TaxTMI 
TaxTMI 
TaxTMI 
2014 (10) TMI 278
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..... On 21 August 2008, the Petitioner issued 2,89,224 equity shares of the face value of Rs. 10/- each on a premium of Rs. 8,509/- per share to its holding company. This resulted in the Petitioner receiving a total consideration of Rs. 246.38 crores from its holding company on issue of shares between August and November 2008. The fair market value of the issue of equity shares at Rs. 8,519/- per share was determined by the Petitioner in accordance with the methodology prescribed by the Government of India under the Capital Issues (Control) Act, 1947. However, according to the Assessing Officer (AO) and Transfer Pricing Officer (TPO), the Petitioner ought to have valued each equity share at Rs. 53,775/- as against the aforesaid valuation done under the Capital Issues (Control) Act, 1947 at Rs. 8,519/- and on that basis shortfall in premium to the extent of Rs. 45,256/- per share resulted into total shortfall of Rs. 1308.91 crores. Both the AO and the TPO on application of the Transfer Pricing provisions in Chapter X of the Income Tax Act 1961, (the Act) held that this amount of Rs. 1308.91 crores is income. Further, as a consequence of the above, this amount of Rs. 1308.91 crores is ....
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.... Act does arise and the same was not considered either by the TPO or by the AO. At that time, we did not deal with the jurisdictional issue as the Counsel for the Respondent-Revenue refused to address us on merits of the jurisdictional issue on the ground that same could be raised before the authorities under the Act. Thus, as the Petitioner had already filed its objections (excluding the issue of jurisdiction) to the Draft Assessment Order, before the Dispute Resolution Panel (DRP) under Section 144C(2) of the Act and it was pending, the DRP was directed to first decide only the jurisdictional issue raised by the Petitioner as preliminary issue within two months from the date on which the Petitioner files its objection on the question of jurisdiction. Consequent to the directions of this Court in Vodafone-III, the DRP has considered the issue of jurisdiction as raised by the Petitioner and by an order dated 11 February 2014 rejected the Petitioner's preliminary objection thereto. This petition essentially challenges the order dated 11 February 2014 passed by the DRP holding that the Respondent-Revenue has jurisdiction to tax the Petitioner's issue of shares to its holding ....
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....f the Income Tax Act, 1961 any income arising shall be computed having regard to the arm's length price. This transaction of issue of equity shares does not affect income of the Company. However, out of abundant caution, the same is reported here." (d) On 30 August 2010, the A.O. issued a notice under Section 143(2) of the Act to the Petitioner for the purposes of carrying out scrutiny assessment. On 11 July 2011, the AO referred all the transactions reported by the Petitioner in Form 3-CEB dated 28 September 2009 to the TPO. This was for determining the ALP of the reported International Transactions in accordance with Section 92CA(1) of the Act; (e) On 14 December 2012, the TPO issued a show cause notice to the Petitioner. In the above notice, in so far as relevant to these proceedings, the Petitioner was inter alia, called upon to show cause why: (i) the issue price (including the premium) of the equity shares to its holding company as declared by the Petitioner should be accepted for the purposes of computing ALP under the Act; and (ii) the ALP of the shares issued by the Petitioner to its holding company be not determined on the basis of its Net Asset Value (in short "NA....
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....o be taken into account to determine the fair value of the Petitioner's business; (vii) Finally, the TPO determined the ALP of equity shares issued by the Petitioner to its holding company as under:- "7.5 Determination of Arm's Length Price: Thus, based on the above discussion, the ALP of equity shares of the company as on 31-03-2008 is computed as below:- Description Amount (Rs. Million) Number/ Amount (Rs.) Remarks (a) Net-worth of the assessee company based on audited balance sheet as on 31-03-2008 12341.8 As per the audited balance sheet of the assessee as on 31-03-2008 (b) Add: Off-Balance sheet items (for TP adjustment made in the earlier years, ALP valuation of sale of call centre business and ALP of assignment of call options) i Shortfall (net of taxes) in charging for provision of IT enabled services for FY 2006-07 331.53 As per information available in the order of the TPO for the FY 2007- 08 (c) ii. Shortfall in charging for sale of call centre business during FY 2007- 08 13443.92 As per the order of the TPO for the FY 2008-09, as modified by the directions given by DRP-I, Mumbai. (d) iii. Shortfall in charging for assignment of call options ....
