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 Patel
CPA(USA), Former IRS Officer
This Analysis of the Bombay High Court’s
Order dated 10th October 2014, in case of
Vodafone India Services Pvt Ltd, has been
made by Nilesh Patel.
Nilesh has experience of about 18 years in
the filed of Direct Taxes: 4 years as an
independent Transfer Pricing and
International Tax Consultant in Mumbai, 2
years as a Senior Manger (Corporate Tax)
with Deloitte, 1 year as a US Tax Professional
with a US CPA Firm and 11 years as a Indian
Revenue Service (IRS) Officer.
Nilesh is a Certified Public Accountant (CPA)
licensed by California Board of Accountancy
and M.Tech. from Indian Institute of
Technology (IIT), Powai, Mumbai.

Website: www.taxwize.in
For any queries related to this Analysis you may Contact
Nilesh Patel – CPA (USA), IRS (Former) at the Email ID:
Nilesh@taxwize.in
Contact

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

of Shares
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

of Shares
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 India
Services Pvt Ltd, the Bombay High Court pronounced its eagerly
awaited verdict on taxability – under the Transfer Pricing
Regulations – of the arm’s length price of consideration (or
premium) received, or receivable, on issue of shares by an Indian
Company to its Non-Resident Holding Company.
Transfer Pricing adjustment of Rs. 1397 Crores was involved in this
case; the High Court ruled in Taxpayer’s favour.
What facts and arguments persuaded the High Court in favour of
the Taxpayer? What litigation strategies were adopted by the
Taxpayer 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 of
consideration or premium, on issue of shares to its holding
company, was this: If the Taxpayer had received full premium at
arms’ length price (ALP), then the Taxpayer would have earned
income by investing such premium - income, therefore, does arise
in terms of Sec. 92 (1).
How did the Taxpayer meet this ground before the High Court? And
what 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 any
benefit 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 of
shares by the Taxpayer to its Holding Company.
How did the Taxpayer rebut this argument? And what was the High
Court’s response?

11
Introduction
We have made this thorough analysis of the High Court’s Order. In
this Analysis, we answer the foregoing questions. Besides, we also
present to you the following:
 Full reasoning of the High Court
 Contention of the Taxpayer
 Contentions of Revenue
 Contentions of the Solicitor General during hearing before
the 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 of
about Rs. 15,000 Crores was made.
We place this Analysis in your hands with the hope that it will add
to 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 Holding
Company (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 Holding
Company (Vodafone Holdings)

Vodafone
Holdings
Vodafone
India
Foreign
15
Holding Company
India
Vodafone Holdings
(Vodafone Tele-
Services Holdings
Ltd), a Non
Resident Company,
is the holding
company of
Vodafone India
(Vodafone India
Services Pvt Ltd)

Vodafone
Holdings
Vodafone
India
Foreign
16
Vodafone India needed Funds
India
In FY 2008-09,
Vodafone India
needed funds for its
telecommunications
project 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 India
issued fresh equity
shares to Vodafone
Holdings (a Non
Resident Company),
because Vodafone
India needed funds
for its
telecommunications
project in India.

 How to value the equity shares issued by
Vodafone India to Vodafone Holdings?
 What should be the issue price of shares?
Vodafone India - Issue of Shares
1
8
Questions

 The issue of equity shares by an Indian Company,
to a Non-Resident Company, is regulated by the
Regulations issued under FEMA (Foreign Exchange
Management Act, 1999)
1
9
Answer

 The equity shares issued by Vodafone India to
Vodafone Holdings should be valued, as
prescribed by the Regulations issued under FEMA
(Foreign Exchange Management Act, 1999)
20
Answer

The issue price of shares should be as determined
under the Regulations issued under FEMA (Foreign
Exchange Management Act, 1999)
 Those Regulations ensure that shares are not
undervalued
 Those Regulations ensure that issue price of
shares is commensurate with the value
transferred to the shareholder
21
Answer

 Under FEMA the issue price of shares can be
determined in accordance with the methodology
prescribed by the Government of India under the
Capital Issues (Control) Act, 1947
22
Answer

 The Taxpayer (Vodafone India) adopted the
methodology prescribed by the Government of
India under the Capital Issues (Control) Act, 1947,
and determined the issue price of shares at
Rs. 8,519 per share:
Face Value Rs. 10 + Premium Rs. 8,509
23
Answer

 Is there no relevance of Transfer Pricing
Regulations to determination of the issue price
of shares?
 For Answer, please see the analysis of Bombay
High Court’s Order in the later part of this
presentation.
24
Question

25
Facts
2. Filing of Return of Income and Form 3CEB

Vodafone India and Vodafone Holdings are
Associated Enterprises
Vodafone – Return of Income & Form 3CEB
26

Vodafone India received money from Vodafone
Holdings for subscription of shares
 How to report the issue of shares, and the
receipt of money on such issue, under the
Transfer Pricing Regulations?
 Should the issue of shares, and the receipt of
money on such issue, be reported as
International 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 abundant
caution, Vodafone India
Reported the issue of
shares and total
consideration of Rs.
246.38 Crores in Form 3
CEB, as International
Transaction. A Note,
however, was
appended to Form 3
CEB.

