2014 (10) TMI 278 - HC - Income Tax

Share Premium to Non-Resident Holding Company is Capital Receipt, Not Taxable Income Under Section 56(2)(viib)

Vodafone India Services Pvt. Ltd. Versus Union of India, Addl. Commissioner of Income Tax, Dy. Commmissioner of Income Tax

The HC held that amounts received on issue of shares, including premium, to a non-resident holding company are capital receipts and do not constitute ... Transfer pricing adjustment - Definition and scope of 'income' - 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 - Held that:- 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 under Section 56(2)(viib) of the Act and the same is enumerated as Income in Section 2(24)(xvi) of the Act - 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 – following the decision in Cadell Weaving Mill Co. vs. CIT [2001 (2) TMI 105 - BOMBAY HIGH COURT] – the contention of the assessee is correct that neither the capital receipts received on issue of equity shares to its holding company, a non-resident entity, nor the 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. Jurisdiction to apply Chapter X – Held that:- As the assessee itself had filed Form 3CEB for purposes of Chapter X of the Act – it has already been decided that the issue of jurisdiction as raised by the Petitioner of income arising, is a condition precedent for applicability of Section 92(1) of the Act - although the words International Taxation has been defined in Section 92B of the Act for the purposes of Chapter X of the Act, the words 'Income' has not been defined - it was not open to DRP to seek aid of the supposed intent of the Legislature to give a wider meaning to the word 'Income'. The issue of shares at a premium does not exhaust the universe of applicability of Chapter X of the Act - There are transactions which would otherwise qualify to be covered by the definition of International Transaction. The transaction on capital account or on account of restructuring would become taxable to the extent it impacts income i.e. under reporting of interest or over reporting of interest paid or claiming of depreciation etc. It is that income which is to be adjusted to the ALP price - It is not a tax on the capital receipts - section 92(2) of the Act deals with a situation where two or more AE's enter into an arrangement whereby they are to receive any benefit, service or facility then the allocation, apportionment or contribution towards the cost or expenditure is to be determined in respect of each AE having regard to ALP. The definition of income under Section 2(24)(xvi) of the Act includes within its scope the provisions of Section 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 - None of the notices issued to the Petitioner on the draft order passed by AO on the order passed by DRP even proposes to assess the Petitioner in its representative capacity - the Petitioner had no occasion to challenge the jurisdiction of the Revenue on the above aspect – thus, 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 – there is no occasion to apply Chapter X of the Act – Decided in favour of assessee. Issues Involved:1. Jurisdiction to apply Chapter X of the Income Tax Act, 1961.2. Definition and scope of 'income' under the Act.3. Application of transfer pricing provisions to capital transactions.4. Validity of the assessment and transfer pricing orders.5. Interpretation of relevant statutory provisions.Detailed Analysis:1. Jurisdiction to Apply Chapter X of the Income Tax Act, 1961:The core issue was whether Chapter X of the Act, which deals with transfer pricing, applies to the issuance of shares by the Petitioner to its holding company. The Petitioner argued that no income arises from the issuance of shares, and thus Chapter X should not be applicable. The Court held that income arising from an international transaction is a condition precedent for the application of Chapter X. This was affirmed by the Court's earlier order in Vodafone-III, which directed the DRP to consider this jurisdictional issue first.2. Definition and Scope of 'Income' Under the Act:The Petitioner contended that the Act does not tax the inflow of capital, and the alleged shortfall in the share premium cannot be treated as income. The Court agreed, noting that the definition of income in Section 2(24) of the Act does not include capital receipts unless specifically provided, such as in Section 2(24)(vi) for capital gains. The amounts received on the issue of share capital, including the premium, are on capital account and thus not taxable as income.3. Application of Transfer Pricing Provisions to Capital Transactions:The Court examined whether the issuance of shares at a premium falls within the ambit of transfer pricing provisions. It concluded that Chapter X aims to ensure that profits are not understated or losses overstated in international transactions between associated enterprises. However, it does not apply to capital transactions like the issuance of shares, which do not generate income. The Court emphasized that the Transfer Pricing Officer (TPO) and Assessing Officer (AO) had erred in treating the shortfall in the share premium as deemed income and a deemed loan.4. Validity of the Assessment and Transfer Pricing Orders:The Court found that the orders passed by the TPO and AO were without jurisdiction. The TPO's determination of the Arm's Length Price (ALP) for the share issuance and the subsequent draft assessment order by the AO were based on an incorrect interpretation of the law. The Court quashed these orders, stating that they were null and void.5. Interpretation of Relevant Statutory Provisions:The Court scrutinized the relevant provisions of the Act, including Sections 2(24), 56, 92, and 92B. It held that the term 'income' should be construed narrowly, consistent with its definition in the Act. The Court rejected the DRP's broader interpretation, which included notional income from the alleged shortfall in share premium. The Court also dismissed the revenue's reliance on Section 92(2) to justify taxing the benefit passed to the holding company, stating that this section does not apply to the facts of the case.Conclusion:The Court allowed the Petition, ruling that the issuance of shares at a premium by the Petitioner to its non-resident holding company does not give rise to any income from an international transaction. Consequently, Chapter X of the Act does not apply. The Court quashed the reference by the AO to the TPO, the TPO's order, the draft assessment order, and the DRP's order on jurisdiction, declaring them without jurisdiction, null, and void.