vodafone, issue of shares (transfer pricing) bombay high court

Vodafone India - Issue of Shares to Holding Company

1

Is it subject to Transfer Pricing Regulations?

Stand of Taxpayer vs Stand of Revenue

– By Nilesh Patel Former IRS Officer, CPA (USA)

Vodafone India - Issue of Shares to Holding Company

2

Verdict of Bombay High Court in Writ Petition No. 871 of 2014, dated 10-10-2014

– By Nilesh Patel Former IRS Officer, CPA (USA)

Nilesh PatelCPA(USA), Former IRS Officer

This Analysis of the Bombay High Court’sOrder dated 10th October 2014, in case ofVodafone India Services Pvt Ltd, has beenmade by Nilesh Patel.

Nilesh has experience of about 18 years inthe filed of Direct Taxes: 4 years as anindependent Transfer Pricing andInternational Tax Consultant in Mumbai, 2years as a Senior Manger (Corporate Tax)with Deloitte, 1 year as a US Tax Professionalwith a US CPA Firm and 11 years as a IndianRevenue Service (IRS) Officer.

Nilesh is a Certified Public Accountant (CPA)licensed by California Board of Accountancyand M.Tech. from Indian Institute ofTechnology (IIT), Powai, Mumbai.

Website: www.taxwize.in

For any queries related to this Analysis you may ContactNilesh Patel – CPA (USA), IRS (Former) at the Email ID:[email protected]

Contact

http://www.taxwize.in/

mailto:[email protected]

Vodafone India – High Court Order on Issue of Shares

5

Sr. No. Particulars Slide Nos.

1 Introduction 8 - 12

2 Facts 1:

Issue of Shares by an Indian Company (Vodafone India) to a Non-Resident Holding Company (Vodafone Holdings)

14 - 24

3 Facts 2:

Filing of Return of Income and Form 3CEB

25 - 29

4 Assessment Proceedings:

Reference by Assessing Officer (AO) to the Transfer Pricing Officer (TPO)

30 - 34


Order passed by the Transfer Pricing Officer (TPO)

35 - 42

CONTENTS


6



Draft Assessment Order passed by the AO under Sec. 144C (1)

43 - 46

7 Objections before Dispute Resolution Panel (DRP) 47 - 49

8 First Writ Petition (No. 1877 of 2013) to Bombay High Court 50 - 51

9 Order passed by High Court 52 - 57

10 Order of DRP on Preliminary Jurisdictional Issue 58 - 64

11 Basis of DRP’s Order 65 - 73

12 Second Writ Petition (No. 871 of 2014) before the Bombay High Court

74 - 74

CONTENTS


7


13 Hearing before the High Court 75 - 75

14 Submissions of the Taxpayer 76 - 81

15 New Grounds of Revenue – raised by Solicitor General 82 - 86

16 Submissions of the Revenue in support of DRP’s Order 87 - 92

17 Rejoinder of the Taxpayer 93 - 93

18 Analysis of the Order of the Bombay High Court in Writ Petition (No. 871 of 2014)

94 - 101

19 Findings of the Bombay High Court 102 - 163

20 Final Order of the High Court 164 - 167

21 Way Forward – implication of the High Court’s verdict 168 - 177

CONTENTS

8

Introduction

Last Friday (10th October 2014), in the case of Vodafone IndiaServices Pvt Ltd, the Bombay High Court pronounced its eagerlyawaited verdict on taxability – under the Transfer PricingRegulations – of the arm’s length price of consideration (orpremium) received, or receivable, on issue of shares by an IndianCompany to its Non-Resident Holding Company.

Transfer Pricing adjustment of Rs. 1397 Crores was involved in thiscase; the High Court ruled in Taxpayer’s favour.

What facts and arguments persuaded the High Court in favour ofthe Taxpayer? What litigation strategies were adopted by theTaxpayer and the Revenue during hearing before the High Court?

9

Introduction

One of the grounds on which the Dispute Resolution Panel (DRP)had rejected the Taxpayer’s objections on taxability ofconsideration or premium, on issue of shares to its holdingcompany, was this: If the Taxpayer had received full premium atarms’ length price (ALP), then the Taxpayer would have earnedincome by investing such premium - income, therefore, does arisein terms of Sec. 92 (1).

How did the Taxpayer meet this ground before the High Court? Andwhat was the decision of High Court on this ground of DRP?

10

Introduction

In course of hearing before the High Court the Solicitor General,representing the Revenue, made an ingenious argument:

The Taxpayer, by issuing shares at a price below fair market value,had passed on benefit to its holding company.

Sec. 92 (2) read with Sec. 92 (1) lays down that the cost of anybenefit passed on by the Taxpayer to its Associated Enterprise(Holding Company) should be determined at arm’s length price.Hence, Transfer Pricing Regulations were applicable to the issue ofshares by the Taxpayer to its Holding Company.

How did the Taxpayer rebut this argument? And what was the HighCourt’s response?

11

Introduction

We have made this thorough analysis of the High Court’s Order. Inthis Analysis, we answer the foregoing questions. Besides, we alsopresent to you the following:

Full reasoning of the High Court

Contention of the Taxpayer

Contentions of Revenue

Contentions of the Solicitor General during hearing beforethe High Court

Grounds on which the DRP rejected Taxpayer’s contentions.

12

Introduction

Similar issue is involved in a number of cases, including the well-known case of Shell India, where Transfer Pricing adjustment ofabout Rs. 15,000 Crores was made.

We place this Analysis in your hands with the hope that it will addto your knowledge, and will act as a valuable reference.

Nilesh Patel – CPA (USA), Former IRS Officer

1. Issue of Shares by an Indian Company(Vodafone India) to a Non-Resident HoldingCompany (Vodafone Holdings)

13

Facts

2. Filing of Return of Income and Form 3CEB

14

Facts

1. Issue of Shares by an Indian Company(Vodafone India) to a Non-Resident HoldingCompany (Vodafone Holdings)

Vodafone Holdings

Vodafone India

Foreign

15

Holding Company

India

Vodafone Holdings(Vodafone Tele-Services HoldingsLtd), a NonResident Company,is the holdingcompany ofVodafone India(Vodafone IndiaServices Pvt Ltd)

Vodafone Holdings

Vodafone India

Foreign

16

Vodafone India needed Funds

India

In FY 2008-09,Vodafone Indianeeded funds for itstelecommunicationsproject in India.

Telecommun-ications Project

Funds

Vodafone Holdings

Vodafone India

Foreign

17

Vodafone India issues Shares

India

Telecommun-ications Project

Funds

Issue of Equity Shares

In FY 2008-09,Vodafone Indiaissued fresh equityshares to VodafoneHoldings (a NonResident Company),because VodafoneIndia needed fundsfor itstelecommunicationsproject in India.