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....ary of TP adjustments The transfer pricing adjustments made in this order is summarized as below:- Sr. No. Nature of International Transactions Adjustment Amount (Rs.) 1 Shortfall in price of shares issued to AE 1308,91,21,344 2 Interest on deemed loan 88,35,15,691 TOTAL:- 1397,26,37,035 Thus the above total amount of Rs. 1397,26,37,035/- is treated as transfer pricing adjustment for the FY 2008-09, relevant for the AY 2009-10." II. Post TPO order and filing of Vodafone-III Writ Petition: 7(a) Consequent to the order dated 28 January 2013 of the TPO, the A.O. on 4 February 2013, issued notice to the Petitioner. The above notice under Section 142 (2) inter alia called upon the Petitioner to show cause as to why adjustment aggregating to Rs. 1397.26 Crores as proposed by TPO should not be made to the total income of the Petitioner; (b) On 12 February 2013 and 19 March 2013, the Petitioner responded to the show cause notice dated 4 February 2013. The Petitioner submitted that the order of the TPO is without jurisdiction as the transfer pricing provisions do not apply to a transaction of issuing equity shares to its holding company. Besides, the transaction of issuing shar....
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....on determination of an ALP before he proceeds further in determining the ALP or referring the issue to the TPO to determine the ALP. In this case, we find that the Petitioner has from the very beginning been challenging the jurisdiction to apply Chapter X on the ground that no income arises and/or is affected or potentially arises and/or is affected on account of issue of its shares to its holding company. The Assessing officer does not deal with this objection/issue before referring the matter to the TPO. The TPO does not deal with the above objection on the ground that in terms of Section 92CA, his mandate is only to compute the ALP in relation to the International Transaction. The TPO in the impugned order dated 28 January 2012 meets the Petitioner's objection by stating that the same would be dealt with by the Assessing Officer. However, when the same objection was raised before the Assessing Officer post the order of the TPO, the Assessing Officer does not consider the same in the impugned draft assessment order dated 22 March 2013 on the ground that in view of Section 92 CA (4), the Assessing Officer is obliged to pass an order in conformity with the ALP determined by th....
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....ourse subject to the additional grounds on jurisdiction being filed by the Petitioner within two weeks from today. The DRP shall decide the issue of jurisdiction as a preliminary issue within two months from the date on which the Petitioner files its objections on the question of jurisdiction. (C) We make it clear that since the question of jurisdiction for applicability of Chapter X for the Assessment Year 2009-10 is raised independently of the challenge to the orders of the TPO and the AO for the Assessment Year 2008-09, the DRP shall decide the preliminary issue about applicability of Chapter X to the assessment for the Assessment Year 2009-10, without awaiting for decision on the dispute relating to the Assessment Year 2008-09. (D) We further make it clear that in case the decision of the DRP on the above preliminary issue is adverse to the Petitioner, it would be open to the Petitioner to challenge the order of the DRP on the preliminary issue in a writ petition if a case is made out at that stage that the decision of the DRP is patently illegal, notwithstanding the availability of alternative remedy of filing an appeal before the Income Tax Appellate Tribunal." IV. Hearing....
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....sue of shares is a transfer within themeaning of Section 2(47) of the Act; and (iv) The meaning of International Transaction as given in clauses (c) and (e) of the Explanation (i) to Section 92B of the Act would include within its scope even capital account transaction. 12 Thereafter, on 11 February, 2014, the DRP passed the impugned order. By the above impugned order, it was held that the nonreceipt of the premium to the extent not received, is an income arising from issue of shares. Thus, the impugned order holds that the AO has jurisdiction to invoke Chapter X of the Act. 13 The impugned order dated 11 February, 2014, holds that Section 92(1) of the Act, mandates computation of income arising out of International Transaction be determined, having regard to the ALP. It further holds that the term 'Income' has not been defined in Chapter X of the Act unlike International Transaction. Therefore, the impugned order holds that term 'Income' is to be construed in a broad manner embracing all types of receipts or incomings. In support, reliance is placed upon Section 2(24) of the Act which defines income in an inclusive manner and capital receipts which would otherwi....
