TaxTMI 
TaxTMI 
2014 (10) TMI 278
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....g company during the financial year 2008-09 i.e. Assessment Year (AY) 2009-10. 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....
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....plea of the Petitioner that a jurisdictional issue of application of Chapter X of the 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....
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....mium of Rs. 8500 per share aggregating to total consideration of Rs. 2,46,38,99,016. As per Section 92(1) of 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 is....
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....ation adopted is not suitable to derive the ALP; (vi) The Transfer Pricing adjustment for the A.Y.s 2007-08 and 2008-09 have to 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 or....
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....eived Rs. Nil Shortfall being adjustment u/s 92CA Rs.88,35,15,691/- The above amount of Rs. 88,35,15,691/- is treated as an adjustment u/s 92CA for the price chargeable as interest on the deemed loan to its AE for the F. Y. 2008-09. 10 Summary 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 Petitio....
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....ntially arising and/or affected by an International Transaction for the purpose of application of Chapter X. This would appear to be in the nature of jurisdictional requirement and the Assessing officer must be satisfied that there is an income or a potential of an income arising and/or being affected 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 b....
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....ubmit before the DRP its preliminary objections to Draft Assessment Order and the TPO's order by raising jurisdictional issues. (B) The DRP shall decide the issue of jurisdiction before considering issue of valuation / quantification raised by the Petitioner in its objections filed before the DRP, this of course 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 b....
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....tion price would give rise to income; (ii) Income as defined in Section 2(24) of the Act is inclusive definition and it does not prohibit taxing capital receipts as income; (iii) The forgoing of premium on the part of the Petitioner amounts to extinguishment/ relinquishment of a right to receive fair market value. Therefore, the issue 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 C....
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....ich in turn could have reduced its debts or the excess funds could have been invested to earn income. Thus, the amount not received could have enhanced its potential income. In view of the above, the impugned order also holds that the share premium forgone has impacted potential income. Thus, appropriately giving rise to application of Chapter X 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 appe....
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....e. This is different from the transfer of an existing property. An issue of shares is a process of creation of shares and not a transfer of shares. Therefore, there is no transfer of shares so as to make Section 45 of the Act applicable. It was submitted that if the contention of the Revenue is correct, then every issue of shares by any Company would be subjected to 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 r....
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.... refused to make any submission on merits of jurisdictional issue on the ground that it would be considered by the Authorities under the Act; (b) Therefore, we informed the learned Solicitor General that it would only be fair that in case he is seeking to support the impugned order, with fresh reasons, then respondent-revenue should file an affidavit, indicating the new grounds 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 Petition....
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....f actual income, a notional income can be brought to tax; (d) Section 92(1) of the Act uses the word 'Any income arising from an International Transaction'. This indicates that the income of either party to the transaction could be subject matter of tax and not the income of resident only. Further, it is submitted that for the purpose of Chapter X of the Act, real income concept has no 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 det....
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....fore us as under:- Section 2(24) - In this Act, unless to context otherwise requires:- (1) .... .... .... .... to (23) .... .... .... .... (24) Income includes:- (i) profits and gains, (ii) ... to (v) .... .... (vi) any capital gains chargeable under section 45 and w.e.f. (xvi) any consideration received for issue of shares as 1-4-2013 { exceeds the fair market value of the shares referred to { in clause (viib) 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....
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....t in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. Explanation - For the removal of doubts, it is hereby clarified that- (i) the expression "international transaction" shall include- (a) .... .... .... (b) .... .... .... (c) capital financing, including any type of long-term or 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 uncontroll....
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....from an accountant by persons entering into International Transactions and definitions of certain expressions occurring in the said sections. 55.4:- The newly substituted section 92 provides that income arising from an International Transaction between AE shall be computed having regard to the arm's length price. Any expense or outgoing in an International Transaction is also to be computed having regard to the arms length price. Thus in the case of a manufacturer, for 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. ....