How to value the equity shares issued byVodafone India to Vodafone Holdings?

What should be the issue price of shares?

Vodafone India - Issue of Shares

18

Questions

The issue of equity shares by an Indian Company,to a Non-Resident Company, is regulated by theRegulations issued under FEMA (Foreign ExchangeManagement Act, 1999)


19

Answer

The equity shares issued by Vodafone India toVodafone Holdings should be valued, asprescribed by the Regulations issued under FEMA(Foreign Exchange Management Act, 1999)


20

Answer

The issue price of shares should be as determinedunder the Regulations issued under FEMA (ForeignExchange Management Act, 1999)

Those Regulations ensure that shares are notundervalued

Those Regulations ensure that issue price ofshares is commensurate with the valuetransferred to the shareholder


21

Answer

Under FEMA the issue price of shares can bedetermined in accordance with the methodologyprescribed by the Government of India under theCapital Issues (Control) Act, 1947


22

Answer

The Taxpayer (Vodafone India) adopted themethodology prescribed by the Government ofIndia under the Capital Issues (Control) Act, 1947,and determined the issue price of shares atRs. 8,519 per share:

Face Value Rs. 10 + Premium Rs. 8,509


23

Answer

Is there no relevance of Transfer PricingRegulations to determination of the issue priceof shares?

For Answer, please see the analysis of BombayHigh Court’s Order in the later part of thispresentation.


24

Question

25

Facts

2. Filing of Return of Income and Form 3CEB

Vodafone India and Vodafone Holdings areAssociated Enterprises

Vodafone – Return of Income & Form 3CEB

26

Vodafone India received money from VodafoneHoldings for subscription of shares

How to report the issue of shares, and thereceipt of money on such issue, under theTransfer Pricing Regulations?

Should the issue of shares, and the receipt ofmoney on such issue, be reported asInternational Transaction in Form 3CEB?

Vodafone – Return of Income & Form 3CEB

27

Question

Vodafone India

Form 3 CEB

28

Vodafone India – Form 3CEB

AY 2009-10

Out of abundantcaution, Vodafone IndiaReported the issue ofshares and totalconsideration of Rs.246.38 Crores in Form 3CEB, as InternationalTransaction. A Note,however, wasappended to Form 3CEB.

Vodafone India

Form 3 CEB

29

Vodafone India – Form 3CEB

AY 2009-10

“The company has issued 289224equity shares of Rs.10/- each fullypaid at a premium of Rs.8500 pershare aggregating to totalconsideration of Rs.2,46,38,99,016.As per Section 92(1) of the IncomeTax Act, 1961 any income arisingshall be computed having regard tothe arm's length price. Thistransaction of issue of equityshares does not affect income ofthe Company. However, out ofabundant caution, the same isreported here.”

Note appended to Form 3 CEB

30

Assessment Proceedings

Reference by Assessing Officer (AO) to theTransfer Pricing Officer (TPO)

Order passed by the Transfer Pricing Officer(TPO)

31

Reference by Assessing Officer (AO) to theTransfer Pricing Officer (TPO)


Reference by the AO to TPO

The AO referred all International Transactions reported inForm 3CEB, to the TPO, for determination of the Arm’sLength Price (ALP) [see Sec. 92CA (1)]

Vodafone India – Assessment Proceedings

32


The AO is not required to give an opportunity of hearing tothe Taxpayer, before making reference to the TPO, fordetermination of the Arm’s Length Price (ALP) [AztecSoftware & Technology Services Ltd vs ACIT [2007] 107 ITD141 (Bangalore)(Special Bench)]

Therefore, before the AO, the Taxpayer was not able toraise the plea that issue of shares is not covered by theTransfer Pricing Regulations enshrined in Chapter X of theI. T. Act, 1961 [Preliminary Jurisdictional Issue]


33


The following is the basis for the plea that issue of sharesis not covered by the Transfer Pricing Regulationsenshrined in Chapter X of the I. T. Act, 1961:

The language or text of Sec. 92 (1) provides that any incomearising from an International Transaction shall be computedhaving regard to the Arm’s Length Price.

The consideration for issue of shares is a Capital Receipt; it isnot income, which is taxable.


34

35


Order passed by the Transfer Pricing Officer(TPO)

Order passed by the TPO (on PreliminaryJurisdictional Issue)

For the first time the Taxpayer got the opportunity to raisethe plea that issue of shares is not covered by the TransferPricing Regulations enshrined in Chapter X of the I. T. Act,1961 [Preliminary Jurisdictional Issue]


36


As already stated the basis for the foregoing plea is:

Sec. 92 (1) provides that any income arising from anInternational Transaction shall be computed having regardto the Arm’s Length Price.

The consideration for issue of shares is a Capital Receipt; itis not income, which is taxable .


37


TPO did not consider the Preliminary Jurisdictional Issueraised by the Taxpayer (Vodafone India)


38


According to the TPO, he or she only has the authority tocompute ALP; he or she has no authority to decide thetaxability of a transaction referred by the AO

On this point please see: Veer Gems vs ACIT [2011] 15taxmann.com 355/351 ITR 35 (Gujarat HC); CIT vs Cushmanand Wakefield (India) Pvt Ltd [2014] 46 taxmann.com 317(Delhi HC); CIT vs EKL Appliances Ltd [2012] 24 taxmann.com199/209 Taxman 200/345 ITR 241 (Delhi HC); Honda Siel CarsIndia Ltd vs ACIT [2011] 129 ITD 200 (ITAT Delhi)


39

Order passed by the TPO (on ALP of Shares)

The TPO included the Transfer Pricing adjustments madefor prior years (AY 2007-08 and 2008-09) in the Net AssetValue

On that basis the TPO worked out the ALP of shares atRs. 53,775 per share; the Taxpayer had worked out theprice of shares at Rs. 8,519 per share.


40


The TPO made transfer pricing adjustment for the deficitof Rs. 45,256 (53,775 – 8,529) per share.

Total adjustment of Rs. 1308.91 Crores was made on thisground of valuation of shares, issued by Vodafone India toits holding company.


41


Yet another Transfer Pricing adjustment was made by theTPO:

The shortfall in the value of shares was treated as deemedloan given by Vodafone India to its holding company.

Interest of 13.50% per annum was charged on the deemedloan of Rs. 1308.91 Crores for 6 months – adjustment onaccount of interest thus worked out to Rs. 88.35 Crores.


42

43


Draft Order passed by the Assessing Officer(AO) under Sec. 144C (1)

Draft Assessment Order passed by the AOunder Sec. 144C (1)

After receiving the Order of the TPO the AO issued a show-cause to the Taxpayer.