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.... of the Act to the transaction of issues of share. 15 In conclusion, the impugned order at paragraph 44 holds as under:- " In the light of the elaborate discussion above, the directions given by the Hon'ble Bombay High Court in its order dated 29.11.2013, stands disposed off. The DRP's findings are summarized as under: a. On a broader and harmonious construction of the term "income" in Section 92(1), A.O. has jurisdiction to invoke Chapter X as share premium is an income arising from issue of shares (para 21) b. Even if the term "income" is not given a broad interpretation, the A.O. has jurisdiction to invoke Chapter X as there is income potentially arising or affected by the short receipt of share premium (para 24)" PETITIONER'S SUBMISSIONS:- 16 On the aforesaid facts, Mr. Harish Salve, learned Sr. Counsel appearing in support of the Petition, submits as under:- (a) Chapter X of the Act is a special provisions relating to avoidance of tax. Section 92 of the Act provides for computation of income arising from International Transaction, having regard to ALP. Section 92(1) of the Act which applies to the the present facts, directs that any income arising from an In....
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....tax; (f) The issue of shares by the Petitioner to its holding company and receipt of consideration of the same is a capital receipt under the Act. Capital receipts cannot be brought to tax unless specifically/ expressly brought to tax by the Act. It is well settled that capital receipts do not come within the ambit of the word 'Income' under the Act, save when so expressly provided as in the case of Section 2 (24) (vi) of the Act. This brings capital gains chargeable under Section 45 of the Act, to tax within the meaning of the word 'Income'; (g) Attention was drawn to the definition of `Income' in Section 2(24) (xvi) of the Act which includes in its scope amounts received arising or accruing within the provisions of section 56(2) (viib) of the Act. However, it applies to issue of shares to a resident. Besides, it seeks to tax consideration received in excess of the fair market value of the shares and not the alleged short-fall in the issue price of equity shares. Thus, this also indicates absence of any intent to tax the issue of shares below the alleged fair market value as in this case; (h) The impugned order proceeds on an assumption, surmise or conjectur....
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.... of support to the impugned order. This would give an opportunity to the Petitioner also to respond to the same; (c) Consequently, an affidavit of Mr. Bhanwar Singh Ratnoo, Dy, Commissioner of Income Tax dated 9 September, 2014 was filed. In the above affidavit, it has been stated that Section 92(1) of the Act is to be read with Section 92(2) of the Act. It is stated that a conjoint reading of two provisions would indicate that what is being brought to tax under Chapter X of the Act is not share premium but is the cost incurred by the Petitioner in passing on a benefit to its holding company by issue of shares at a premium less than ALP. This benefit is the difference between the ALP and the premium at which the shares were issued. It is submitted in the affidavit that by issue of shares by the Petitioner to its holding company, resulted in the following benefits to its holding company:- "(a) cost incurred by the Indian Co. for a corresponding benefit given to the Holding Co. After all, the Holding Co. has actually got shares worth Rs. 53,775/- each at a price of Rs. 8,159/- each., (b) benefit also accrues to the valuation of Holding Co. in the international market by taking und....
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.... application, otherwise the words would have been 'actual Income'. Therefore, the difference between ALP and the contracted price would be added to the total Income; (e) It was next submitted under the Act what is taxable is income when it accrues or arises or when it is deemed to accrue or arise and not only when it is received. Therefore, even if an amount is not actually received, yet,in case income has arisen or deemed to arise, then the same is chargeable to tax. Thus, the difference between ALP and contract price is an income which has arisen but not received. Thus, income forgone is also subject to tax; (f) Chapter X of the Act is a complete code by itself and not merely a machinery provision to compute the ALP. Chapter X of the Act applies wherever the ALP is to be determined by the A.O. It is the hidden benefit in the transaction which is being charged to tax. Therefore, the charging section is inherent in Chapter X of the Act; (g) Even if there is no separate head of income under Section 14 of the Act in respect of International Transaction, such passing on of benefit by the Petitioner to its holding company would fall under the head 'Income' from other....