Vodafone
India
Form 3 CEB
29
Vodafone India – Form 3CEB
AY 2009-10
“The company has issued 289224
equity shares of Rs.10/- each fully
paid at a premium of Rs.8500 per
share aggregating to total
consideration of Rs.2,46,38,99,016.
As per Section 92(1) of the Income
Tax Act, 1961 any income arising
shall be computed having regard to
the arm's length price. This
transaction of issue of equity
shares does not affect income of
the Company. However, out of
abundant caution, the same is
reported here.”
Note appended
to Form 3 CEB

30
Assessment Proceedings
Reference by Assessing Officer (AO) to the
Transfer Pricing Officer (TPO)
Order passed by the Transfer Pricing Officer
(TPO)

31
Reference by Assessing Officer (AO) to the
Transfer Pricing Officer (TPO)

Reference by the AO to TPO
 The AO referred all International Transactions reported in
Form 3CEB, to the TPO, for determination of the Arm’s
Length Price (ALP) [see Sec. 92CA (1)]
Vodafone India – Assessment Proceedings
32

 The AO is not required to give an opportunity of hearing to
the Taxpayer, before making reference to the TPO, for
determination of the Arm’s Length Price (ALP) [Aztec
Software & Technology Services Ltd vs ACIT [2007] 107 ITD
141 (Bangalore)(Special Bench)]
 Therefore, before the AO, the Taxpayer was not able to
raise the plea that issue of shares is not covered by the
Transfer Pricing Regulations enshrined in Chapter X of the
I. T. Act, 1961 [Preliminary Jurisdictional Issue]
33

 The following is the basis for the plea that issue of shares
is not covered by the Transfer Pricing Regulations
enshrined in Chapter X of the I. T. Act, 1961:
 The language or text of Sec. 92 (1) provides that any income
arising from an International Transaction shall be computed
having regard to the Arm’s Length Price.
 The consideration for issue of shares is a Capital Receipt; it is
not income, which is taxable.
34

35
Order passed by the Transfer Pricing Officer
(TPO)

Order passed by the TPO (on Preliminary
Jurisdictional Issue)
 For the first time the Taxpayer got the opportunity to raise
the plea that issue of shares is not covered by the Transfer
Pricing 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 an
International Transaction shall be computed having regard
to the Arm’s Length Price.
 The consideration for issue of shares is a Capital Receipt; it
is not income, which is taxable .
37

 TPO did not consider the Preliminary Jurisdictional Issue
raised by the Taxpayer (Vodafone India)
38

 According to the TPO, he or she only has the authority to
compute ALP; he or she has no authority to decide the
taxability of a transaction referred by the AO
 On this point please see: Veer Gems vs ACIT [2011] 15
taxmann.com 355/351 ITR 35 (Gujarat HC); CIT vs Cushman
and Wakefield (India) Pvt Ltd [2014] 46 taxmann.com 317
(Delhi HC); CIT vs EKL Appliances Ltd [2012] 24 taxmann.com
199/209 Taxman 200/345 ITR 241 (Delhi HC); Honda Siel Cars
India 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 made
for prior years (AY 2007-08 and 2008-09) in the Net Asset
Value
 On that basis the TPO worked out the ALP of shares at
Rs. 53,775 per share; the Taxpayer had worked out the
price of shares at Rs. 8,519 per share.
40

 The TPO made transfer pricing adjustment for the deficit
of Rs. 45,256 (53,775 – 8,529) per share.
 Total adjustment of Rs. 1308.91 Crores was made on this
ground of valuation of shares, issued by Vodafone India to
its holding company.
41

 Yet another Transfer Pricing adjustment was made by the
TPO:
 The shortfall in the value of shares was treated as deemed
loan given by Vodafone India to its holding company.
 Interest of 13.50% per annum was charged on the deemed
loan of Rs. 1308.91 Crores for 6 months – adjustment on
account 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 AO
under Sec. 144C (1)
 After receiving the Order of the TPO the AO issued a show-
cause to the Taxpayer.
44

under Sec. 144C (1)
 In response the Taxpayer submitted that the issue of
shares is not covered by the Transfer Pricing Regulations
enshrined 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 an
International Transaction shall be computed having regard
to the Arm’s Length Price.
 When no income arises the provisions of Sec. 92 (1) and
Chapter X are not applicable
45

under Sec. 144C (1)
 The AO did not consider the Preliminary Jurisdictional
Issue raised by the Taxpayer (Vodafone India).
 The AO stated that he or she is bound to follow the Order
passed by the TPO on computation of ALP.
 On this point please see Veer Gems vs ACIT [2011] 15
taxmann.com 355/351 ITR 35 (Gujarat HC); CIT vs Cushman
and 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 Order
passed 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 the
holding company.
 However, objections on the Preliminary Jurisdictional Issue
were not filed before the DRP. Why?
Vodafone India – Objections before DRP
48

Objections against the Draft Assessment Order
passed by the AO under Sec. 144C (1)
 The Taxpayer did not file objections to DRP on the
Preliminary Jurisdictional Issue, because the Taxpayer
wished to raise that issue before the High Court, by way of
a Writ Petition.
 Had the Taxpayer filed objections to the DRP even on the
Preliminary Jurisdictional Issue, the High Court might have
dismissed the Writ Petition on the theory of ‘Alternate
Remedy 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 under
Sec. 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 Preliminary
Jurisdictional Issue
 Preliminary Jurisdictional Issue is: the issue of shares, and
resulting receipt of consideration, is not covered by the Transfer
Pricing Regulations enshrined in Chapter X of the I. T. Act, 1961
Vodafone – Writ Petition to High Court (A)
51

52
Bombay High Court
Order dated 29th November 2013 of High
Court

Order dated 29-11-2013 of High Court in Writ
Petition No. 1877 of 2013
 The High Court accepted the plea of Vodafone India (the
Taxpayer/Petitioner) that a jurisdictional issue of
application of Chapter X of the Act does arise and the
same was not considered either by the TPO or by the AO
 The Taxpayer is entitled to have its preliminary objection
dealt with - not a single authority has so far dealt with this
issue.
53