44


In response the Taxpayer submitted that the issue ofshares is not covered by the Transfer Pricing Regulationsenshrined in Chapter X of the I. T. Act, 1961, because:

the consideration for issue of shares is a Capital Receipt,which is not taxable as income

Sec. 92 (1) provides that any income arising from anInternational Transaction shall be computed having regardto the Arm’s Length Price.

When no income arises the provisions of Sec. 92 (1) andChapter X are not applicable


45


The AO did not consider the Preliminary JurisdictionalIssue raised by the Taxpayer (Vodafone India).

The AO stated that he or she is bound to follow the Orderpassed by the TPO on computation of ALP.

On this point please see Veer Gems vs ACIT [2011] 15taxmann.com 355/351 ITR 35 (Gujarat HC); CIT vs Cushmanand Wakefield (India) Pvt Ltd [2014] 46 taxmann.com 317(Delhi HC)


46

47

Objections before the Dispute Resolution Panel (DRP), under Sec. 144C (2)

Objections against the Draft Assessment Orderpassed by the AO under Sec. 144C (1)

The Taxpayer filed objections to DRP (under Sec. 144C (2))on the issue of computation of ALP of shares issued to theholding company.

However, objections on the Preliminary Jurisdictional Issuewere not filed before the DRP. Why?

Vodafone India – Objections before DRP

48

Objections against the Draft Assessment Orderpassed by the AO under Sec. 144C (1)

The Taxpayer did not file objections to DRP on thePreliminary Jurisdictional Issue, because the Taxpayerwished to raise that issue before the High Court, by way ofa Writ Petition.

Had the Taxpayer filed objections to the DRP even on thePreliminary Jurisdictional Issue, the High Court might havedismissed the Writ Petition on the theory of ‘AlternateRemedy Available’.

Vodafone India – Objections before DRP

49

50

Writ Petition (No. 1877 of 2013) to Bombay High Court

This is the first Writ Petition.

(Later, a second Writ Petition was filed.)

Just two days after filing objections before the DRP underSec. 144C (2), the Taxpayer filed the first Writ Petition(No. 1877 of 2013) before the Bombay High Court

In the Writ Petition the Taxpayer raised the PreliminaryJurisdictional Issue

Preliminary Jurisdictional Issue is: the issue of shares, andresulting receipt of consideration, is not covered by the TransferPricing Regulations enshrined in Chapter X of the I. T. Act, 1961

Vodafone – Writ Petition to High Court (A)

51

52


Order dated 29th November 2013 of HighCourt

Order dated 29-11-2013 of High Court in WritPetition No. 1877 of 2013

The High Court accepted the plea of Vodafone India (theTaxpayer/Petitioner) that a jurisdictional issue ofapplication of Chapter X of the Act does arise and thesame was not considered either by the TPO or by the AO

The Taxpayer is entitled to have its preliminary objectiondealt with - not a single authority has so far dealt with thisissue.


53

Order dated 29-11-2013 of High Court in WritPetition No. 1877 of 2013

As the Taxpayer had already filed its objections, (excludingthe issue of jurisdiction) to the Draft Assessment Order,before the DRP under Section 144C(2) of the Act, and it waspending -

the High Court directed the DRP to first decide only thejurisdictional issue raised by the Taxpayer as preliminary issue,within two months from the date on which the Taxpayer filedits objection on the question of jurisdiction.


54

The High Court disposed of the Writ Petition No. 1877 of2013 with the following directions:—

(A) The petitioner shall within two weeks from the date of HighCourt’s Order submit before the DRP its preliminaryobjections, to Draft Assessment Order and the TPO's order, byraising jurisdictional issues.


55

The High Court disposed of the Writ Petition No. 1877 of2013 with the following directions:—

(B) The DRP shall decide the issue of jurisdiction beforeconsidering issue of valuation / quantification raised by thepetitioner in its objections filed before the DRP - this ofcourse subject to the additional grounds on jurisdiction beingfiled by the Petitioner within two weeks from today.

The DRP shall decide the issue of jurisdiction as a preliminaryissue within two months from the date on which thepetitioner files its objections on the question of jurisdiction.


56

The High Court disposed of the Writ Petition No. 1877of 2013 with the following directions:—

(C) If the decision of the DRP on the above preliminary issueis adverse to the petitioner, it would be open to thepetitioner to challenge the order of the DRP on thepreliminary issue in a writ petition if a case is made out atthat stage that the decision of the DRP is patently illegal,notwithstanding the availability of alternative remedy offiling an appeal before the Income Tax Appellate Tribunal.


57

58

Order of DRP on Jurisdictional Issue

In accordance with the Order of High Court theTaxpayer filed objections before the Dispute ResolutionPanel (DRP) on the Preliminary Jurisdictional Issue.

Vodafone India – Order of DRP

59

Taxpayer’s Objections before the DRP:

(i) Chapter X of the Act will not apply as the issue of equityshares by the Petitioner to its holding company does not giverise to any income;


60


(ii) Chapter X of the Act will not apply as no expenditure isincurred that impacts computation of the taxable income; and


61


(iii) Chapter X of the Act will not apply as issue of shares istransaction on capital account and thus does not impactcomputation of income.


62

The DRP passed an Order against the Taxpayer –rejecting the objections.


63

The DRP held that the AO has the jurisdiction to taxthe issue of shares by the Taxpayer - to its holdingcompany at a premium, to the extent the premium isnot received - the AO has the jurisdiction to tax theissue of shares under Chapter X of the Act, as incomedoes arise in the above International Transaction.


64

What is the basis of DRP’s Order?


65

The basis of DRP’s Order/Reasoning given by DRP

Sec. 92 (1) of the Act, mandates computation of income arisingout of International Transaction be determined, having regard tothe ALP.

The term 'Income' has not been defined in Chapter X of the Actunlike International Transaction.

Therefore, the term 'Income' is to be construed in a broadmanner embracing all types of receipts or incomings.


66


Sec. 2 (24) of the Act defines income in an inclusive manner, andcapital receipts which would otherwise not be covered by theterm 'Income' would also stand included in the definition.

Therefore, all incomings would fall within the concept of income.

The broader meaning of the term “Income” should be acceptedbecause a broader interpretation of the word 'Income' wouldadvance the object of Chapter X of the Act, and would bepurposive interpretation of the statutory provision.


67


The definition of International Transaction as given in Sec. 92B ofthe Act and in particular in Explanation (i)(c) of Sec. 92B providesthat the expression 'International Transaction' includes capitalfinancing like purchase of marketable securities.

If the normal meaning of Income as canvassed by the Taxpayer isadopted, then purchase of marketable securities, could nevergive rise to Income, rendering the provision otiose.


68


The clause (e) to Explanation (i) of Sec. 92B of the Act includes atransaction of business restructuring or reorganization enteredinto as an International Transaction.