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....iib) of sub-section (2) of section 56. Income from other sources. Section 56(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "income from other sources", if it is not chargeable to Income-tax under any of the heads specified in section 14, items A to E. (2) In particular and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "income from other sources" namely:- "................." (viib)* Where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares. *w.e.f. 1.4.2013. (emphasis supplied) Section 92 - Computation of income from International Transaction having regard to arm's length price. "92 (1) Any income arising from an International Transaction shall be computed having regard to the arm's length price. Explanation....
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.... shortterm borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business (d) .... .... .... (e) a transaction of business restructuring or reorganization, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date. Section 92 (f) (i) .... .... .... (ii) 'arm's length price' means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions." 22 Chapter X of the Act in the present form replaced the erstwhile Section 92 of the Act by Section 92 to 92F of the Act with effect from A. Y. 2002-03. Erstwhile Section 92 of Chapter X of the Act did deal with cross border transactions permitting adjustments of profits made by a resident in case of transactions with non-resident (two entities having close connection) if the profits of the resident were understated. This and Section 40A(2) of the Act whi....
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....r example, the provisions will apply to exports made to the AE as also to imports from the same or any other associated enterprise. The provision is also applicable in a case where the International Transaction comprises only an outgoing from the Indian assessee. 55.5:- The new section further provides that the cost or expenses allocated or apportioned between two or more AE under a mutual agreement or arrangement shall be at arm's length price. Examples of such transactions could be where one associated enterprise carries out centralized functions which also benefit one or more other AE, or two or more AE agree to carry out a joint activity, such as research and development, for their mutual benefit. 55.6:- The new provision is intended to ensure that profits taxable in India are not understated (or losses are not overstated) by declaring lower receipts or higher outgoings than those which would have been declared by persons entering into similar transactions with unrelated parties in the same or similar circumstances. The basic intention underlying the new transfer pricing regulations is to prevent shifting out of profits by manipulating prices charged or paid in Internatio....
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....r dated 29 November 2013 of this Court in Vodafone-III. We could have straight way held that the issue of examining the jurisdiction to apply Chapter X of the Act stands concluded by the order in Vodafone- III. 25 But we have examined the issue afresh. The word income for the purpose of the Act has a well understood meaning as defined in Section 2(24) of the Act. This even when the definition in Section 2(24) of the Act is an inclusive definition. It cannot be disputed that income will not in its normal meaning include capital receipts unless it is so specified, as in Section 2(24) (vi) of the Act. In such a case, Capital Gains chargeable to tax under Section 45 of the Act are, defined to be income. 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. 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-re....
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....er wise a capital receipt is to be charged to tax, section 2(24) specifically so provides." In view of the above, we find considerable substance in the Petitioner's case that 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. 26 We shall now consider the submissions on behalf of the Revenue in the context of the statutory provisions. At one point of time we were toying with the idea of only dealing with the new grounds in support of the impugned order, as canvassed before us by the learned Solicitor General. This was for the reason that the revenue itself did not adopt the basis/grounds found in the impugned order viz. the short receipt of share premium being sufficient justification to invoke Section 92(1) in Chapter X of the Act. The ground found in the impugned order was substituted /replaced at the hearing with a new ground viz: benefit given by the Petitioner to its holding comp....
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....gned order in support of interpretation on the basis of purpose/intent of the legislation relies upon the decision of the Supreme Court in Maulai Hussain Haji Abrahim Vs. State of Gujarat and ors. 2004 AIR (SC) 3946 rendered in the context of Prevention of Terrorist Activities Act 2002 (POTA). This transaction of issue of shares by the Petitioner company to its holding company has nothing to do even remotely with terrorism. In fact, while interpreting a fiscal/taxing statute, the intent or purpose is irrelevant and the words of the taxing statute have to be interpreted strictly. 29 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. The Supreme Court in Mathuram Agarwal Vs. State of M.P. 1999(8) SCC 667 had laid down the following test for interpreting a taxing statue as under:- " The intention of the legislature in a taxation statute is to be gathered from the language of the provisions particularly where the language is plain and unambiguous. In a taxing Act it is not possible to assume any intention or governing purpose of the stat....
