FD could be ascribed, thus, bank was not liable to deduct tax under section 194A on interest accrued on such FD.

Facts:

(a)		The petitioner ('UCO Bank') accepted a Fixed Deposit ('FD') made by litigant as per directives of the Court. The bank did not deduct tax on accrued interest on such FD as it was in name of Register General of Court as custodian and the actual beneficiaries were not known, as the matter was sub-judice.
(b)		Thus, the issue that arose for consideration of the High Court was:
		• Whether the bank would be liable to deduct tax under section 194A on interest accrued on such FD where the assessee was not ascertainable and the person in whose name the interest was credited was also not a person liable to pay tax under the income-tax Act ('the Act')?

The High Court held in favour of assessee as under:

(1)		The words "credit of such income to the account of the payee" occurring in section 194A of the Act necessarily imply that deduction of tax bears nexus with the income of an assessee. In absence of an assessee, the machinery provisions for deduction of tax to his credit were ineffective. The expression "payee" under section 194A of the Act would mean the recipient of income whose account was maintained by the person paying interest.
(2)		In the instant case, although FD was made in the name of the Registrar General, the account represented funds which were in custody of the Court and the Registrar General was neither the recipient of the amount credited to that account nor the interest accruing thereon. Thus, the Registrar General could not be considered as payee for the purpose of section 194A of the Act.
(3)		There was no assessee to whom interest income from the FD could be ascribed; no person could file return claiming the interest payable by bank as income. The machinery provisions of recovering tax by deduction of tax at source would not be applicable in absence of an ascertainable assessee.
(4)		The litigant who was asked to deposit the money in the court ceased to have any control or proprietary right over those funds. The amount deposited vested in the Court and the depositor ceased to exercise any dominion over those funds. It was also not necessary that the litigant who deposited the money would be the ultimate recipient of income. The person to whom funds would be granted was to be determined by orders passed subsequently. Thus, petitioner-bank was not required to deduct tax under section 194A on interest accrued on FD made by the litigant.

POA- Capital Gains

CAPITAL GAINS In favour of: Assessee Capital gains on sale of property cannot be assessed in the hands of power of attorney holder, when no consideration was paid to the actual owner at the time of execution of the power of attorney and the assessee had acted merely as an agent, since there was no transfer to or enabling enjoyment of property in favour of agent in any manner so as to attract Section 2(47)(vi). High Court Of Madras Commissioner Of Income Tax Vs C. Sugumaran : (2014) 90 CCH 0173 ChenHC Decided On: Nov 03, 2014

 

NBFC-Revised Regulatory Framework

RBI tightens norms for NBFCs

In a bid to bring non-banking financial company (NBFC) norms in line with those of banks, the Reserve Bank of India (RBI)  unleashed tighter rules for NBFCs. According to the new guidelines, NBFCs will require higher minimum capital, have less time to declare bad loans, and a board-approved fit and proper criteria for director appointments.The new norms, which will be implemented in a phased manner, are made applicable for NBFCs that manage funds worth Rs 500 crore and for those that accept public deposits. The central bank will also start granting fresh NBFC licences.

3 CB CD utility

FYI - CBDT on 06-11-2014 released Revised Form 3CA-3CD & Form 3CB-3CD filing utility along with updated Schema. Revised Utility is is now available for e-Filing.

Download Revised Utility updated on 06th November for Tax Audit Report for AY 2014-15.

CBDT to I-T officers: make proper tax assessments

The Central Board of Direct Taxes (CBDT) has directed supervisory officers to play a more proactive role in ensuring that high-pitched assessments without proper basis are not made by the Income-Tax Department.

Also, such officers should ensure that lengthy questionnaires or summons without due application of mind are avoided, CBDT said in a circular to its field officers.

This instruction is seen as yet another effort on part of the CBDT in moving towards a non-adversarial tax regime.

Though less than one per cent of returns filed are selected for scrutiny, this area of work has often drawn adversarial comments.

Supervisory officers have now been directed to ensure inspections and reviews are undertaken in accordance with guidelines issued. This must be done to enable capacity building within the department and accountability of the officers.

The CBDT has highlighted that enquiries arising in limited scrutiny cases selected on the basis of AIR/CIB/26AS information will ordinarily be restricted to that information.

Senior officers have been directed to ensure that appeals are filed only on the merits thereof and not merely on the tax effect involved.