This provision enables the AO to bring to tax income forgonewhile restructuring /reorganizing the business. In such a case,though there is no formal transfer of source of income ortangibles, yet the income forgone would be notional incomeliable to tax under the provisions of Chapter X of the Act.


69


The Taxpayer not receiving the ALP on the issue of shares,resulted in lesser premium being garnered by the Petitioner.

The result is: the Taxpayer having less liquid funds available at itscommand which in turn could have reduced its debts - or theexcess funds could have been invested to earn income.


70


Thus, the amount not received could have enhanced theTaxpayer’s potential income.

In view of the above, the share premium forgone has impactedpotential income. Thus, there are appropriate reasons giving riseto application of Chapter X of the Act to the transaction of issuesof share.


71

Summary of DRP’s findings

a. On a broader and harmonious construction of the term“income” in Section 92(1), AO has jurisdiction to invokeChapter X as share premium is an income arising from issueof shares

b. Even if the term “income” is not given a broad interpretation,the AO has jurisdiction to invoke Chapter X as there is incomepotentially arising or affected by the short receipt of sharepremium


72

The Taxpayer filed second Writ Petition (No. 871 of2014) before the High Court challenging the adverseOrder passed by the DRP, on the jurisdictional issue.

Though alternative remedy of filing an appeal before theIncome Tax Appellate Tribunal (ITAT) was available, theTaxpayer chose to file Writ Petition on the ground thatthe decision of the DRP is patently illegal.

On this ground, the High Court had permitted - in theOrder passed in the first Writ Petition - High Court hadpermitted the Taxpayer to file a second Writ Petition.


73

74

Writ Petition No. 871 of 2014 before the Bombay High Court

Hearing before the High Court

Vodafone – Second Writ Petition (No. 871 of 2014)

75

Submission of the Taxpayer (Petitioner)

a) For application of Sec. 92 (1) it is a must that income shouldarise from an International Transaction. In case of theTaxpayer no income arises from the issue of equity shares tothe holding company.

a) The word “Income” should be understood as defined in Sec.2 (24). A fiscal statute has to be strictly interpreted –meaning of ordinary words cannot be expanded to givepurposeful interpretation.


76

c) Chapter X of the Act is not designed to tax all sums involvedin a transaction, which are otherwise not taxable. Thepurpose and objective is not to tax difference between theALP and transaction-value, but to reach the fairprice/consideration. Therefore, before any transaction couldbe brought to tax, a taxable income must arise.

d) The DRP’s Order itself shows that share premium on issue ofshares is not taxable – the share premium received by theTaxpayer has not been taxed, only the deficit of sharepremium has been taxed.


77

e) When shares are issued, they come into existence for thefirst time only when the shares are allotted. Thus, it iscreation of property for the first time. An issue of shares is acreation of shares – it is different from transfer of an existingproperty. So, Sec. 45 will not apply.

f) Receipt of consideration on issue of shares is a capitalreceipt. Capital receipts cannot be brought to tax, unlessexpressly brought to tax. Capital receipts do not fall withinthe ambit of the word “Income” unless specifically provided.For example, clause (vi) of Sec. 2(24) which brings to chargeCapital Gains under Sec. 45.


78

g) Clause (xvi) of Sec. 2(24) incudes, within income, amountsreceived within the provisions of Sec. 56 (2)(viib). However,it applies to issue of shares to a resident. Besides, it seeks totax consideration received in excess of the fair market valueof the shares, not the alleged short-fall in the issue price ofshares. This indicates the absence of any intent to tax theissue of shares below the alleged fair market value.

h) DRP’s Order proceeds on an assumption, surmise orconjecture that had the Taxpayer received the notionalincome – the amount of share premium foregone – theTaxpayer would have invested the same, giving rise toincome. No tax can be charged on guess work orassumption.


79

i) 1. Explanation (i)(c) to Sec. 92B of the Act only states thatcapital financing transaction such as borrowing moneyand/or lending money to AE would be an InternationalTransaction. However, what is brought to tax is not thequantum of amount lent and/or borrowed but the impacton Income due to such lending or borrowing. This impact isfound in either under reporting/ over reporting the interestpaid/interest received.


80

i) 2. Similarly, Explanation (i)(e) to Sec. 92B of the Act, whichcovers business restructuring would only have application ifsaid restructuring/ reorganizing impacts income. If there isany impact of income on account of businessrestructuring/reorganizing, then such income would besubjected to tax as and when it arises.


81

Submission of the Revenue (Respondent)

The Revenue sought to support the DRP’s Order on completelynew grounds, grounds completely different from the groundsstated in the DRP’s Order


82

New Grounds of Revenue (Respondent)

Text of Sec. 92 (1) and 92 (2)

Sec. 92. Computation of income having regard to arm's lengthprice

(1) Any income arising from an international transaction shallbe computed having regard to the arm's length price.

Explanation.—For the removal of doubts, it is hereby clarifiedthat the allowance for any expense or interest arising from aninternational transaction shall also be determined having regardto the arm's length price.


83

Sec. 92. Computation of income having regard to arm's lengthprice

(2) Where in an international transaction or specified domestictransaction, two or more associated enterprises enter into amutual agreement or arrangement for the allocation orapportionment of, or any contribution to, any cost or expenseincurred or to be incurred in connection with a benefit, service orfacility provided or to be provided to any one or more of suchenterprises, the cost or expense allocated or apportioned to, or,as the case may be, contributed by, any such enterprise shall bedetermined having regard to the arm's length price of suchbenefit, service or facility, as the case may be.


84


The Solicitor General argued that Section 92(1) of the Act is tobe read with Section 92(2) of the Act.

A conjoint reading of two provisions would indicate that what isbeing brought to tax under Chapter X of the Act is not sharepremium but is the cost incurred by the Petitioner in passing ona benefit to its holding company by issue of shares at a premiumless than ALP.

This benefit is the difference between the ALP and the premiumat which the shares were issued.


85


The issue of shares by the Petitioner to its holding company,resulted in the following benefits to its holding company:-

(i) cost incurred by the Indian Co. for a corresponding benefitgiven to the Holding Co. After all, the Holding Co. has actuallygot shares worth Rs.53,775/- each at a price of Rs.8,159/- each;

(ii) benefit also accrues to the valuation of Holding Co. in theinternational market by taking undervalued shares of thesubsidiary Co., by increasing the real net worth of the HoldingCo.


86

Submission of the Revenue (Respondent) insupport of DRP’s Order – Other than New Grounds

a) The Taxpayer does not challenge the constitutional validity ofChapter X. The Taxpayer raises only an issue of interpretation.Moreover, the Taxpayer and its holding company areAssociated Enterprises. Therefore, provisions of Chapter X arefully satisfied, and that Chapter is applicable to the facts of theTaxpayer’s case.


