Transfer pricing cannot tax share premium on equity issue when the receipt is capital in nature.

Chapter X transfer pricing provisions apply only where the underlying international transaction gives rise to income chargeable to tax under the Act. Share premium received on issue of equity shares is a capital receipt on capital account and does not become income unless specifically brought within section 2(24). The machinery provisions for arm's length pricing cannot alter the character of the receipt or create a tax charge where none exists. On that reasoning, the reference to the Transfer Pricing Officer, the show-cause notice and the transfer pricing order in relation to the share issue were without jurisdiction and liable to be quashed.

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Issues: Whether Chapter X of the Income-tax Act, 1961 could be invoked to determine arm's length price in respect of issue of equity shares at premium by an company to its non-resident holding company, and whether the related reference, show-cause notice and transfer pricing order were without jurisdiction.

Analysis: The issue turned on whether any income arose from the share subscription transaction so as to attract Chapter X. The Court held that the precondition for applying Chapter X is the existence of income arising from an international transaction and that such income must first be chargeable under the Act. It further held that share premium received on issue of equity shares is a capital receipt arising on capital account and does not fall within the definition of income unless specifically brought within Section 2(24) of the Act. The Court also held that the charging provisions of the Act do not tax receipts from issue of shares by an Indian entity to a non-resident, and that Chapter X is only a machinery provision for determining arm's length price and cannot alter the character of the receipt or create a charge where none exists.

Conclusion: Chapter X could not be applied to the share issue transaction, and the reference to the Transfer Pricing Officer, the show-cause notice and the transfer pricing order were without jurisdiction and liable to be quashed.

Ratio Decidendi: Transfer pricing provisions can operate only where the underlying transaction yields income chargeable to tax under the Act; they cannot be used to treat a capital receipt, such as share premium on issue of equity shares, as taxable income or to create a tax charge by recharacterising the receipt.

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