It has also been decided that in multi-CCIT Charges, reference before High Court would be taken by two CCITs.

The CBDT circular also lays emphasis on cleanliness in office, punctuality, timeliness in appointment and avoiding unnecessary adjournments.

All supervisory authorities have been directed to enable an effective grievance redressal system in their jurisdictions.

CBDT to create non-adversarial tax regime

The Central Board of Direct Taxes (CBDT) has directed supervisory officers to play a more proactive role in ensuring that high-pitched assessments without proper basis are not made by the income tax department.

Also, such officers should ensure that lengthy questionnaires or summons without due application of mind are avoided, CBDT said in a circular to its field officers.

This instruction is seen as yet another effort on part of the CBDT in moving towards a non-adversarial tax regime.

Though less than 1 per cent of the returns filed are selected for scrutiny, this area of work has often drawn adversarial comments.

Supervisory officers have now been directed to ensure inspections and reviews are undertaken in accordance with guidelines issued. This must be done to enable capacity building within the department and accountability of the officers.

Senior officers have been directed to ensure that appeals are filed only on the merits thereof and not merely on the tax-effect involved. All supervisory authorities have also been directed to enable an effective grievance redressal system in their jurisdictions.

The CBDT circular also lays emphasis on cleanliness in office, punctuality, timeliness in appointment and avoiding unnecessary adjournments.

  

Kerala High Court on Service tax on Restaurants

Division Bench of Kerala HC upholds Single Judge order, service tax levy on serving food & beverages in AC restaurant, hotel, inn, guest house, club or camp-site u/s 65(105)(zzzzv) & (zzzzw) of Finance Act unconstitutional; Post 46th Constitutional amendment, supply of food & other articles for human consumption in restaurants a 'deemed sale' under Art 366(29-A) and no service involved therein; Said activity enumerated in Entry 54 of List II of Seventh Schedule and States alone have legislative competence to impose tax on whole consideration received; Further, relies on SC decision in Godfrey Philips India Ltd to hold that hotels, inn, clubs, guest-house enumerated in Entry 62 of List II, taxable as 'luxuries' by State legislature; Rejects Revenue's reliance on SC ruling in Tamil Nadu Kalyana Mandapan Assn. to contend that Art. 366(29-A)(f) only permits State to impose tax on supply of food & drink, conceptually, supply of services not included within definition of "sale and purchase of goods"; Said judgment deals with mandap-keeper's liability to service tax, cannot be equated with supply of food & beverages by a restaurant; Vide introduction of Art. 366(29-A), characteristics of restaurant transaction have changed for the purpose of imposition & levy of tax, hence European Court's ruling in Faaborg-Gelting Linien A/S vs. Finanzamt Flensburg cannot be relied upon; Differs from Bombay HC ratio in Indian Hotels and Restaurant Association & Anr., since whole consideration for supply of food (including service part of transaction) is exigible to State tax by virtue of constitutional definition, Union cannot characterise the same transaction as 'service' for levy of service tax  : Kerala HC

CPE requirement for 2014-2016

CPE HOURS REQUIREMENTS FOR THE BLOCK PERIOD OF 3 YEARS (1-1-2014 TO 31-12-2016) TO BE COMPLIED WITH BY DIFFERENT CATEGORIES OF MEMBERS

A. All the members (aged less than 60 years) who are holding Certificate of Practice (except all those members who are residing abroad) are required to: 

a) Complete at least 90 CPE credit hours in a rolling period of three-years. 

b) Complete minimum 20 CPE credit hours of structured learning in each calendar year. 

C) Out of the 90 CPE Credit Hours as mentioned above, 30 CPE credit hours can be completed either through Structured or Unstructured learning (as per Member’s choice). 

 

B. All the members (aged less than 60 years) who are not holding Certificate of Practice and all the members who are residing abroad (whether holding Certificate of Practice or not) are required to: 

(a) Complete at least 45 CPE credit hours either structured or unstructured learning (as per Member’s choice) in rolling period of three-years 

b) Complete minimum 10 CPE credit hours of either structured or unstructured learning (as per member’s choice) in each calendar year. 