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....rged on the amount received as share premium. 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. It appears for the above reason that the learned Solicitor General did not seek to defend the conclusion in the impugned order on the basis of the reasons found therein, but sought to support the conclusion with new reasons. 33 Before dealing with the submissions advanced by the learned Solicitor General in his reply, to support the impugned order on grounds different from those found therein, it would be necessary to note that taxing of premium not received as the ground in the impugned order is given up and the jurisdiction to tax a transaction of issue of shares is on the basis of benefit given to the holding company. The basis/justification of the impugned order is based upon Section 92(1) of the Act, while before us the learned Solicitor General places reliance upon Section 92(2) read with 92(1) of the Act to subject the t....
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....d/outside the jurisdiction of Courts. 36 Be that as it may, 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. Thus, to illustrate, the cost of research carried on by an AE for the benefit of three AE's, then the cost will be distributed i.e. allocated, apportioned or contributed depending upon the ALP of such benefit to be received by the assessed AE. It would have no application in the cases like the present one, where there is no occasion to allocate, apportion or contribute any cost and/or expenses between the Petitioner and the holding company. Therefore, we find no substance in the above submission. 37 The learned Solicitor General next contended that the issue is no long res intergra as the issue stands covered by the decision of the Apex Court in Mazgaon Dock Ltd. (supra) while interpreting Section 42(2) of 1922 Act. It is submitted that the above Section 42(2) of the 1922 Act dealt with transfer pricing. In the ab....
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....sue of shares is admittedly a capital account transaction not separately brought within the definition of Income, except in cases covered by Section 56(2) (viib) of the Act. Thus such capital account transaction not falling within a statutory exception cannot be brought to tax as already discussed herein above while considering the challenge to the grounds as mentioned in the impugned order. 39 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. This distinction is brought out by the Supreme Court in Bombay Tyres India Ltd. Vs. Union of India reported in 1984 (1) SCC 467 wherein it was held that the charge of excise duty is on manufacture while the measure of the tax is the selling price of the manufactured goods. In this case also the charge is on income as understood in the Act, and where income arises from an International Transaction, then the measure is to be found on a....
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.... present facts. 42 It was contended by the Revenue that in any event the charge would be found in Section 56(1) of the Act. Section 56 of the Act does provide that income of every kind which is not excluded from the total income is chargeable under the head income from other sources. However, before Section 56 of the Act can be applied, there must be income which arises. As pointed out above, the issue of shares at a premium is on Capital Account and gives rise to no income. The submission on behalf of the revenue that the shortfall in the ALP as computed for the purposes of Chapter X of the Act give rise to income is misplaced. The ALP is meant to determine the real value of the transaction entered into between AEs. It is a re-computation exercise to be carried out only when income arises in case of an International transaction between AEs. It does not warrant recomputation of a consideration received /given on capital account. It permits re-computation of Income arising out of a Capital Account Transaction, such as interest paid/received on loans taken/given, depreciation taken on machinery etc. All the above would be cases of income being affected due to a transaction on capita....
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....nding rule of statutory construction: "Tax Statutes .... should be construed, and, if any ambiguity be found to exist, it must be resolved in favour of the citizen. Eidman v. Martinez 184 U.S. 578, 583; .................... Again in Unites States v. Merriam, the Supreme Court clearly stated at pages 187-88: "On behalf of the Government it is urged that taxation is a practical matter and concerns itself with the substance of the thing upon which the tax is imposed, rather than with legal forms or expressions. But, in statutes levying taxes, the literal meaning of the words employed is most important, for such statutes are not to be extended by implication beyond the clear import of the language used. If the words are doubtful, the doubt must be resolved against the Government and in favour of the taxpayer. Gould v. Gould 245 U.S. 151, 153." As Lord Cairns said many years ago in Partington v. Attorney-General: As I understand the principle of all fiscal legislation it is this: If the person sought to be taxed comes within the letter of the law he must be taxed, however, great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover th....