87

Submission of the Revenue (Respondent) insupport of DRP’s Order – Other than New Grounds

b) The Taxpayer itself had submitted to the jurisdiction of ChapterX by fling Form 3 CEB, declaring the ALP. So, the AO and the TPOwere mandated to apply Chapter X, and compute ALP.Therefore, the Taxpayer should be relegated to the alternateremedy of approaching the Authorities under the Act.


88

c) Identical provision as found in Sec. 92 of the Act was existing inSec. 42(2) of the I.T. Act, 1922. The Supreme Court inMazagaon Dock Ltd vs CIT (1958) 34 ITR 368 observed thatnotional profits can be taxed under the erstwhile Sec. 42 (2).Thus, the legislative history supports the stand of the Revenuethat even in the absence of actual income, a notional incomecan be brought to tax.


89

d) For the purposes of Chapter X the real income concept has noapplication. Otherwise the words used would have been‘actual income’. The difference between ALP and thecontracted price would be added to the total income.

e) Under the Act what is taxable is income when it accrues orarises or deemed to accrue or arise, and not only when it isreceived. The difference between ALP and contract price is anincome which has arisen but not received. Thus, incomeforgone is also subject to tax


90

f) Chapter X of the Act is a complete code by itself and notmerely a machinery provision to compute the ALP. Chapter X ofthe Act applies wherever the ALP is to be determined by theA.O. It is the hidden benefit in the transaction which is beingcharged to tax - the charging section is, therefore, inherent inChapter X of the Act.

g) Even if there is no separate head of income under Section 14of the Act in respect of International Transaction, such passingon of benefit by the Petitioner to its holding company wouldfall under the head 'Income' from other sources under Section56(1) of the Act.


91

h) Sec. 4 of the Act is the charging Section which provides thatthe charge will be in respect of the total Income for theAssessment Year.

The scope of total Income is defined in Sec. 5 of the Act toinclude all Income from whatever source which is received oraccrues or arises or deemed to be received, accrued or arisenwould be a part of the total Income.

Therefore, the word 'Income' for purposes of Chapter X of theAct is to be given a widest meaning to be deemed to be incomearising, for the purposes of total income in Sec. 5 of the Act.


92

Rejoinder of the Taxpayer (Petitioner)

Sec. 92(2) of the Act will have no application in the present factsas it deals with costs or expenditure allocated or apportionedbetween two or more AE.

The objective of Sec. 92(2) of the Act is only to ensure thatprofits are not understated, nor losses over-stated, by disclosinghigher cost or expenditure, than the benefit received.

Therefore, Sec. 92(2) of the Act has no application to thepresent facts.


93

94


Order dated 10th October 2014 of HighCourt

Order of the High Court

The High Court began by setting out the following relevantStatutory Provisions:

Sec. 2 (24) – Definition of “Income”

Sec. 56 (1) – Income from Other Sources

Sec. 56 (1) (viib) – Taxation of excess consideration -consideration in excess of fair market value of shares - receivedby a Company on issue of shares to residents


95



Sec. 92 (1) – Any income arising from an InternationalTransaction shall be computed having regard to the Arm’sLength Price.

Sec. 92 (2) – The cost or expense allocated or apportioned orcontributed by an enterprise under a Cost Sharing Arrangement(CSA) or a Cost Contribution Arrangement (CCA) shall bedetermined having regard to the Arm’s Length Price of thebenefit, service or facility received under the CSA or CCA.


96



Sec. 92B – Definition of “International Transaction”.

Sec. 92 (f)(i) – Definition of “ Arm’s Length Price”


97

Order of the High Court – purpose of Chapter X (Transfer Pricing Regulations)

The High Court noted the following purpose for which Chapter X(Transfer Pricing Regulations) was introduced in the Act:

The aim of Transfer Pricing Regulations enshrined in Chapter X isto have well defined rules to tax transactions betweenAssociated Enterprises, and not leave it to the discretion of theAO, and bring out uniformity in treatment to tax of InternationalTransaction between AEs.


98


The Explanatory Notes to the Finance Act, 2001 brings out theobjectives as indicated in Circular No.14 of 2001. Thoseobjectives are mentioned below:

Chapter X of the Act now existing was to ensure that quaInternational Transaction between AEs, the profits are notunderstated nor losses overstated by abuse of either showinglesser consideration or higher expenses between AEs thanwould be the consideration between two independent entities,uninfluenced by relationship.


99


The Explanatory Notes to the Finance Act, 2001 brings out theobjectives as indicated in Circular No.14 of 2001. Thoseobjectives are mentioned below:

Chapter X did not replace the concept of Income or Expenditureas normally understood in the Act for the purposes of Chapter Xof the Act.

The objective of Chapter X of the Act is certainly not to punishMultinational Enterprises and/or AEs from doing business interse.


100

Order of the High Court – statute has to beconstrued strictly on basis of what is stated inthe Act

Having noted the purpose and objective of Transfer PricingRegulations enshrined in Chapter X of the Act, the High Courtthen observed that in fiscal statutes, whatever may be theintent of the Parliament, the Courts have to construe the statutestrictly on the basis of what is stated in the Act. [Oft quotedPassage of Rowlatt J. and Sales Tax Commissioner vs Modi SugarMills, AIR 1961 Page 1047]


101

Findings of the High Court


102

Order of the High Court – findings of the HighCourt

I. On Statutory Provisions

II. On Revenue’s Contentions - A

III. On submissions of Solicitor General – New Grounds raisedfor the first time during hearing before the High Court

IV. On Taxpayer’s Contentions

V. On Revenue’s Contentions - B


103

I. Findings of the High Court On Statutory Provisions


104

Findings of the High Court – on StatutoryProvisions

A plain reading of Sec. 92 (1) of the Act very clearly brings outthat income arising from a International Transaction is acondition precedent for application of Chapter X of the Act.

The word income for the purpose of the Act has a wellunderstood meaning as defined in Sec. 2 (24) of the Act. This istrue even when the definition of “Income” in Sec. 2 (24) is aninclusive definition.


105


It cannot be disputed that income will not, in its normalmeaning, include capital receipts, unless it is so specified, as inclause (vi) of Sec. 2 (24). In such a case – where clause (vi) ofSec. 2 (24) applies - Capital Gains chargeable to tax underSection 45 of the Act, are defined to be income.

The amounts received on issue of share capital including thepremium is undoubtedly on capital account.


106


Share premium has been made taxable by a legal fiction underSection 56(2)(viib) of the Act and the same is enumerated asIncome in Section 2(24)(xvi) of the Act.