 

 C. All the members (aged 60 years & above) who are holding Certificate of Practice, are required to: 

a) Complete at least an aggregate of 70 CPE credit hours of either Structured or Unstructured Learning (as per member’s choice) in a rolling period of three years 

b) Complete minimum of 10 CPE credit hours being an aggregate of either Structured or Unstructured Learning in the first calendar year i.e. 2014. 

c) Complete minimum of 20 CPE credit hours being an aggregate of either Structured or Unstructured Learning (as per member’s choice) in the second and third calendar years i.e. 2015 & 2016 

Non Submission of C Form-Interest

Interest chargeable from 'Return Date' on Form "C" non-production, not 'Assessment' under CST Act

 

HC quashes Tribunal order, interest chargeable from the date of furnishing monthly returns in case of default in furnishing 'C' Form declarations claiming concessional rate under Central Sales Tax (CST) Act; Tribunal misread SC judgement in J. K. Synthetics wherein liability to pay tax and interest thereon was held to arise only after adjudication and not earlier to it; In instant case, assessee aware of liability on inter-state sale, hence tax paid pursuant to assessment order ought have been paid alongwith return, as prescribed under CST Act; Having failed to do so, State deprived of revenue and hence, interest payable from the date when assessee became liable to pay tax to compensate the delay; Rejects assessee's contention that no interest payable absent provision in CST Act, Sec 9(2B) r/w Sec 36 & 37 of Karnataka VAT Act makes it very clear that power conferred to levy interest flows from statutory provision  : Karnataka HC

04/11/2014

The ruling was delivered by Justice N. Kumar and Justice B. Manohar.

Ms. S. Sujatha appeared on behalf of the Revenue, while assessees were represented by Ms. H. Vani, Mr. T. Surya Narayana and Mr. T. Rajaram. 

[TS-499-HC-2014(KAR)-VAT]

Interest U/s 234 A Stayed

Madras High Court Stays Clause 7 of CBDT Order dated 26-09-2014 regarding Extension of ITR Due Date AY 2014-15 with Levy of Interest u/s 234A

 

 

Earlier on 26-09-2014 CBDT, following the direction of the Gujarat High Court had extended the due date for Income Tax Returns (ITR) filing from 30th September, 2014 to 30th November, 2014 for assessee covered under tax audit us 44AB of Income Tax Act, 1961.

However, the clause 7 of CBDT order dated 26-09-2014 provided that assessee shall have to pay interest under section 234A for the period of the extension granted.

Clause 7 of CBDT Order is reproduced hereunder:

7. There shall be no extension of the "due date" for the purposes of Explanation 1 to section 234A (Interest for defaults in furnishing return) of the Act and the assessees shall remain liable for payment of interest as per the provisions of section 234A of the Act.

Now, it is reported that the Madras High Court has granted a stay on the operation of the clause 7 of the said order of CBDT and has issued a direction to Income Tax to accept returns without interest.

The full details of the order are awaited.

CBDT on Non filers

CBDT Directive On Calling For Returns Of Non-Filers For AY 2014-15

October 29th, 2014

The Joint Director of Income-tax Systems has issued a letter dated 29.10.2014 stating that 5,09,898 taxpayers who had submitted an e-return in the earlier AYs with returned income of Rs. 10 lakhs and more have not filed a return for AY 2014-15. It has been stated that as a measure of revenue augmentation, a notice must be sent to the non-filers to furnish their returns for AY 2014-15.

Amendment to seventh Schedule (CSR)

Amendment to seventh Schedule (CSR):
to add sanitation and 'Swachh Bharat Mission' MCA today vide its notification dated 24th October, 2014 amended Seventh Schedule to include
'sanitation', 'Swachh Bharat Mission', 'cleaning of water and
Ganga' as a part of CSR activity.

ST3 Return Due Date Extended to 14th Nov,2014

Government of India
Ministry of Finance
Department of Revenue
Central Board of Excise & Customs

New Delhi, the 24th October, 2014

ORDER NO 02/2014-SERVICE TAX

In exercise of the powers conferred by sub-rule (4) of rule 7 of the Service Tax Rules, 1994, the Central Board of Excise & Customs hereby extends the date of submission of the Form ST-3 for the period from 1st April 2014 to 30th September 2014, from 25th October, 2014 to 14th November, 2014.

In exercise of the powers conferred by sub-rule (4) of rule 7 of the Service Tax Rules, 1994, the Central Board of Excise & Customs hereby extends the date of submission of the Form ST-3 for the period from 1st April 2014 to 30th September 2014, from 25th October, 2014 to 14th November, 2014.

The circumstances of a special nature, which have given rise to this extension of time, are as follows:

"Natural calamities in certain parts of the country."

