Vodafone India Services Pvt. Ltd (No. 2) vs. UOI (Bombay High Court)

DATE: (Date of pronouncement)
DATE: November 30, 2013 (Date of publication)

Click here to download the judgement (vodafone_share_premium_TP_.pdf)

Transfer Pricing: Existence of income is a jurisdictional requirement for the applicability of T. P. provisions. AO must deal with it after giving personal hearing before making reference to TPO. The dept should not treat the assessee as an adversary who has to be taxed, no matter what

The assessee, an Indian company, issued equity shares at the premium of Rs.8591 per share aggregating Rs.246.38 crores to its holding company. Though the transaction was reported as an “international transaction” in Form 3 CEB, the assessee claimed that the transfer pricing provisions did not apply as there was no income arising to it. The AO referred the issue to the TPO without dealing with the preliminary objection. The TPO held that he could not go into the issue whether income had arisen or not because his jurisdiction was limited to determine the ALP. He held that the assessee ought to have charged the NAV of the share (Rs. 53,775) and that the difference between the NAV and the issue price was a deemed loan from the assessee to the holding company for which the assessee ought to have received 13.5% interest. He accordingly computed the adjustment for the shares premium at Rs. 1308 crore and the interest thereon at Rs. 88 crore. The AO passed a draft assessment order u/s 144C(1) in which he held that he was bound u/s 92-CA(4) with the TPO’s determination and could not consider the contention whether the transfer pricing provisions applied. The assessee filed a Writ Petition challenging the jurisdiction of the TPO/AO to make the adjustment. On the merits of the adjustment, the assessee filed objections before the DRP. Before the High Court the assessee argued that (i) it was a precondition before the transfer pricing provisions apply that there has to be income arising to the assessee. As the allotment of shares at a premium does not give rise to income, the transfer pricing provisions do not apply, (ii) there was a breach of natural justice because neither the TPO nor the AO had heard the assessee on, or decided, the fundamental issue as to whether the transfer pricing provisions applied at all, (iii) the DRP does not offer an alternative remedy because the DRP has no power to quash the draft assessment order even if it is satisfied that the same is without jurisdiction & (iv) the DRP cannot take an unbiased view because one of its members is the DIT (TP). HELD by the High Court:

(i) The assessee’s contention that the DRP does not offer an alternative remedy because it does not have the power to quash the assessment order even if it is satisfied that the same is without jurisdiction is not acceptable because in Vodafone 37 taxmann.com 250 it was held that the DRP’s power to confirm would include the power not to confirm and to annul the draft assessment order;

(ii) It is clear from s. 92(1) that there must be income arising/ potentially arising by an international transaction for the application of the transfer pricing provisions. This is a jurisdictional requirement and has to be dealt with by the AO when specifically raised by the assessee before making reference to the AO. Grant of personal hearing before referring the matter to the TPO has to be read into s. 92CA(1) in cases where the very jurisdiction to tax under Chapter X is challenged by the assessee (Veer Gems 351 ITR 35 (Guj) disagreed with to the extent it holds that no hearing is required at the stage of reference to the TPO even on jurisdictional issues). If, after the hearing the assessee, the AO holds that there is an international transaction, that would be binding on the TPO;

(iii) The department’s contention, based on CBDT Instruction No.3 dated 20.05.2003, that the action of the AO in referring the international transaction is a mere administrative act is not acceptable. The AO is bound to hear the assessee in respect of jurisdictional issues before making the reference. The failure to do so is an illegality;

(iv) The assessee’s contention that the DRP would not give a fair hearing as one of its members is the DIT (TP) is not acceptable because it overlooks the fact that these are not appeal proceedings but to finalize the draft assessment order. Also, the DIT(TP) who approved the TPO’s order is not on the panel;

(v) The Revenue should keep in mind the sage advice of Nani Palkhivala that the department should not cause misery and harassment to the taxpayer and the gnawing feeling that he is made the victim of palpable injustice. In this case it would be natural for the assessee to feel harassed as neither the AO nor the TPO gave a hearing or dealt with the preliminary objection. It is hoped that the revenue will be more sensitive to the just demands of the assessee and not treat the assessee as an adversary who has to be taxed, no matter what;

(vi) The DRP should decide the assessee’s objection regarding chargeability of alleged shortfall in share premium as a preliminary issue. In case the DRP’s decision on the preliminary issue is adverse, the assessee shall be entitled to challenge it in a writ petition if it can show that the DRP’s decision on the preliminary issue is patently illegal notwithstanding the availability of alternate remedy before the ITAT.

One comment on “Vodafone India Services Pvt. Ltd (No. 2) vs. UOI (Bombay High Court)
  1. INDEED IT IS Wonderful path-breaking DECISION . Nani is indeed always be considered as sage on all Revenue or constitutional matters though he was indeed a literature MA with a degree in law. Why so because he applies his mind, while that rote learning people mechanically apply their minds, in spite of so called Tax knowledge that means tax knowledge without application og mind is indeed a great hypocrisy is it not..

    So tiruvalluvar says in kural ..No.271..’Vanja manaththan patitrau olukkam puthangal iyindhum aghaththe nagum’ (Tamil)…At the hypocritical conduct of a false hearted man, Even the five elements inside will laugh derisively.’

    In Gita, 7.4, it is said, i am writing not sanskrit rendering but english to easily understand, ….’The sentinels of this ‘Conscience and mind’ ( or a thoughtful mind’) , shaped by the five perceptive senses ,( are obviously refereed to here by valluvar), as ‘the five internal watching elements’, and not necessarily the chemical elements forming the man’s constitution or the five basic elements (of the Indian way of thinking ) – water, earth, fire, air, and ether, which constitute all matter.

    In Lay Morals. R L Stevenson expressed ..’A sentiment was expressed in a larger context, when he said,..’The evading og police(inner senses ) cannot long satisfy an active conscience or a thoughtful mind’.

    The same idea is well expressed by judges in the well written judgement..

    Kudos to Bombay High Court.

    Hope the Revenue can take a lesson including so called CBDT as also Ministry of finance, govt of India as the incumbent minister himself a Tamilian may have read Tirukkural!

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