However, what is bought into the ambit of income is thepremium received from a resident in excess of the fair marketvalue of the shares.

In this case what is being sought to be taxed is capital notreceived from a non-resident i.e. premium allegedly notreceived on application of ALP.


107


Absent express legislation, no amount received, accrued orarising on capital account transaction can be subjected to tax asIncome. This is settled by the decision of this Court in CadellWeaving Mill Co. vs. CIT 249 ITR 265, which was upheld by theApex Court in CIT vs. D.P. Sandu Bros. Chember (P) Ltd. 273 ITR 1.


108


We find considerable substance in the Petitioner's case thatneither the capital receipts received by the Petitioner on issueof equity shares to its holding company (a non-resident entity),nor the alleged short-fall - between the so called fair marketprice of its equity shares and the issue price of the equity shares- can be considered as income, within the meaning of theexpression as defined under the Act.


109

II. Findings of the High Court on Revenue’s Contentions - A


110

Findings of the High Court – on Revenue’sContentions

The first contention on behalf of the revenue is that no questionof even examining the issue of jurisdiction to apply Chapter X ofthe Act arises in this case, as the Petitioner itself had filed Form3CEB for purposes of Chapter X of the Act.


111


The contention is rejected. The Taxpayer had submitted Form3CEB by way of abundant caution and had informed theRespondent-Revenue about the International Transaction ofissue of share capital, while denying that any income arises fromthe International Transaction.

After accepting the above defence of the Taxpayer, this Court inWrit Petition No. 1877 of 2013, by its order dated 29 November2013, concluded that the issue, of jurisdiction of income arising,is a condition precedent for applicability of Section 92(1) of theAct.


112


Sec. 92 of the Act provides for computation of income fromInternational Taxation having regard to ALP.

Sec. 92 (1) of the Act states that while determining/computing/assessing income from an International Taxationregard shall be had to ALP.


113


The DRP’s Order seeks to widen the meaning of the word“Income” to include all incomings. This is sought to besupported by the intent/object of Chapter X of the Act,particularly the definition of International Transaction given inSec. 92B of the Act.


114


The DRP’s Order in support of interpretation on the basis ofpurpose/intent of the legislation relies upon the decision of theSupreme Court in Maulai Hussain Haji Abrahim Vs. State ofGujarat and ors. 2004 AIR (SC) 3946 rendered in the context ofPrevention of Terrorist Activities Act 2002 (POTA).


115


The transaction of issue of shares by the Petitioner company toits holding company has nothing to do even remotely withterrorism.

In fact, while interpreting a fiscal/taxing statute, the intent orpurpose is irrelevant and the words of the taxing statute have tobe interpreted strictly.


116


In case of taxing statutes, in the absence of the provision byitself being susceptible to two or more meanings, it is notpermissible to forgo the strict rules of interpretation whileconstruing it.


117


The intention of the legislature in a taxation statute is to begathered from the language of the provisions particularly wherethe language is plain and unambiguous.

In a taxing Act it is not possible to assume any intention orgoverning purpose of the statute more that what is stated in theplain language.

Words cannot be added to or substituted so as to give ameaning to the statute which will serve the spirit and intentionof the legislature.[Mathuram Agarwal Vs. State of M.P. 1999(8) SCC 667]


118


In view of the above, it is clear that it was not open to DRP toseek aid of the supposed intent of the Legislature to give awider meaning to the word “Income”.


119


The reliance by the revenue upon the definition of InternationalTaxation in the sub clause (c) and (e) of Explanation (i) to Sec.92B of the Act, to conclude that Income has to be given abroader meaning to include notional income, as otherwiseChapter X of the Act would be rendered otiose, is far fetched.


120


The issue of shares at a premium does not exhaust the universeof applicability of Chapter X of the Act. There are transactionswhich would otherwise qualify to be covered by the definitionof International Transaction.

The transaction on capital account or on account ofrestructuring would become taxable to the extent it impactsincome i.e. under reporting of interest or over reporting ofinterest paid or claiming of depreciation etc.


121


It is that income (as mentioned in the previous Slide) which is tobe adjusted to the ALP price. It is not a tax on the capitalreceipts.

This aspect appears to have been completely lost sight of in theimpugned order of DRP.


122


The other basis in the impugned order is that as a consequenceof under valuation of shares, there is an impact on potentialincome. The reasoning is that if the ALP were received, thePetitioner would be able to invest the same and earn income,proceeds on a mere surmise/assumption.

This cannot be the basis of taxation.


123


In any case, the entire exercise of charging to tax the amountsallegedly not received as share premium fails, as no tax is beingcharged on the amount received as share premium.

Chapter X is invoked to ensure that the transaction is charged totax only on working out the income after arriving at the ALP ofthe transaction.

This is only to ensure that there is no manipulation ofprices/consideration between AEs. The entire considerationreceived would not be a subject-matter of taxation.


124


It appears for the above reason that the learned SolicitorGeneral did not seek to defend the conclusion in the impugnedorder on the basis of the reasons found therein, but sought tosupport the conclusion with new reasons/grounds.


125

III. Findings of the High Court on submissions of Solicitor General (New Grounds raised)


126

Findings of the High Court – on submissions ofSolicitor General

The learned Solicitor General submitted that Sec. 92 (1) has tobe read with Sec. 92 (2) of the Act - a conjoint reading wouldindicate that what is taxed is the cost incurred in passing on thebenefit to the holding company. The share premium, notreceived, is not subjected to tax by the Revenue.

The difference between the ALP and the price charged for issueof shares is the benefit conferred upon the holding company.Thus passing of benefit to holding company, is the cost to thePetitioner, which is being brought to tax.


127


In support the learned Solicitor General wanted the High Courtto read Sec. 92(2) of the Act by omitting certain words in theSection.

According to the High Court, this indeed is a unique way ofreading a provision i.e. to omit words in the Section. Thismanner of reading a provision by ignoring/rejecting certainwords without any finding that in the absence of so rejecting,the provision would become unworkable, is certainly not apermitted mode of interpretation.


128


It would lead to burial of the settled legal position that aprovision should be read as a whole, without rejecting and/oradding words thereto. This rejecting of words in a statute toachieve a predetermined objective is not permissible. Thiswould amount to redrafting the legislation which isbeyond/outside the jurisdiction of Courts.


129


Be that as it may, Section 92(2) of the Act deals with a situationwhere two or more AE's enter into an arrangement wherebythey are to receive any benefit, service or facility then theallocation, apportionment or contribution towards the cost orexpenditure is to be determined in respect of each AE havingregard to ALP.


130


Thus, to illustrate, the cost of research carried on by an AE forthe benefit of three AE's, then the cost will be distributed i.e.allocated, apportioned or contributed depending upon the ALPof 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 contributeany cost and/or expenses between the Petitioner and theholding company.


