2014 (11) TMI 1052 - HC - Income Tax

Court nullifies tax on international transactions involving equity shares & debentures issued to non-resident Associated Enterprises

Equinox Business Parks (P.) Ltd. Versus Union of India

The Court set aside the orders of the Transfer Pricing Officer, Assessing Officer, and Dispute Resolution Panel, which sought to tax income from ... Transfer pricing adjustment - amounts received on issue of shares - whether issue of shares at a premium by the Petitioner to its non-resident holding company gave rise to any income from an admitted International Transaction - applicability of provisions of chapter X - Held that:- As in the case of M/s Vodafone India Services Private Limited [2014 (10) TMI 278 - BOMBAY HIGH COURT ] held that the amounts received on issue of shares is a capital account transaction not separately brought within the definition of 'income' as per the provisions of section 2(24) as well as sections 4 & 5 of the Act. Therefore, such capital account transaction not falling within a statutory exception cannot be brought to tax. Even income arising from international Transaction between AE must satisfy the test of income under the Act and must find its home in one of the above heads i.e. charging provisions. There is no charging section in chapter X of the act. Only if there is income which is chargeable to tax under the normal provisions of the act, then alone chapter X of the act could be invoked. Further, since there is no income arising from the transaction of issue of shares, the provisions of chapter X would not apply. Accordingly, we set aside the orders of TPO dated 30 January 2013, the Draft Assessment order dated 26 March 2014 and of DRP dated 1 December 2013 to the extent they seek to make additions on account of issue of equity shares and debentures to its AE and the shortfall in receipt thereof being considered as deemed loan and deemed interest thereon being sought to be brought to tax. - Decided in favour of assessee Issues:Challenge to order of Transfer Pricing Officer, Draft Assessment Order by Assessing Officer, and directions by Dispute Resolution Panel regarding income from international transactions arising from the issue of equity shares and Compulsory Convertible Debentures (CCDs) to non-resident Associated Enterprises (AE).Analysis:1. The Petition challenges the order dated 30 January 2013 by the Transfer Pricing Officer (TPO), Draft Assessment Order dated 26 March 2013 by the Assessing Officer, and directions dated 31 December 2013 by the Dispute Resolution Panel (DRP). The impugned orders held that issuing equity shares and CCDs to non-resident AE generates income from International Transactions taxable under the Income Tax Act, 1961.2. The Petition pertains to the Assessment Year (A.Y.) 2009-10.3. The Petitioner filed its income return for A.Y. 2009-10, declaring a loss and issued equity shares and CCDs. The Assessing Officer referred the international transaction to the TPO for determining its Arm's Length Price (ALP) under Section 144C(1) of the Act.4. The TPO issued show cause notices to the Petitioner regarding the issuance of equity shares and CCDs at a premium, leading to a shortfall in ALP. The TPO sought explanations on revising the ALP and treating the shortfall as a deemed loan attracting interest.5. The Petitioner responded to the show cause notices, contending that issuing equity shares and CCDs does not generate income under Chapter X of the Act. The TPO's order focused on ALP computation, determining adjustments and treating shortfalls as deemed loans with interest.6. Subsequently, the Assessing Officer issued a draft assessment order based on the TPO's findings. The Petitioner objected to this order before the DRP, which upheld the shortfall in issue prices of equity shares and CCDs.7. The Petitioner challenged the orders on jurisdictional grounds, arguing that issuing equity shares and CCDs does not create income. The Court referenced the Vodafone IV case, holding that Chapter X of the Act applies only to income arising from international transactions, not capital account transactions like issuing shares.8. The Revenue accepted the Vodafone IV decision and applied it in a similar case for A.Y. 2010-11, where the DRP ruled in favor of the Petitioner, stating that income from issuing shares is a capital account transaction not subject to tax under Chapter X.9. The Revenue's counsel acknowledged the applicability of Vodafone IV in the present case, given the similar facts and rulings in the A.Y. 2010-11.10. Consequently, the Court set aside the TPO's order, Draft Assessment order, and DRP's directions seeking additions based on issuing equity shares and debentures to AE, treating shortfalls as deemed loans with interest for taxation.11. The Petition was allowed with no costs awarded.This detailed analysis covers the issues raised in the legal judgment, providing a comprehensive overview of the case and the Court's decision based on relevant legal principles and precedents.