Bombay High Court Ruling – Whether shortfall in premium of shares issued to non-resident holding company is to be considered as income as defined under the Act – Consequently, whether the said shortfall can be treated as deemed loan – Whether a charging provision can be read into Chapter X of the Act to tax notional income – Whether Chapter X is a code in itself
Vodafone India Services Pvt. Ltd. vs. Union of India, Additional Commissioner of Income-tax, Dy. Commissioner of Income-tax, DRP-II
[Writ Petition No. 871 of 2014]
Facts of the case
- The assessee, Vodafone India Services Pvt. Ltd., is a wholly owned subsidiary of a non-resident company, Vodafone Tele-Services (India) Holdings Limited. The assessee required funds for its telecommunication services project in India. Thus, it issued 2,89,224 equity shares of the face value of INR 10/- each on a premium of INR 8,509/- per share to its holding company which was determined in accordance with the methodology prescribed by the Government of India under the Capital Issues (Control) Act, 1947.
- However, the Assessing Officer (AO) and Transfer Pricing Officer (TPO) valued each equity share at INR 53,775/- and on that basis made an adjustment of INR 45,256 per share (amounting to INR 1308.91 crores), by treating the shortfall in premium as income. Further, as a consequence of the above, the AO/ TPO treated the same as deemed loan given by the assessee to its holding company and also contended that periodical interest of INR 88.35 crores had to be charged to tax as interest income
- The assessee filed a Writ Petition (Vodafone-III) before the Hon’ble Bombay Court (‘the HC’) challenging the jurisdiction of the AO/ TPO to tax the above transaction of issue of shares considering that the same did not generate any income as defined under the Income-tax Act, 1961 (‘the Act’). Further, the HC in Vodafone-III accepted the plea of the assessee and directed the Dispute Resolution Panel (DRP) to first decide only the preliminary jurisdictional issue raised by the assessee. Consequent to these directions, the DRP considered the issue of jurisdiction and rejected the assessee's preliminary objection thereto
- Hence, the assessee filed a Writ Petition (present) before the HC, challenging the DRP’s order which had held that the AO/TPO had jurisdiction to tax such shortfall in premium under Chapter X of the Act, as income arose in the above international transaction
Key observations and decision of the HC
- The word income as defined in Section 2(24) of the Act, though an inclusive definition, cannot include capital receipts unless it is so specified, as in Section 2(24)(vi) of the Act. Further, 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 were undoubtedly on capital account. Therefore, due to absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as income;
- Further, the Hon’ble HC did not accept the Revenue’s contention that Chapter X of the Act is a complete code by itself and not merely a machinery provision to compute the arm’s length price (ALP). The HC also did not accept that, it is a hidden benefit of the transaction which is being charged to tax and the charging Section is inherent in Chapter X of the Act. It is a well settled position in law that a charge to tax must be found specifically mentioned in the Act i.e. in the absence 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. There is no charge express or implied, in letter or in spirit to tax issue of shares at a premium;
- The Hon’ble HC did not accept the Revenue’s contention on the applicability of Section 92(2) and concluded that Section 92(2) would have no application in the assessee’s case, as there was no occasion to allocate, apportion or contribute any cost and/or expenses between the assessee and the holding company;
- The Hon’ble HC also did not accept the Revenue’s contention that in view of Chapter X of the Act, the notional income is to be brought to tax and real income will have no place. With regards to the same, the HC observed that the revenue seems to be confusing the measure to a charge and calling the measure a notional income;
- The HC observed that the Parliament consciously has not brought to tax amounts received from a non-resident for issue of shares, as it would discourage capital inflow from abroad;
- Chapter X of the Act is a machinery provision to arrive at the ALP of a transaction between associated enterprises (AEs). The substantive charging provisions are found in Sections 4, 5, 15 (Salaries), 22 (Income from house property), 28 (Profits and gains of business), 45 (Capital gain) and 56 (Income from other Sources) of the Act. Thus, the HC observed that even an income arising from an international transaction between AE must satisfy the test of income under the Act and must find its home in one of the above heads i.e. charging provisions;
- Based on all the above reasons and findings, the HC concluded that the issue of shares at a premium by the assessee to its non-resident holding company does not give rise to any income from an admitted international transaction. Thus, there was no occasion to apply Chapter X of the Act in such a case. The HC quashed all the orders of the Revenue authorities i.e. AO/ TPO/ DRP and set them aside as being without jurisdiction, null and void
This is a welcome judgement as it reinstates the first principles of taxation under the Act. It has brought out the important aspect of the jurisdictional issue for the applicability of Chapter X. It re-emphasises that Chapter X of the Act is a machinery section and not a charging section.
This judgement demonstrates that there is a conceptual difference between transfer pricing literature and the scope of domestic tax law of any nation, to bring within its net all such concepts debated in such literature.