High Court overturns Transfer Pricing Officer's order on share pricing difference, refers to Vodafone IV case. Draft Assessment Order annulled.

The High Court set aside the Transfer Pricing Officer's order taxing the difference between the Arm's Length Price and actual issuance price of equity shares, citing the Vodafone IV case. The Draft Assessment Order relying on the TPO's decision was also annulled. The court directed the Dispute Resolution Panel to review other issues raised by the petitioner. The petition was allowed, and no costs were awarded.

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Issues:
Challenge to orders passed under Section 92CA(3) of the Income Tax Act, 1961 and draft assessment order dated 31 January 2014 regarding taxation on the difference between the ALP and actual prices of issued equity shares.

Analysis:
The petition challenged two orders: one passed under Section 92CA(3) of the Income Tax Act, 1961 by the Transfer Pricing Officer (TPO), and the other was the draft assessment order dated 31 January 2014 by the Assessing Officer. The challenge was based on the contention that the orders treated the difference between the Arm's Length Price (ALP) and the actual issuance price of equity shares as taxable income under the Act. The petitioner relied on the decision in Vodafone India Services Pvt. Ltd. Vs. Union of India, where it was established that Chapter X of the Act applies only if income arises from an international transaction chargeable under the Act. It was clarified that capital receipts from capital account transactions are not considered income unless specified in Section 2(24) of the Act. Additionally, the Act does not tax amounts received from issuing shares to a non-resident entity as it pertains to capital account transactions, not income.

The respondent's counsel conceded that the issue in the petition was settled in favor of the petitioner by the Vodafone IV case. Consequently, the High Court set aside the TPO's order dated 30 January 2014, which sought to tax the shortfall in consideration received for issuing shares compared to the ALP. The court also annulled the Draft Assessment Order dated 31 January 2014 to the extent it relied on the TPO's now-set-aside order. However, other issues raised by the petitioner before the Dispute Resolution Panel (DRP) against the draft Assessment Order would be reviewed by the DRP on their merits.

Therefore, the court allowed the petition, quashed the TPO's order regarding taxing the difference in share prices, and directed the DRP to consider other issues raised by the petitioner. The judgment concluded with no order as to costs.

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