Vodafone India Services Pvt. Ltd vs. UOI (Bombay High Court)

DATE: October 10, 2014 (Date of pronouncement)
DATE: October 10, 2014 (Date of publication)
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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.

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. The High Court directed the DRP to decide the assessee’s objection regarding chargeability of alleged shortfall in share premium as a preliminary issue. Upon the DRP’s decision, the assessee filed another Writ Petition. HELD by the High Court allowing the Petition:

(1) 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.

(2) The word income for the purpose of the Act has a well understood meaning as defined in s. 2(24) of the Act. The amounts received on issue of share capital including the premium is undoubtedly on capital account. Share premium have been made taxable by a legal fiction u/s 56(2)(viib) of the Act and the same is enumerated as Income in s. 2(24)(xvi) of the Act. However, what is bought into the ambit of income is the premium received from a resident in excess of the fair market value of the shares. In this case what is being sought to be taxed is capital not received from a non-resident i.e. premium allegedly not received on application of ALP. Therefore, absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income (Cadell Weaving Mill Co. vs. CIT 249 ITR 265 approved in CIT vs. D.P. Sandu Bros 273 ITR 1 followed);

(3) In case of taxing statutes, in the absence of the provision by itself being susceptible to two or more meanings, it is not permissible to forgo the strict rules of interpretation while construing it. It was not open to the DRP to seek aid of the supposed intent of the Legislature to give a wider meaning to the word ‘Income’;

(4) The other basis in the impugned order, namely that as a consequence of under valuation of shares, there is an impact on potential income and 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.

(5) 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;

(6) The department’s method of interpretation indeed is a unique way of reading a provision i.e. to omit words 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.

(7) 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 which the rate is to be applied. Thus, there is difference between a charge to tax and the measure of tax (a) & (d) above;

(8) The 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 is not acceptable because the entire exercise of determining the ALP is only to arrive at the real income earned i.e. the correct price of the transaction, shorn of the price arrived at between the parties on account of their relationship viz. AEs. In this case, the revenue seems to be confusing the measure to a charge and calling the measure a notional income. We find that there is absence of any charge in the Act to subject issue of shares at a premium to tax.

(9) W.e.f. 1 April 2013, the definition of income u/s 2(24)(xvi) includes within its scope the provisions of s. 56(2) (vii-b) of the Act. This indicates the intent of the Parliament to tax issue 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.

(10) Consequently, the issue of shares at a premium by the Petitioner to its non resident holding company does not give rise to any income from an admitted International Transaction. Thus, no occasion to apply Chapter X of the Act can arise in such a case.

6 comments on “Vodafone India Services Pvt. Ltd vs. UOI (Bombay High Court)
  1. Sher Singh says:

    Expect a retrospective amendments in Section 2, Section 4, Section 5, Section 6, Section 9 soon

  2. Ray says:

    I hope other judicial forums take note of the following observation made by Hon’ble HIgh Court:

    “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”

  3. skc says:

    a welcome judgement.

  4. I have dealt with this issue in detail in my article “THE MULTI-MILLION DOLLAR PUZZLE”.

    Those interested, may refer to ‘CURRENT TAX REPORTER’, (2013) 261 CTR (ART) 42 (20.9.2013).


  5. vswami says:

    If , for a change, -as commented elsewhere, – viewed with a different stroke, WPRT the clinching observation that the price was arrived at based on the methodology prescribed by the Controller of Capital Issues (CCI) >

    This is one in, but not to be safely presumed to be the only one of the type, in the lately experienced series of instances in which common sense seems to have taken, rather, violently and vengefully pushed, to the proverbial ‘back seat’. Simply going by the writer’s narration, it is evident that the aggrieved party /its counsel has chosen to go to town, or to follow a beaten track, to urge and support its case against the Revenue. Instead of, in one’s viewpoint, as expected, questioning the propriety of the Revenue, regardless what the IT Act provides or not, in discrediting and tinkering with the ‘transfer price’ stated to have been arrived at by following the ‘methodology’ prescribed by the duly empowered and only competent authority, being the CCI.
    To put it differently, the Revenue is not seen to have even remotely tried and questioned the right or wrong of the transfer price adopted by following the prescribed methodology. That is, in the nature of things, to be taken to be a pure and simple question of admitted ‘fact’; not of law, much less a “substantial question of law”. On that premise, the indicated possibility/wishful thinking of the Revenue pursuing , more so righteously, the dispute any further, may turn out, -if properly canvassed against and argued, to be unwise and a wasteful prolongation of litigation.

    To add, this is the most certainly a matter for law experts to consider and recommend whether, through suitable measures, the CCI be required to go into, decide and give his finding, on a case to case basis, with a binding on the transfer price adopted, thereby leaving no scope for the Revenue to choose and go by its own reasoning de hors/ distinct, often diagonally opposite to the CCI prescribed methodology.

    Tail Piece: As a great law legend, ‘Nani’, reflecting from the bottom of his heart, said, – There can be no excellence in the law without excellence in lawyers.

    (Source: His published speeches)

  6. vswami says:

    To share a few more random thoughts:

    The merit of the arguments mainly advanced by the aggrieved assessee is not readily understood. For instance, one of the propositions canvassed is that, under the transfer pricing regulations, the concept of ‘income’ does not include any thing in respect of a ‘capital account transaction’. The court has accepted it, with the observation that, – “Therefore, absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income (Cadell Weaving Mill Co. vs. CIT 249 ITR 265 approved in CIT vs. D.P. Sandu Bros 273 ITR 1 followed)”.
    Pending an insightful study, it will be worthwhile for tax lawyers / other experts to independently examine and ascertain,- why and how those cited cases, on a quick reading are seen to have been decided on an altogether distinct factual matrix and basically different issue,- that is not under the TP Regulations (TPR), – could apply on all fours to the given case.
    By the way, certain other viewpoints since brought out through comments elsewhere (e.g wrt ICL Blog @ Bombay High Court Ruling in Favour of Vodafone in Share Issue Case ), if anyone were to so care and mind, may be looked up for useful hints.

    Further, for a discussion of the not-so-unrelated proposition namely, whether or not ‘income’ as envisaged under TPR can be rightly construed to cover (‘expense’ or ‘loss’), the published write-up ( [2007]165 TAXMAN 165 (ART)
    TRANSFER PRICING , discussing itat decision in Aztec Software & Technology Services Ltd. v. Asstt. CIT)
    may be looked up.

    It may be worth the effort to try and ascertain further developments, if any, since then in Aztec ‘s case; also share with the rest.

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