F.No.137/99/2011-Service Tax

Himani Bhayana
Under Secretary (Service Tax)
Central Board of Excise and Customs

e Form ADT-1

New e-Form ADT-1

New features/ Options of e-form ADT-1 introduced by Ministry of Corporate Affairs

·         Provide whether company is falling  under any class of Companies as per Section 139(2).

·         Whether Joint Auditors have been appointed - Provide Whether joint auditors have been appointed. If yes is selected then provide the value for Number of auditor(s) appointed shall be greater than 1.

·         Period of account for which appointed - Please mention the "From" and "To" date for the period for which auditor is appointed.

·         Number of financial year(s) to which appointment relates - Please provide the Number of financial year(s) to which appointment relates.

·         Whether the appointment of auditor is within the limits of twenty companies as specified in sub section 3(g) of section 141 - Please provide Whether the appointment of auditor is within the limits of twenty companies.

·         Specify the tenure of previous appointment(s) of the auditor or auditor's firm or its member in the same company in which audit was conducted or is functioning (excluding previous years having break of five or more years as specified in Rule 6) - Please provide the tenure of previous appointment(s) of the auditor or auditor's firm or its member in the same company in which audit was conducted or is functioning in number of financial year(s). Please provide details as Person appointed as auditor, financial start date and financial end date of his tenure

·         Manadatory Attachmetns:

Ø  Copy of the intimation sent by company

Ø  Copy of written consent given by auditor;

Ø  Copy of resolution passed by the company;

NOTE:

v  The e-Form will be auto approved (STP).

v  Now it's mandatory for the companies to attach the above mentioned documents with e-form ADT-1.

v  Its mandatory to mention Number of financial year(s) to which appointment relate.

IndianCAs: Wish you a very Happy Diwali!!

 

| Ashwin Nagar | FCA and SAP-Finance & Consolidations |+919833015352

Success is not permanent and failure is not final

 

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Extension of CLSS till November 15, 2014

Extension of CLSS till November 15, 2014. General Circular No 40/2014 dated 15/10/2014.

Wef FY 2015-16, Co Audit Report to state about existence of Adequate Internal Financial Controls System & its Operating Effectiveness. Notification of 14-10-14.

Restructuring of CBEC

Alert on Re-oganisation of CBEC Officer

 

Although the reorganization of formations under CBEC will take effect from 15th October 2014, to avoid inconvenience to the existing Central Excise and Service Tax assessees, they will continue to be mapped in ACES to the existing location codes (Commissionerate, Division and Range). Applicants for new registration can also apply to the existing formations. After migration of the assessees to the new formations, information will be sent to the assessees via email informing them of their new locations. Facility will also be provided in ACES for assessees to ascertain their new location codes, on their own, without visiting the Range offices, through "know you location code" on ACES website and filling of the registration number.

Vodafone TP Case

Vodafone India Services Pvt. Ltd vs. UOI (Bombay High Court) 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. 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'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. HELD by the High Court allowing the Petition: (1) 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. (2) The word income for the purpose of the Act has a well understood meaning as defined in s. 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 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 (Cadell Weaving Mill Co. vs. CIT 249 ITR 265 approved in CIT vs. D.P. Sandu Bros 273 ITR 1 followed); (3) 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. It was not open to the DRP to seek aid of the supposed intent of the Legislature to give a wider meaning to the word 'Income'; (4) The other basis in the impugned order, namely that as a consequence of under valuation of shares, there is an impact on potential income and 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. In any case, the entire exercise of charging to tax the amounts allegedly not received as share premium fails, as no tax is being charged on the amount received as share premium. (5) Chapter X is invoked to ensure that the transaction is charged to tax only on working out the income after arriving at the ALP of the transaction. This is only to ensure that there is no manipulation of prices/consideration between AEs. The entire consideration received would not be a subject-matter of taxation; (6) The department's method of interpretation indeed is a unique way of reading a provision i.e. to omit words in the Section. This manner of reading a provision by ignoring/rejecting certain words without any finding that in the absence of so rejecting, the provision would become unworkable, is certainly not a permitted mode of interpretation. It would lead to burial of the settled legal position that a provision should be read as a whole, without rejecting and/or adding words thereto. This rejecting of words in a statute to achieve a predetermined objective is not permissible. This would amount to redrafting the legislation which is beyond/outside the jurisdiction of Courts. (7) In tax jurisprudence, it is well settled that following four factors are essential ingredients to a taxing statute:- (a) subject of tax; (b) person liable to pay the tax; (c) rate at which tax is to be paid, and (d) measure or value on which the rate is to be applied. Thus, there is difference between a charge to tax and the measure of tax (a) & (d) above; (8) The contention that in view of Chapter X of the Act, the notional income is to be brought to tax and real income will have no place is not acceptable because the entire exercise of determining the ALP is only to arrive at the real income earned i.e. the correct price of the transaction, shorn of the price arrived at between the parties on account of their relationship viz. AEs. In this case, the revenue seems to be confusing the measure to a charge and calling the measure a notional income. We find that there is absence of any charge in the Act to subject issue of shares at a premium to tax. (9) W.e.f. 1 April 2013, the definition of income u/s 2(24)(xvi) includes within its scope the provisions of s. 56(2) (vii-b) of the Act. This indicates the intent of the Parliament 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. (10) Consequently, the issue of shares at a premium by the Petitioner to its non resident holding company does not give rise to any income from an admitted International Transaction. Thus, no occasion to apply Chapter X of the Act can arise in such a case.