Order dated 29-11-2013 of High Court in Writ
Petition No. 1877 of 2013
 As the Taxpayer had already filed its objections, (excluding
the issue of jurisdiction) to the Draft Assessment Order,
before the DRP under Section 144C(2) of the Act, and it was
pending -
 the High Court directed the DRP to first decide only the
jurisdictional issue raised by the Taxpayer as preliminary issue,
within two months from the date on which the Taxpayer filed
its objection on the question of jurisdiction.
54

The High Court disposed of the Writ Petition No. 1877 of
2013 with the following directions:—
(A) The petitioner shall within two weeks from the date of High
Court’s Order submit before the DRP its preliminary
objections, to Draft Assessment Order and the TPO's order, by
raising jurisdictional issues.
55

The High Court disposed of the Writ Petition No. 1877 of
2013 with the following directions:—
(B) The DRP shall decide the issue of jurisdiction before
considering issue of valuation / quantification raised by the
petitioner in its objections filed before the DRP - this of
course subject to the additional grounds on jurisdiction being
filed by the Petitioner within two weeks from today.
The DRP shall decide the issue of jurisdiction as a preliminary
issue within two months from the date on which the
petitioner files its objections on the question of jurisdiction.
56

The High Court disposed of the Writ Petition No. 1877
of 2013 with the following directions:—
(C) If the decision of the DRP on the above preliminary issue
is adverse to the petitioner, it would be open to the
petitioner to challenge the order of the DRP on the
preliminary issue in a writ petition if a case is made out at
that stage that the decision of the DRP is patently illegal,
notwithstanding the availability of alternative remedy of
filing an appeal before the Income Tax Appellate Tribunal.
57

58
Order of DRP on Jurisdictional Issue

In accordance with the Order of High Court the
Taxpayer filed objections before the Dispute Resolution
Panel (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 equity
shares by the Petitioner to its holding company does not give
rise to any income;
60

(ii) Chapter X of the Act will not apply as no expenditure is
incurred that impacts computation of the taxable income; and
61

(iii) Chapter X of the Act will not apply as issue of shares is
transaction on capital account and thus does not impact
computation 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 tax
the issue of shares by the Taxpayer - to its holding
company at a premium, to the extent the premium is
not received - the AO has the jurisdiction to tax the
issue of shares under Chapter X of the Act, as income
does 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 arising
out of International Transaction be determined, having regard to
the ALP.
The term 'Income' has not been defined in Chapter X of the Act
unlike International Transaction.
Therefore, the term 'Income' is to be construed in a broad
manner embracing all types of receipts or incomings.
66

Sec. 2 (24) of the Act defines income in an inclusive manner, and
capital receipts which would otherwise not be covered by the
term '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 accepted
because a broader interpretation of the word 'Income' would
advance the object of Chapter X of the Act, and would be
purposive interpretation of the statutory provision.
67

The definition of International Transaction as given in Sec. 92B of
the Act and in particular in Explanation (i)(c) of Sec. 92B provides
that the expression 'International Transaction' includes capital
financing like purchase of marketable securities.
If the normal meaning of Income as canvassed by the Taxpayer is
adopted, then purchase of marketable securities, could never
give rise to Income, rendering the provision otiose.
68

The clause (e) to Explanation (i) of Sec. 92B of the Act includes a
transaction of business restructuring or reorganization entered
into as an International Transaction.
This provision enables the AO to bring to tax income forgone
while restructuring /reorganizing the business. In such a case,
though there is no formal transfer of source of income or
tangibles, yet the income forgone would be notional income
liable 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 its
command which in turn could have reduced its debts - or the
excess funds could have been invested to earn income.
70

Thus, the amount not received could have enhanced the
Taxpayer’s potential income.
In view of the above, the share premium forgone has impacted
potential income. Thus, there are appropriate reasons giving rise
to application of Chapter X of the Act to the transaction of issues
of 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 invoke
Chapter X as share premium is an income arising from issue
of shares
b. Even if the term “income” is not given a broad interpretation,
the AO has jurisdiction to invoke Chapter X as there is income
potentially arising or affected by the short receipt of share
premium
72

The Taxpayer filed second Writ Petition (No. 871 of
2014) before the High Court challenging the adverse
Order passed by the DRP, on the jurisdictional issue.
 Though alternative remedy of filing an appeal before the
Income Tax Appellate Tribunal (ITAT) was available, the
Taxpayer chose to file Writ Petition on the ground that
the decision of the DRP is patently illegal.
 On this ground, the High Court had permitted - in the
Order passed in the first Writ Petition - High Court had
permitted 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 should
arise from an International Transaction. In case of the
Taxpayer no income arises from the issue of equity shares to
the 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 give
purposeful interpretation.
of 2014)
76

c) Chapter X of the Act is not designed to tax all sums involved
in a transaction, which are otherwise not taxable. The
purpose and objective is not to tax difference between the
ALP and transaction-value, but to reach the fair
price/consideration. Therefore, before any transaction could
be brought to tax, a taxable income must arise.
d) The DRP’s Order itself shows that share premium on issue of
shares is not taxable – the share premium received by the
Taxpayer has not been taxed, only the deficit of share
premium has been taxed.
of 2014)
77

e) When shares are issued, they come into existence for the
first time only when the shares are allotted. Thus, it is
creation of property for the first time. An issue of shares is a
creation of shares – it is different from transfer of an existing
property. So, Sec. 45 will not apply.
f) Receipt of consideration on issue of shares is a capital
receipt. Capital receipts cannot be brought to tax, unless
expressly brought to tax. Capital receipts do not fall within
the ambit of the word “Income” unless specifically provided.
For example, clause (vi) of Sec. 2(24) which brings to charge
Capital Gains under Sec. 45.
of 2014)
78