131


The learned Solicitor General next contended that the issue isno long res intergra as the issue stands covered by the decisionof the Apex Court in Mazgaon Dock Ltd. (supra) whileinterpreting Sec. 42 (2) of 1922 Act.

It is submitted that the above Sec. 42 (2) of the 1922 Act dealtwith transfer pricing.


132


In the above case, the Apex Court held that under Section 42(2)of the 1922 Act, the tax is charged on the resident in respect ofprofits which he would have normally made but not made,because of a business association with a non resident.

The resident was subjected to tax on notional profits in respectof its business dealing with a non resident with whom he hadclose connection.


133


If the provision of Sec. 42 (2) of the 1922 Act is contrasted withthe provisions of Chapter X of the Act, and in particular Section92 thereof, it would be noticed that the crucial words “shall bechargeable to income tax” which are found in Section 42(2) ofthe 1922 Act are absent in Chapter X of the Act.


134


The High Court pointed out this difference in the two provisionsto the learned Solicitor General and he agreed that the abovedifference exists.

However, according to him this was in view of the fact thatSections 4, 5, 14 and 56 of the Act does create a charge toincome tax on deemed income earned from Internationaltaxation. Therefore, it is clear that the deemed income whichwas charged to tax under Section 42(2) of the 1922 Act wasdone away with under the Act.


135


The charge of Income now has to be found in Section 4 of theAct.

If it is income which is chargeable to tax, under the normalprovision of the Act, then alone Chapter X of the Act could beinvoked.

Sections 4 and 5 of the Act brings /charges to tax total income ofthe previous year.


136


This would take us to the meaning of the word income underthe Act as defined in Section 2(24) of the Act.

The amounts received on issue of shares is admittedly a capitalaccount transaction, not separately brought within thedefinition of Income, except in cases covered by Section 56(2)(viib) of the Act.


137


Thus such capital account transaction, not falling within astatutory exception, cannot be brought to tax, as alreadydiscussed herein above, while considering the challenge to thegrounds as mentioned in the impugned order.


138


In tax jurisprudence, it is well settled that following four factorsare 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.


139


There is difference between a charge to tax and the measure oftax (a) & (d) above. This distinction is brought out by theSupreme Court in Bombay Tyres India Ltd. Vs. Union of Indiareported in 1984 (1) SCC 467 wherein it was held that the chargeof excise duty is on manufacture while the measure of the tax isthe selling price of the manufactured goods.


140


In this case also the charge is on income as understood in theAct, and where income arises from an International Transaction,then the measure is to be found on application of ALP so farChapter X of the Act is concerned. The arriving at thetransactional value/ consideration on the basis of ALP does notconvert non-income into income.


141


The tax can be charged only on income; in the absence of anyincome arising, the issue of applying the measure of ALP totransactional value/consideration itself does not arise.

The ingredient (a) above is not satisfied i.e. subject of tax is‘income which is chargeable to tax’. The issue of shares at apremium is a capital account transaction and not income.


142


It was contended by the Revenue that in view of Chapter X ofthe Act, the notional income is to be brought to tax and realincome will have no place.

The entire exercise of determining the ALP is only to arrive atthe real income earned i.e. the correct price of the transaction,shorn of the price arrived at between the parties on account oftheir relationship viz. AEs.


143


In this case, the revenue seems to be confusing the measure toa charge and calling the measure a notional income. We findthat there is absence of any charge in the Act, to subject issue ofshares at a premium to tax.


144

IV. Findings of the High Court on Taxpayer’s Contentions


145

Findings of the High Court – on Taxpayer’sContentions

The High Court also found merit in the submission on behalf ofthe petitioners that w.e.f. 1 April 2013, the definition of incomeunder Section 2(24)(xvi) of the Act includes within its scope theprovisions of Section 56(2) (vii-b) of the Act. This indicates theintent of the Parliament to tax issue of shares to a resident,when the issue price is above its fair market value.


146

Findings of the High Court – on Taxpayer’sContentions

In the instant case, the Revenue's case is that the issue price ofequity share is below the fair market value of the shares issuedto a non-resident.

Thus Parliament has consciously not brought to tax amountsreceived from a non-resident for issue of shares, as it woulddiscourage capital inflow from abroad.

The revenue has not been able to meet the above submissionbut have in their written submission only submitted that theabove provisions would have no application to the present facts.


147

V. Findings of the High Court on Revenue’s Contentions - B


148


It was contended by the Revenue that in any event the chargewould be found in Section 56(1) of the Act. Section 56 of the Actdoes provide that income of every kind which is not excludedfrom the total income is chargeable under the head incomefrom other sources.

However, before Section 56 of the Act can be applied, theremust be income which arises.


149


As pointed out above, the issue of shares at a premium is onCapital Account and it gives rise to no income.

The submission on behalf of the revenue that the shortfall in theALP as computed for the purposes of Chapter X of the Act givesrise to income is misplaced.

The ALP is meant to determine the real value of the transactionentered into between AEs.


150


Determination of ALP is a re-computation exercise to be carriedout only when income arises in case of an Internationaltransaction between AEs. It does not warrant re-computation ofa consideration received /given on capital account.

It permits re-computation of Income arising out of a CapitalAccount Transaction, such as interest paid/received on loanstaken/given, depreciation taken on machinery etc.

All the above would be cases of income being affected due to atransaction on capital account.


151


This is not the revenue's case here.

Therefore, although Section 56(1) of the Act would permitincluding within its head, all income not otherwise excluded, itdoes not provide for a charge to tax on Capital AccountTransaction of issue of shares as is specifically provided for inSection 45 or Section 56(2)(viib) of the Act and included withinthe definition of income in Section 2(24) of the Act.


152


It was contended by the revenue that income becomes taxableno sooner it accrues or arises or when it is deemed to accrue orarise and not only when it was received.

It is submitted that even though the Petitioner did not receivethe ALP value/ consideration for the issue of its shares to itsholding company, the difference between the ALP and thecontract price is an income, as it arises even if not received andthe same must be subjected to tax.


153


There can be no dispute with the proposition that income underthe Act is taxable when it accrues or arises or is received orwhen it is deemed to accrue, arise or received. The charge-ability to tax is when right to receive an income becomes vestedin the assessee.

However, the issue under consideration is different viz: whetherthe amount said to accrue, arise or receive is at all income. Theissue of shares to the holding company is a capital accounttransaction, therefore, has nothing to do with income.


154


It was also contended that Chapter X of the Act is a completecode by itself and not merely a machinery provision to computethe ALP. It is a hidden benefit of the transaction which is beingcharged to tax and the charging Section is inherent in Chapter Xof the Act.

It is well settled position in law that a charge to tax must befound specifically mentioned in the Act. In the absence of therebeing a charging Section in Chapter X of the Act, it is notpossible to read a charging provision into Chapter X of the Act.


155


The High Court noted: We can do no better than refer to thefollowing observations of the five Member Bench of the ApexCourt in CIT vs Vatika Township P Ltd 367 ITR 466:-

“Tax laws are clearly in derogation of personal rights and propertyinterests and are, therefore, subject to strict construction, and anyambiguity must be resolved against imposition of the tax… in statuteslevying taxes, the literal meaning of the words employed is mostimportant, for such statutes are not to be extended by implicationbeyond the clear import of the language used. If the words aredoubtful, the doubt must be resolved against the Government and infavour of the taxpayer…”


156


In this case, we are not in the zone of uncertainty referred toabove. There is no charge express or implied, in letter or in spiritto tax issue of shares at a premium as income.


157


Chapter X of the Act is a machinery provision to arrive at theALP of a transaction between AEs. The substantive chargingprovisions are found in Sections 4, 5, 15 (Salaries), 22 (Incomefrom house property), 28 (Profits and gains of business), 45(Capital gain) and 56 (Income from other Sources).

Even Income arising from International Transaction between AEsmust satisfy the test of Income under the Act and must find itshome in one of the above heads i.e. charging provisions. Thisthe revenue has not been able to show.


158


It was next submitted that the machinery Section of the Actcannot be read de-hors charging Section. The Act has to be readas an integrated whole. On the aforesaid submission also, therecan be no dispute.

However, as observed by the Supreme Court in CIT vs B. C.Srinivasa Shetty 128 ITR 294, “there is a qualitative differencebetween the charging provisions and computation provisionsand ordinarily the operation of the charging provisions cannotbe affected by the construction of computation provisions.”


159


In the present case, there is no charging provision to tax capitalaccount transaction in respect of issue of shares at a premium.Computation provisions cannot replace/ substitute the chargingprovisions.


160


In fact, in B. C. Srinivasa Shetty (supra), there was chargingprovision but the computation provision failed and in such acase the Court held that the transaction cannot be brought totax.

The present facts are on a higher pedestal as there is nocharging provision to tax issue of shares at premium to a non-resident, then the occasion to invoke the computationprovisions does not arise.


161


In course of the hearing the learned Solicitor General also madesubmissions with regard to taxing income in the hands of thePetitioner even though the income has allegedly been earnedby the holding company.

None of the notices issued to the Petitioner on the draft orderpassed by AO on the impugned order passed by DRP evenproposes to assess the Petitioner in its representative capacity.

Hence, the Petitioner had no occasion to challenge thejurisdiction of the Revenue on the above aspect. Therefore,there is no reason to examine the issue.


162


In its written submissions, the revenue has raised an issue ofalternative remedy which was not raised at the hearing andcontended that there is no patent illegality in the impugned orderwarranting interference by this Court.

However, the very fact that at the time of oral submissions, theRevenue supported the conclusions in the impugned order ongrounds different from those mentioned therein would itself speakvolumes of the patent non-sustainability of the impugned order.

The preliminary objection, not raised at the hearing, is, completelydevoid of any substance.


163

Final Order of the High Court


164


In the present facts issue of shares at a premium by the Petitionerto its non-resident holding company does not give rise to anyincome from an admitted International Transaction.

Thus, no occasion to apply Chapter X of the Act can arise in such acase.


165


Petition is allowed in terms of the above finding and the followingorders are quashed and set aside as being without jurisdiction, nulland void:-

(i) Reference dated 11 July 2011 by the AO to TPO to determinethe ALP of issue of shares at a premium by the petitioner to itsholding company which is a non-resident entity;

(ii) Order dated 28 January 2013 of the TPO;


166


(iii) Draft Assessment Order dated 22 March 2013 passed by AOunder section 143 read with section 144C(1) of the Act; and

(iv) Order dated 11 February 2014 of DRP on the preliminary issueof jurisdiction to tax issues of shares at a premium to its holdingcompany.


167

168

Way Forward – Implication of the High Court’s Verdict

How to, henceforth, report issue of sharesby an Indian Company to Non-ResidentShareholders?

How to, henceforth, report issue of shares by anIndian Company to Non-Resident Shareholders?

Unless the Bombay High Court’s Order is overruled by the SupremeCourt, we may follow its decision to report – for purposes ofTransfer Pricing - the issue of shares by an Indian Company to Non-Resident Shareholders.


169


As the High Court has ruled, the issue of shares and resultingreceipt of consideration or premium is beyond the scope ofTransfer Pricing Regulations enshrined in Chapter X of the Act.

Therefore, the issue of shares to Non-Residents will have to bevalued and priced as per rules prescribed under FEMA.

Arm’s length pricing of shares under the Transfer PricingRegulations (Chapter X of the Act) is not required.


170


Form 3 CEB in Column No. 16 requires the Accountant to report‘any international transaction(s) entered into by an assessee inrespect of purchase or sale of marketable securities or issue ofequity shares.’


171


Here, it must be noted that the High Court has not given anyfinding on the issue ‘Whether the issue of shares by an IndianCompany to a Non-Resident Holding Company is, or is not, anInternational Transaction?’


172


The High Court has held that no income arises out of issue ofshares by an Indian Company to a Non-Resident Holding Company.And, therefore, the Transfer Pricing Regulations are not applicableto the issue of shares.

The High Court has clearly held that no occasion to apply Chapter Xof the Act can arise in a case of issue of shares by an IndianCompany to its Non-Resident Holding Company.


173


Further, the High Court has quashed and set aside interalia thefollowing orders as being without jurisdiction, null and void:-

Reference by the AO to TPO to determine the ALP of issue ofshares

Order passed by the TPO

Draft Assessment Order passed by the AO under section 143read with section 144C(1) of the Act


174


So, we may fairly infer that the provisions of Chapter X - includingSec. 92B (International Transaction) and Sec. 92E (Accountant’sReport) - do not apply to the transaction of issue of shares.


175


Based on such inference we may place a Note as under in ColumnNo. 16 of Form 3 CEB regarding the issue of shares to non-residents:

“During the year, the Assessee has issued…number of shares to…SH(name of the shareholder). The Assessee and SH are AssociatedEnterprises. But, this transaction does not fall within the scope ofChapter X of the Act, as held by the Hon. Bombay High Court in thecase of Vodafone India Services Pvt Ltd (citation). Therefore, nospecific particulars regarding the issue of shares are reported here.”


176


In future, our stand and reporting will ultimately depend on theVerdict of Supreme Court, because the Revenue will surelychallenge the Order of the Bombay High Court before the SupremeCourt.


177

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Vodafone India – Order of Bombay High Court on issue of Shares

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