 

 

 

 

Vodafone India Services Pvt. Ltd vs. UOI (Bombay High Court)

October 10th, 2014

COURT:	Bombay High Court
CORAM:	M. S. Sanklecha J, Mohit Shah CJ
SECTION(S):	92CA
GENRE:	Transfer Pricing
CATCH NOTE:	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.
CATCH WORDS:	share premium, Transfer Pricing
COUNSEL:	Harish Salve
FILE:	http://laws4.us/wp-content/uploads/vodafone_transfer_pricing3.pdf
DATE:	October 10, 2014 (Date of pronouncement)
DATE:	October 10, 2014 (Date of publication)

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'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. HELD by the High Court allowing the Petition:

(1) 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.

(2) The word income for the purpose of the Act has a well understood meaning as defined in s. 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 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 (Cadell Weaving Mill Co. vs. CIT 249 ITR 265 approved in CIT vs. D.P. Sandu Bros 273 ITR 1 followed);

(3) 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. It was not open to the DRP to seek aid of the supposed intent of the Legislature to give a wider meaning to the word 'Income';

(4) The other basis in the impugned order, namely that as a consequence of under valuation of shares, there is an impact on potential income and 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. In any case, the entire exercise of charging to tax the amounts allegedly not received as share premium fails, as no tax is being charged on the amount received as share premium.

(5) Chapter X is invoked to ensure that the transaction is charged to tax only on working out the income after arriving at the ALP of the transaction. This is only to ensure that there is no manipulation of prices/consideration between AEs. The entire consideration received would not be a subject-matter of taxation;

(6) The department's method of interpretation indeed is a unique way of reading a provision i.e. to omit words in the Section. This manner of reading a provision by ignoring/rejecting certain words without any finding that in the absence of so rejecting, the provision would become unworkable, is certainly not a permitted mode of interpretation. It would lead to burial of the settled legal position that a provision should be read as a whole, without rejecting and/or adding words thereto. This rejecting of words in a statute to achieve a predetermined objective is not permissible. This would amount to redrafting the legislation which is beyond/outside the jurisdiction of Courts.

(7) In tax jurisprudence, it is well settled that following four factors are essential ingredients to a taxing statute:- (a) subject of tax; (b) person liable to pay the tax; (c) rate at which tax is to be paid, and (d) measure or value on which the rate is to be applied. Thus, there is difference between a charge to tax and the measure of tax (a) & (d) above;

(8) The contention that in view of Chapter X of the Act, the notional income is to be brought to tax and real income will have no place is not acceptable because the entire exercise of determining the ALP is only to arrive at the real income earned i.e. the correct price of the transaction, shorn of the price arrived at between the parties on account of their relationship viz. AEs. In this case, the revenue seems to be confusing the measure to a charge and calling the measure a notional income. We find that there is absence of any charge in the Act to subject issue of shares at a premium to tax.

(9) W.e.f. 1 April 2013, the definition of income u/s 2(24)(xvi) includes within its scope the provisions of s. 56(2) (vii-b) of the Act. This indicates the intent of the Parliament 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.

(10) Consequently, the issue of shares at a premium by the Petitioner to its non resident holding company does not give rise to any income from an admitted International Transaction. Thus, no occasion to apply Chapter X of the Act can arise in such a case.