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....ute be interpreted or any presumption or assumptions. It must interpret a taxing statute in the light of what is clearly expressed....." Thus, we would examine the provisions of Chapter X of the Act with the aid of the submission made before us. FINDINGS : 24 A plain reading of Section 92(1) of the Act very clearly brings out that income arising from a International Transaction is a condition precedent for application of Chapter X of the Act. This has already been so held by the order 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....
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.... that purpose we have to read the sub section strictly. We cannot widen the scope of sub section by saying that the definition as a whole is inclusive and not exhaustive. In the present case, the words "chargeable under section 45" are very important. They are not being read by the Department. These words cannot be omitted. In fact, the prior history shows that capital gains were not chargeable before 1946. They were not chargeable between 1948 and 1956. Therefore, whenever an amount which is other 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 on....
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.... had to ALP. The impugned order correctly holds that 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. Thereafter, the impugned order seeks to widen the meaning of the word "Income" to include all incomings. This is sought to be supported by the intent/object of Chapter X of the Act, particularly the definition of International Transaction given in Section 92B of the Act. The impugned 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 m....
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....ave been completely lost sight of in the impugned order. 32 The other basis in the impugned order is that as a consequence of under valuation of shares, there is an impact on potential income. The reasoning is that if the ALP were received, the Petitioner would be able to invest the same and earn income, proceeds on a mere surmise/assumption. This cannot be the basis of taxation. In any case, the entire exercise of charging to tax the amounts allegedly not received as share premium fails, as no tax is being charged 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....
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....in the Section. This manner of reading a provision by ignoring/rejecting certain words without any finding that in the absence of so rejecting, the provision would become unworkable, is certainly not a permitted mode of interpretation. It would lead to burial of the settled legal position that a provision should be read as a whole, without rejecting and/or adding words thereto. This rejecting of words in a statute to achieve a predetermined objective is not permissible. This would amount to redrafting the legislation which is beyond/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 l....
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....t is clear that the deemed income which was charged to tax under Section 42(2) of the 1922 Act was done away with under the Act. The charge of Income now has to be found in Section 4 of the Act. If it is income which is chargeable to tax, under the normal provision of the Act, then alone Chapter X of the Act could be invoked. Sections 4 and 5 of the Act brings /charges to tax total income of the previous year. This would take us to the meaning of the word income under the Act as defined in Section 2(24) of the Act. The amounts received on issue 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 whic....
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.... 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. The revenue has not been able to meet the above submission but have in their written submission only submitted that the above provisions would have no application to the 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 misplace....
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....e of there being a charging Section in Chapter X of the Act, it is not possible to read a charging provision into Chapter X of the Act. We can do no better than refer to the following observations of the five Member Bench of the Apex Court in CIT v/s. Vatika Township P Ltd. 367 ITR 466:- "Tax laws are clearly in derogation of personal rights and property interests and are, therefore, subject to strict construction, and any ambiguity must be resolved against imposition of the tax. In Billings v. U. S, the Supreme Court clearly acknowledged this basic and long-standing 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 statute....
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....are on a higher pedestal as there is no charging provision to tax issue of shares at premium to a non-resident, then the occasion to invoke the computation provisions does not arise. We, therefore, find no substance in the aforesaid submission made on behalf of the Revenue. 47 During the course of hearing the learned Solicitor General also made submissions with regard to taxing income in the hands of the Petitioner even though the income has allegedly been earned by the holding company. None of the notices issued to the Petitioner on the draft order passed by AO on the impugned order passed by DRP even proposes to assess the Petitioner in its representative capacity. Hence, the Petitioner had no occasion to challenge the jurisdiction of the Revenue on the above aspect. Therefore, we see no reason to examine the issue. 48 Before parting, we may point out that in its written submissions, the revenue has raised an issue of alternative remedy which was not raised at the hearing and contended that there is no patent illegality in the impugned order warranting interference by this Court. However, the very fact that at the time of oral submissions, the Revenue supported the conclusi....