g) Clause (xvi) of Sec. 2(24) incudes, within income, amounts
received within the provisions of Sec. 56 (2)(viib). However,
it applies to issue of shares to a resident. Besides, it seeks to
tax consideration received in excess of the fair market value
of the shares, not the alleged short-fall in the issue price of
shares. This indicates the absence of any intent to tax the
issue of shares below the alleged fair market value.
h) DRP’s Order proceeds on an assumption, surmise or
conjecture that had the Taxpayer received the notional
income – the amount of share premium foregone – the
Taxpayer would have invested the same, giving rise to
income. No tax can be charged on guess work or
assumption.
of 2014)
79

i) 1. Explanation (i)(c) to Sec. 92B of the Act only states that
capital financing transaction such as borrowing money
and/or lending money to AE would be an International
Transaction. However, what is brought to tax is not the
quantum of amount lent and/or borrowed but the impact
on Income due to such lending or borrowing. This impact is
found in either under reporting/ over reporting the interest
paid/interest received.
of 2014)
80

i) 2. Similarly, Explanation (i)(e) to Sec. 92B of the Act, which
covers business restructuring would only have application if
said restructuring/ reorganizing impacts income. If there is
any impact of income on account of business
restructuring/reorganizing, then such income would be
subjected to tax as and when it arises.
of 2014)
81

Submission of the Revenue (Respondent)
The Revenue sought to support the DRP’s Order on completely
new grounds, grounds completely different from the grounds
stated in the DRP’s Order
of 2014)
82

New Grounds of Revenue (Respondent)
Text of Sec. 92 (1) and 92 (2)
Sec. 92. Computation of income having regard to arm's length
price
(1) Any income arising from an international transaction shall
be computed having regard to the arm's length price.
Explanation.—For the removal of doubts, it is hereby clarified
that the allowance for any expense or interest arising from an
international transaction shall also be determined having regard
to the arm's length price.
of 2014)
83

Sec. 92. Computation of income having regard to arm's length
price
(2) Where in an international transaction or specified domestic
transaction, two or more associated enterprises enter into a
mutual agreement or arrangement for the allocation or
apportionment of, or any contribution to, any cost or expense
incurred or to be incurred in connection with a benefit, service or
facility provided or to be provided to any one or more of such
enterprises, the cost or expense allocated or apportioned to, or,
as the case may be, contributed by, any such enterprise shall be
determined having regard to the arm's length price of such
benefit, service or facility, as the case may be.
of 2014)
84

The Solicitor General argued that Section 92(1) of the Act is to
be read with Section 92(2) of the Act.
A conjoint reading of two provisions would indicate that what is
being brought to tax under Chapter X of the Act is not share
premium but is the cost incurred by the Petitioner in passing on
a benefit to its holding company by issue of shares at a premium
less than ALP.
This benefit is the difference between the ALP and the premium
at which the shares were issued.
of 2014)
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 benefit
given to the Holding Co. After all, the Holding Co. has actually
got 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 the
international market by taking undervalued shares of the
subsidiary Co., by increasing the real net worth of the Holding
Co.
of 2014)
86

Submission of the Revenue (Respondent) in
support of DRP’s Order – Other than New Grounds
a) The Taxpayer does not challenge the constitutional validity of
Chapter X. The Taxpayer raises only an issue of interpretation.
Moreover, the Taxpayer and its holding company are
Associated Enterprises. Therefore, provisions of Chapter X are
fully satisfied, and that Chapter is applicable to the facts of the
Taxpayer’s case.
of 2014)
87

Submission of the Revenue (Respondent) in
support of DRP’s Order – Other than New Grounds
b) The Taxpayer itself had submitted to the jurisdiction of Chapter
X by fling Form 3 CEB, declaring the ALP. So, the AO and the TPO
were mandated to apply Chapter X, and compute ALP.
Therefore, the Taxpayer should be relegated to the alternate
remedy of approaching the Authorities under the Act.
of 2014)
88

c) Identical provision as found in Sec. 92 of the Act was existing in
Sec. 42(2) of the I.T. Act, 1922. The Supreme Court in
Mazagaon Dock Ltd vs CIT (1958) 34 ITR 368 observed that
notional profits can be taxed under the erstwhile Sec. 42 (2).
Thus, the legislative history supports the stand of the Revenue
that even in the absence of actual income, a notional income
can be brought to tax.
of 2014)
89

d) For the purposes of Chapter X the real income concept has no
application. Otherwise the words used would have been
‘actual income’. The difference between ALP and the
contracted price would be added to the total income.
e) Under the Act what is taxable is income when it accrues or
arises or deemed to accrue or arise, and not only when it is
received. The difference between ALP and contract price is an
income which has arisen but not received. Thus, income
forgone is also subject to tax
of 2014)
90

f) Chapter X of the Act is a complete code by itself and not
merely a machinery provision to compute the ALP. Chapter X of
the Act applies wherever the ALP is to be determined by the
A.O. It is the hidden benefit in the transaction which is being
charged to tax - the charging section is, therefore, inherent in
Chapter X of the Act.
g) Even if there is no separate head of income under Section 14
of the Act in respect of International Transaction, such passing
on of benefit by the Petitioner to its holding company would
fall under the head 'Income' from other sources under Section
56(1) of the Act.
of 2014)
91

h) Sec. 4 of the Act is the charging Section which provides that
the charge will be in respect of the total Income for the
Assessment Year.
The scope of total Income is defined in Sec. 5 of the Act to
include all Income from whatever source which is received or
accrues or arises or deemed to be received, accrued or arisen
would be a part of the total Income.
Therefore, the word 'Income' for purposes of Chapter X of the
Act is to be given a widest meaning to be deemed to be income
arising, for the purposes of total income in Sec. 5 of the Act.
of 2014)
92

Rejoinder of the Taxpayer (Petitioner)
Sec. 92(2) of the Act will have no application in the present facts
as it deals with costs or expenditure allocated or apportioned
between two or more AE.
The objective of Sec. 92(2) of the Act is only to ensure that
profits are not understated, nor losses over-stated, by disclosing
higher cost or expenditure, than the benefit received.
Therefore, Sec. 92(2) of the Act has no application to the
present facts.
of 2014)
93

94
Bombay High Court
Order dated 10th October 2014 of High
Court

Order of the High Court
The High Court began by setting out the following relevant
Statutory 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 - received
by a Company on issue of shares to residents
of 2014)
95

Sec. 92 (1) – Any income arising from an International
Transaction shall be computed having regard to the Arm’s
Length Price.
Sec. 92 (2) – The cost or expense allocated or apportioned or
contributed by an enterprise under a Cost Sharing Arrangement
(CSA) or a Cost Contribution Arrangement (CCA) shall be
determined having regard to the Arm’s Length Price of the
benefit, service or facility received under the CSA or CCA.
of 2014)
96

Sec. 92B – Definition of “International Transaction”.
Sec. 92 (f)(i) – Definition of “ Arm’s Length Price”
of 2014)
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 is
to have well defined rules to tax transactions between
Associated Enterprises, and not leave it to the discretion of the
AO, and bring out uniformity in treatment to tax of International
Transaction between AEs.
of 2014)
98

The Explanatory Notes to the Finance Act, 2001 brings out the
objectives as indicated in Circular No.14 of 2001. Those
objectives are mentioned below:
Chapter X of the Act now existing was to ensure that qua
International Transaction between AEs, the profits are not
understated nor losses overstated by abuse of either showing
lesser consideration or higher expenses between AEs than
would be the consideration between two independent entities,
uninfluenced by relationship.
of 2014)
99

The Explanatory Notes to the Finance Act, 2001 brings out the
objectives as indicated in Circular No.14 of 2001. Those
objectives are mentioned below:
Chapter X did not replace the concept of Income or Expenditure
as normally understood in the Act for the purposes of Chapter X
of the Act.
The objective of Chapter X of the Act is certainly not to punish
Multinational Enterprises and/or AEs from doing business inter
se.
of 2014)
100

Order of the High Court – statute has to be
construed strictly on basis of what is stated in
the Act
Having noted the purpose and objective of Transfer Pricing
Regulations enshrined in Chapter X of the Act, the High Court
then observed that in fiscal statutes, whatever may be the
intent of the Parliament, the Courts have to construe the statute
strictly on the basis of what is stated in the Act. [Oft quoted
Passage of Rowlatt J. and Sales Tax Commissioner vs Modi Sugar
Mills, AIR 1961 Page 1047]
of 2014)
101

Findings of the High Court
of 2014)
102

Order of the High Court – findings of the High
Court
I. On Statutory Provisions
II. On Revenue’s Contentions - A
III. On submissions of Solicitor General – New Grounds raised
for the first time during hearing before the High Court
IV. On Taxpayer’s Contentions
V. On Revenue’s Contentions - B
of 2014)
103

I. Findings of the High Court On Statutory
Provisions
of 2014)
104

Findings of the High Court – on Statutory
Provisions
A plain reading of Sec. 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.
The word income for the purpose of the Act has a well
understood meaning as defined in Sec. 2 (24) of the Act. This is
true even when the definition of “Income” in Sec. 2 (24) is an
inclusive definition.
of 2014)
105

Provisions
It cannot be disputed that income will not, in its normal
meaning, include capital receipts, unless it is so specified, as in
clause (vi) of Sec. 2 (24). In such a case – where clause (vi) of
Sec. 2 (24) applies - 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 is undoubtedly on capital account.
of 2014)
106

Provisions
Share premium has been made taxable by a legal fiction under
Section 56(2)(viib) of the Act and the same is enumerated as
Income in Section 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.
of 2014)
107

Provisions
Absent express legislation, no amount received, accrued or
arising on capital account transaction can be subjected to tax as
Income. This is settled by the decision of this Court in Cadell
Weaving Mill Co. vs. CIT 249 ITR 265, which was upheld by the
Apex Court in CIT vs. D.P. Sandu Bros. Chember (P) Ltd. 273 ITR 1.
of 2014)
108

Provisions
We find considerable substance in the Petitioner's case that
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.
of 2014)
109

II. Findings of the High Court on Revenue’s
Contentions - A
of 2014)
110

Findings of the High Court – on Revenue’s
Contentions
The first contention on behalf of the revenue is that no question
of even examining the issue of jurisdiction to apply Chapter X of
the Act arises in this case, as the Petitioner itself had filed Form
3CEB for purposes of Chapter X of the Act.
of 2014)
111

Contentions
The contention is rejected. The Taxpayer had submitted Form
3CEB by way of abundant caution and had informed the
Respondent-Revenue about the International Transaction of
issue of share capital, while denying that any income arises from
the International Transaction.
After accepting the above defence of the Taxpayer, this Court in
Writ Petition No. 1877 of 2013, by its order dated 29 November
2013, concluded that the issue, of jurisdiction of income arising,
is a condition precedent for applicability of Section 92(1) of the
Act.
of 2014)
112

Contentions
Sec. 92 of the Act provides for computation of income from
International Taxation having regard to ALP.
Sec. 92 (1) of the Act states that while determining
/computing/assessing income from an International Taxation
regard shall be had to ALP.
of 2014)
113

Contentions
The DRP’s Order seeks to widen the meaning of the word
“Income” to include all incomings. This is sought to be
supported by the intent/object of Chapter X of the Act,
particularly the definition of International Transaction given in
Sec. 92B of the Act.
of 2014)
114

Contentions
The DRP’s Order in support of interpretation on the basis of
purpose/intent of the legislation relies upon the decision of the
Supreme Court in Maulai Hussain Haji Abrahim Vs. State of
Gujarat and ors. 2004 AIR (SC) 3946 rendered in the context of
Prevention of Terrorist Activities Act 2002 (POTA).
of 2014)
115

Contentions
The transaction of issue of shares by the Petitioner company to
its holding company has nothing to do even remotely with
terrorism.
In fact, while interpreting a fiscal/taxing statute, the intent or
purpose is irrelevant and the words of the taxing statute have to
be interpreted strictly.
of 2014)
116

Contentions
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.
of 2014)
117

Contentions
The intention of the legislature in a taxation statute is to be
gathered from the language of the provisions particularly where
the language is plain and unambiguous.
In a taxing Act it is not possible to assume any intention or
governing purpose of the statute more that what is stated in the
plain language.
Words cannot be added to or substituted so as to give a
meaning to the statute which will serve the spirit and intention
of the legislature.
[Mathuram Agarwal Vs. State of M.P. 1999(8) SCC 667]
of 2014)
118

Contentions
In view of the above, it is clear that it was not open to DRP to
seek aid of the supposed intent of the Legislature to give a
wider meaning to the word “Income”.
of 2014)
119

Contentions
The reliance by the revenue upon the definition of International
Taxation in the sub clause (c) and (e) of Explanation (i) to Sec.
92B of the Act, to conclude that Income has to be given a
broader meaning to include notional income, as otherwise
Chapter X of the Act would be rendered otiose, is far fetched.
of 2014)
120

Contentions
The issue of shares at a premium does not exhaust the universe
of applicability of Chapter X of the Act. There are transactions
which would otherwise qualify to be covered by the definition
of International Transaction.
The transaction on capital account or on account of
restructuring would become taxable to the extent it impacts
income i.e. under reporting of interest or over reporting of
interest paid or claiming of depreciation etc.
of 2014)
121

Contentions
It is that income (as mentioned in the previous Slide) which is to
be adjusted to the ALP price. It is not a tax on the capital
receipts.
This aspect appears to have been completely lost sight of in the
impugned order of DRP.
of 2014)
122

Contentions
The other basis in the impugned order is that as a consequence
of under valuation of shares, there is an impact on potential
income. The reasoning is 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.
of 2014)
123

Contentions
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.
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.
of 2014)
124

Contentions
It appears for the above reason that the learned Solicitor
General did not seek to defend the conclusion in the impugned
order on the basis of the reasons found therein, but sought to
support the conclusion with new reasons/grounds.
of 2014)
125

III. Findings of the High Court on submissions of
Solicitor General (New Grounds raised)
of 2014)
126

Findings of the High Court – on submissions of
Solicitor General
The learned Solicitor General submitted that Sec. 92 (1) has to
be read with Sec. 92 (2) of the Act - a conjoint reading would
indicate that what is taxed is the cost incurred in passing on the
benefit to the holding company. The share premium, not
received, is not subjected to tax by the Revenue.
The difference between the ALP and the price charged for issue
of shares is the benefit conferred upon the holding company.
Thus passing of benefit to holding company, is the cost to the
Petitioner, which is being brought to tax.
of 2014)
127

Solicitor General
In support the learned Solicitor General wanted the High Court
to read Sec. 92(2) of the Act by omitting certain words in the
Section.
According to the High Court, this 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.
of 2014)
128

Solicitor General
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.
of 2014)
129

Solicitor General
Be that as it may, Section 92(2) of the Act deals with a situation
where two or more AE's enter into an arrangement whereby
they are to receive any benefit, service or facility then the
allocation, apportionment or contribution towards the cost or
expenditure is to be determined in respect of each AE having
regard to ALP.
of 2014)
130

Solicitor General
Thus, to illustrate, the cost of research carried on by an AE for
the benefit of three AE's, then the cost will be distributed i.e.
allocated, apportioned or contributed depending upon the ALP
of 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 contribute
any cost and/or expenses between the Petitioner and the
holding company.
of 2014)
131

Solicitor General
The learned Solicitor General next contended that the issue is
no long res intergra as the issue stands covered by the decision
of the Apex Court in Mazgaon Dock Ltd. (supra) while
interpreting Sec. 42 (2) of 1922 Act.
It is submitted that the above Sec. 42 (2) of the 1922 Act dealt
with transfer pricing.
of 2014)
132

Solicitor General
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 of
profits 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 respect
of its business dealing with a non resident with whom he had
close connection.
of 2014)
133

Solicitor General
If the provision of Sec. 42 (2) of the 1922 Act is contrasted with
the provisions of Chapter X of the Act, and in particular Section
92 thereof, it would be noticed that the crucial words “shall be
chargeable to income tax” which are found in Section 42(2) of
the 1922 Act are absent in Chapter X of the Act.
of 2014)
134

Solicitor General
The High Court pointed out this difference in the two provisions
to the learned Solicitor General and he agreed that the above
difference exists.
However, according to him this was in view of the fact that
Sections 4, 5, 14 and 56 of the Act does create a charge to
income tax on deemed income earned from International
taxation. Therefore, it is clear that the deemed income which
was charged to tax under Section 42(2) of the 1922 Act was
done away with under the Act.
of 2014)
135

Solicitor General
The charge of Income now has to be found in Section 4 of the
Act.
If it is income which is chargeable to tax, under the normal
provision of the Act, then alone Chapter X of the Act could be
invoked.
Sections 4 and 5 of the Act brings /charges to tax total income of
the previous year.
of 2014)
136

Solicitor General
This would take us to the meaning of the word income under
the Act as defined in Section 2(24) of the Act.
The amounts received on issue of shares is admittedly a capital
account transaction, not separately brought within the
definition of Income, except in cases covered by Section 56(2)
(viib) of the Act.
of 2014)
137

Solicitor General
Thus such capital account transaction, not falling within a
statutory exception, cannot be brought to tax, as already
discussed herein above, while considering the challenge to the
grounds as mentioned in the impugned order.
of 2014)
138

Solicitor General
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.
of 2014)
139

Solicitor General
There is difference between a charge to tax and the measure of
tax (a) & (d) above. This distinction is brought out by the
Supreme Court in Bombay Tyres India Ltd. Vs. Union of India
reported in 1984 (1) SCC 467 wherein it was held that the charge
of excise duty is on manufacture while the measure of the tax is
the selling price of the manufactured goods.
of 2014)
140

Solicitor General
In this case also the charge is on income as understood in the
Act, and where income arises from an International Transaction,
then the measure is to be found on application of ALP so far
Chapter X of the Act is concerned. The arriving at the
transactional value/ consideration on the basis of ALP does not
convert non-income into income.
of 2014)
141

Solicitor General
The tax can be charged only on income; in the absence of any
income arising, the issue of applying the measure of ALP to
transactional 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 a
premium is a capital account transaction and not income.
of 2014)
142

Solicitor General
It was contended by the Revenue 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.
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.
of 2014)
143

Solicitor General
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.
of 2014)
144

IV. Findings of the High Court on Taxpayer’s
Contentions
of 2014)
145

Findings of the High Court – on Taxpayer’s
Contentions
The High Court also found merit in the submission on behalf of
the petitioners that w.e.f. 1 April 2013, the definition of income
under Section 2(24)(xvi) of the Act includes within its scope the
provisions of Section 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.
of 2014)
146

Findings of the High Court – on Taxpayer’s
Contentions
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.
The revenue has not been able to meet the above submission
but have in their written submission only submitted that the
above provisions would have no application to the present facts.
of 2014)
147

V. Findings of the High Court on Revenue’s
Contentions - B
of 2014)
148

Contentions
It was contended by the Revenue that in any event the charge
would be found in Section 56(1) of the Act. Section 56 of the Act
does provide that income of every kind which is not excluded
from the total income is chargeable under the head income
from other sources.
However, before Section 56 of the Act can be applied, there
must be income which arises.
of 2014)
149

Contentions
As pointed out above, the issue of shares at a premium is on
Capital Account and it gives rise to no income.
The submission on behalf of the revenue that the shortfall in the
ALP as computed for the purposes of Chapter X of the Act gives
rise to income is misplaced.
The ALP is meant to determine the real value of the transaction
entered into between AEs.
of 2014)
150

Contentions
Determination of ALP is a re-computation exercise to be carried
out only when income arises in case of an International
transaction between AEs. It does not warrant re-computation of
a consideration received /given on capital account.
It permits re-computation of Income arising out of a Capital
Account Transaction, such as interest paid/received on loans
taken/given, depreciation taken on machinery etc.
All the above would be cases of income being affected due to a
transaction on capital account.
of 2014)
151

Contentions
This is not the revenue's case here.
Therefore, although Section 56(1) of the Act would permit
including within its head, all income not otherwise excluded, it
does not provide for a charge to tax on Capital Account
Transaction of issue of shares as is specifically provided for in
Section 45 or Section 56(2)(viib) of the Act and included within
the definition of income in Section 2(24) of the Act.
of 2014)
152

Contentions
It was contended by the revenue that income becomes taxable
no sooner it accrues or arises or when it is deemed to accrue or
arise and not only when it was received.
It is submitted that even though the Petitioner did not receive
the ALP value/ consideration for the issue of its shares to its
holding company, the difference between the ALP and the
contract price is an income, as it arises even if not received and
the same must be subjected to tax.
of 2014)
153

Contentions
There can be no dispute with the proposition that income under
the Act is taxable when it accrues or arises or is received or
when it is deemed to accrue, arise or received. The charge-
ability to tax is when right to receive an income becomes vested
in the assessee.
However, the issue under consideration is different viz: whether
the amount said to accrue, arise or receive is at all income. The
issue of shares to the holding company is a capital account
transaction, therefore, has nothing to do with income.
of 2014)
154

Contentions
It was also contended that Chapter X of the Act is a complete
code by itself and not merely a machinery provision to compute
the ALP. 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 well settled position in law that a charge to tax must be
found specifically mentioned in the Act. 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.
of 2014)
155

Contentions
The High Court noted: We can do no better than refer to the
following observations of the five Member Bench of the Apex
Court in CIT vs Vatika Township P Ltd 367 ITR 466:-
“Tax laws are clearly in derogation of personal rights and property
interests and are, therefore, subject to strict construction, and any
ambiguity must be resolved against imposition of the tax… in statutes
levying taxes, the literal meaning of the words employed is most
important, for such statutes are not to be extended by implication
beyond the clear import of the language used. If the words are
doubtful, the doubt must be resolved against the Government and in
favour of the taxpayer…”
of 2014)
156

Contentions
In this case, we are not in the zone of uncertainty referred to
above. There is no charge express or implied, in letter or in spirit
to tax issue of shares at a premium as income.
of 2014)
157

Contentions
Chapter X of the Act is a machinery provision to arrive at the
ALP of a transaction between 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).
Even Income arising from International Transaction between AEs
must satisfy the test of Income under the Act and must find its
home in one of the above heads i.e. charging provisions. This
the revenue has not been able to show.
of 2014)
158

Contentions
It was next submitted that the machinery Section of the Act
cannot be read de-hors charging Section. The Act has to be read
as an integrated whole. On the aforesaid submission also, there
can be no dispute.
However, as observed by the Supreme Court in CIT vs B. C.
Srinivasa Shetty 128 ITR 294, “there is a qualitative difference
between the charging provisions and computation provisions
and ordinarily the operation of the charging provisions cannot
be affected by the construction of computation provisions.”
of 2014)
159

Contentions
In the present case, there is no charging provision to tax capital
account transaction in respect of issue of shares at a premium.
Computation provisions cannot replace/ substitute the charging
provisions.
of 2014)
160

Contentions
In fact, in B. C. Srinivasa Shetty (supra), there was charging
provision but the computation provision failed and in such a
case the Court held that the transaction cannot be brought to
tax.
The present facts are on a higher pedestal as there is no
charging provision to tax issue of shares at premium to a non-
resident, then the occasion to invoke the computation
provisions does not arise.
of 2014)
161

Contentions
In course of the hearing the learned Solicitor General also made
submissions with regard to taxing income in the hands of the
Petitioner even though the income has allegedly been earned
by the holding company.
None of the notices issued to the Petitioner on the draft order
passed by AO on the impugned order passed by DRP even
proposes to assess the Petitioner in its representative capacity.
Hence, the Petitioner had no occasion to challenge the
jurisdiction of the Revenue on the above aspect. Therefore,
there is no reason to examine the issue.
of 2014)
162

Contentions
In its written submissions, the revenue has raised an issue of
alternative remedy which was not raised at the hearing and
contended that there is no patent illegality in the impugned order
warranting interference by this Court.
However, the very fact that at the time of oral submissions, the
Revenue supported the conclusions in the impugned order on
grounds different from those mentioned therein would itself speak
volumes of the patent non-sustainability of the impugned order.
The preliminary objection, not raised at the hearing, is, completely
devoid of any substance.
of 2014)
163

Final Order of the High Court
of 2014)
164

In the present facts 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.
of 2014)
165

Petition is allowed in terms of the above finding and the following
orders are quashed and set aside as being without jurisdiction, null
and void:-
(i) Reference dated 11 July 2011 by the AO to TPO to determine
the ALP of issue of shares at a premium by the petitioner to its
holding company which is a non-resident entity;
(ii) Order dated 28 January 2013 of the TPO;
of 2014)
166

(iii) Draft Assessment Order dated 22 March 2013 passed by AO
under section 143 read with section 144C(1) of the Act; and
(iv) Order dated 11 February 2014 of DRP on the preliminary issue
of jurisdiction to tax issues of shares at a premium to its holding
company.
of 2014)
167

168
Way Forward – Implication of the High
Court’s Verdict
How to, henceforth, report issue of shares
by an Indian Company to Non-Resident
Shareholders?

How to, henceforth, report issue of shares by an
Indian Company to Non-Resident Shareholders?
Unless the Bombay High Court’s Order is overruled by the Supreme
Court, we may follow its decision to report – for purposes of
Transfer Pricing - the issue of shares by an Indian Company to Non-
Resident Shareholders.
Court’s Verdict
169

As the High Court has ruled, the issue of shares and resulting
receipt of consideration or premium is beyond the scope of
Transfer Pricing Regulations enshrined in Chapter X of the Act.
Therefore, the issue of shares to Non-Residents will have to be
valued and priced as per rules prescribed under FEMA.
Arm’s length pricing of shares under the Transfer Pricing
Regulations (Chapter X of the Act) is not required.
Court’s Verdict
170

Form 3 CEB in Column No. 16 requires the Accountant to report
‘any international transaction(s) entered into by an assessee in
respect of purchase or sale of marketable securities or issue of
equity shares.’
Court’s Verdict
171

Here, it must be noted that the High Court has not given any
finding on the issue ‘Whether the issue of shares by an Indian
Company to a Non-Resident Holding Company is, or is not, an
International Transaction?’
Court’s Verdict
172

The High Court has held that no income arises out of issue of
shares by an Indian Company to a Non-Resident Holding Company.
And, therefore, the Transfer Pricing Regulations are not applicable
to the issue of shares.
The High Court has clearly held that no occasion to apply Chapter X
of the Act can arise in a case of issue of shares by an Indian
Company to its Non-Resident Holding Company.
Court’s Verdict
173

Further, the High Court has quashed and set aside interalia the
following orders as being without jurisdiction, null and void:-
 Reference by the AO to TPO to determine the ALP of issue of
shares
 Order passed by the TPO
 Draft Assessment Order passed by the AO under section 143
read with section 144C(1) of the Act
Court’s Verdict
174

So, we may fairly infer that the provisions of Chapter X - including
Sec. 92B (International Transaction) and Sec. 92E (Accountant’s
Report) - do not apply to the transaction of issue of shares.
Court’s Verdict
175

Based on such inference we may place a Note as under in Column
No. 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 Associated
Enterprises. But, this transaction does not fall within the scope of
Chapter X of the Act, as held by the Hon. Bombay High Court in the
case of Vodafone India Services Pvt Ltd (citation). Therefore, no
specific particulars regarding the issue of shares are reported here.”
Court’s Verdict
176

In future, our stand and reporting will ultimately depend on the
Verdict of Supreme Court, because the Revenue will surely
challenge the Order of the Bombay High Court before the Supreme
Court.
Court’s Verdict
177

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

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

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