Case Note & Summary
The petitioner, Vodafone India Services Pvt. Ltd., a wholly owned subsidiary of a non-resident holding company, issued 2,89,224 equity shares at a premium of Rs. 8,519 per share during the financial year 2008-09, receiving a total consideration of Rs. 246.38 crores. The transfer pricing authorities determined that the fair market value of each share should have been Rs. 53,775, resulting in an alleged shortfall in premium of Rs. 1,308.91 crores. This notional shortfall was treated as income and further as a deemed loan to the holding company, with deemed interest of Rs. 88.35 crores taxed as income. The petitioner challenged the jurisdiction of the tax authorities, contending that no income arose from the international transaction and that Chapter X of the Income Tax Act, 1961 could not apply. An earlier writ petition (Vodafone-III) resulted in a High Court direction to the Dispute Resolution Panel (DRP) to first determine the jurisdictional issue. The DRP, by order dated 11 February 2014, rejected the petitioner's preliminary objection and held that income did arise and the revenue had jurisdiction. The present petition challenges the DRP order, seeking to quash it and establish that Chapter X cannot be invoked absent actual income. The court reserved judgment on 18 September 2014 and pronounced it on 10 October 2014, but the final decision and reasoning are not contained in the provided text.
Issue of Consideration
Whether the transfer pricing provisions under Chapter X of the Income Tax Act, 1961 can be applied to an international transaction of issue of equity shares at a premium to a non-resident holding company when the transaction itself does not generate any income, and whether the Assessing Officer and Transfer Pricing Officer have jurisdiction to tax a notional shortfall as deemed income.
Law Points
- Chapter X applies only if income arises from international transaction
- issue of shares at premium is capital receipt not income
- transfer pricing provisions are machinery provisions and cannot create charge
- income must be real and not notional
- condition precedent for Section 92 is existence of international transaction giving rise to income
- capital receipts not taxed unless specific charging section
- Article 226 jurisdiction invoked for jurisdictional issue
Case Details
2014 LawText (BOM) (10) 38
Writ Petition No. 871 of 2014
Mohit S. Shah, C.J., M.S. Sanklecha, J.
Harish Salve, Ranjit Kumar, Ben Chatterjee
Vodafone India Services Pvt. Ltd.
Union of India, Addl. Commissioner of Income Tax Transfer Pricing II(6), Mumbai, Dy. Commissioner of Income Tax Circle 3(3), Dispute Resolution Panel II
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Nature of Litigation
Writ petition under Article 226 of the Constitution of India challenging the jurisdiction of tax authorities to tax a shortfall in share premium as income under transfer pricing provisions.
Remedy Sought
Quash the order dated 11 February 2014 of the Dispute Resolution Panel and hold that Chapter X of the Income Tax Act does not apply as no income arose from the international transaction.
Filing Reason
The Assessing Officer and Transfer Pricing Officer computed a shortfall in premium on issue of shares to the non-resident holding company and treated it as income and deemed loan, resulting in tax demand.
Previous Decisions
In Vodafone-III (Writ Petition No. 1877 of 2013), the High Court directed the Dispute Resolution Panel to decide the jurisdictional issue as a preliminary matter.
Issues
Whether the transfer pricing provisions under Chapter X of the Income Tax Act, 1961 can be invoked when the international transaction does not generate any income?
Whether the issue of equity shares at a premium to a non-resident holding company is an international transaction that gives rise to income.
Whether the Assistant Commissioner and Transfer Pricing Officer have jurisdiction to tax a notional shortfall in premium as deemed income and deemed loan interest.
Submissions/Arguments
Petitioner argued that Chapter X is applicable only when income arises from an international transaction, and the issue of shares at premium is a capital receipt not chargeable to tax.
Revenue contended that the shortfall in premium constitutes income and the transfer pricing provisions apply to determine the arm’s length consideration.
Judgment Excerpts
According to the Petitioner, the Act does not tax inflow of capital into the country so as to impede its coming into India.
This petition essentially challenges the order dated 11 February 2014 passed by the DRP holding that the Respondent-Revenue has jurisdiction to tax the Petitioner's issue of shares to its holding company at a premium to the extent the premium is not received under Chapter X of the Act, as income does arise in the above International Transaction.
Procedural History
The Petitioner filed a return for AY 2009-10. The AO made a reference to TPO under Section 92CA. TPO passed order on 28 January 2013 computing arm’s length price and treating shortfall as income. AO issued draft assessment order on 22 March 2013. Petitioner filed objections before DRP under Section 144C(2). Petitioner also filed Writ Petition No. 1877 of 2013 challenging TPO order and draft assessment order without jurisdiction, which was disposed on 29 November 2013 directing DRP to decide jurisdictional issue as preliminary. DRP passed order on 11 February 2014 rejecting jurisdiction challenge. Petitioner then filed this writ petition challenging the DRP order.
Acts & Sections
- Income Tax Act, 1961: Chapter X, 92, 92A, 92CA, 143(3), 144C
- Capital Issues (Control) Act, 1947:
