TMI Blog2014 (10) TMI 278X X X X Extracts X X X X X X X X Extracts X X X X ..... within the meaning of the expression as defined under the Act. Jurisdiction to apply Chapter X – Held that:- As the assessee itself had filed Form 3CEB for purposes of Chapter X of the Act – it has already been decided that the issue of jurisdiction as raised by the Petitioner of income arising, is a condition precedent for applicability of Section 92(1) of the Act - although the words International Taxation has been defined in Section 92B of the Act for the purposes of Chapter X of the Act, the words 'Income' has not been defined - 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'. 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. It is that income which is to be adjusted to the ALP price - It is not a tax on the capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Year (AY) 2009-10. On 21 August 2008, the Petitioner issued 2,89,224 equity shares of the face value of ₹ 10/- each on a premium of ₹ 8,509/- per share to its holding company. This resulted in the Petitioner receiving a total consideration of ₹ 246.38 crores from its holding company on issue of shares between August and November 2008. The fair market value of the issue of equity shares at ₹ 8,519/- per share was determined by the Petitioner in accordance with the methodology prescribed by the Government of India under the Capital Issues (Control) Act, 1947. However, according to the Assessing Officer (AO) and Transfer Pricing Officer (TPO), the Petitioner ought to have valued each equity share at ₹ 53,775/- as against the aforesaid valuation done under the Capital Issues (Control) Act, 1947 at ₹ 8,519/- and on that basis shortfall in premium to the extent of ₹ 45,256/- per share resulted into total shortfall of ₹ 1308.91 crores. Both the AO and the TPO on application of the Transfer Pricing provisions in Chapter X of the Income Tax Act 1961, (the Act) held that this amount of ₹ 1308.91 crores is income. Further, as a consequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itioner 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. At that time, we did not deal with the jurisdictional issue as the Counsel for the Respondent-Revenue refused to address us on merits of the jurisdictional issue on the ground that same could be raised before the authorities under the Act. Thus, as the Petitioner had already filed its objections (excluding the issue of jurisdiction) to the Draft Assessment Order, before the Dispute Resolution Panel (DRP) under Section 144C(2) of the Act and it was pending, the DRP was directed to first decide only the jurisdictional issue raised by the Petitioner as preliminary issue within two months from the date on which the Petitioner files its objection on the question of jurisdiction. Consequent to the directions of this Court in Vodafone-III, the DRP has considered the issue of jurisdiction as raised by the Petitioner and by an order dated 11 February 2014 rejected the Petitioner's preliminary objection thereto. This petition essentially challenges the order dated 11 February 2014 passed by the DRP holding that the Respondent-Revenue has ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid at a premium of ₹ 8500 per share aggregating to total consideration of ₹ 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. (d) On 30 August 2010, the A.O. issued a notice under Section 143(2) of the Act to the Petitioner for the purposes of carrying out scrutiny assessment. On 11 July 2011, the AO referred all the transactions reported by the Petitioner in Form 3-CEB dated 28 September 2009 to the TPO. This was for determining the ALP of the reported International Transactions in accordance with Section 92CA(1) of the Act; (e) On 14 December 2012, the TPO issued a show cause notice to the Petitioner. In the above notice, in so far as relevant to these proceedings, the Petitioner was inter alia, called upon to show cause why: (i) the issue price (including the premium) of the equity shares to its holding company as declared by the Petitioner should be accepted for the purposes of computing ALP under the Act; and (ii) the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ground that methodology of valuation adopted is not suitable to derive the ALP; (vi) The Transfer Pricing adjustment for the A.Y.s 2007-08 and 2008-09 have to be taken into account to determine the fair value of the Petitioner's business; (vii) Finally, the TPO determined the ALP of equity shares issued by the Petitioner to its holding company as under:- 7.5 Determination of Arm's Length Price: Thus, based on the above discussion, the ALP of equity shares of the company as on 31-03-2008 is computed as below:- Description Amount (Rs. Million) Number/ Amount (Rs.) Remarks (a) Net-worth of the assessee company based on audited balance sheet as on 31-03-2008 12341.8 As per the audited balance sheet of the assessee as on 31-03-2008 (b) Add: Off-Balance sheet items (for TP adjustment made in the earlier years, ALP valuation of sale of call centre business and ALP of assignment of call options) i Shortfall (net of taxes) in charging for provision of IT enabled services for FY 2006-07 331.53 As per information available i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. This deemed loan was sought to be charged with interest at 13.5% per annum. Consequently, the TPO arrived at the following transfer pricing adjustment as under:- 9.2.4 Computation of Arm's Length Price: Amount of Deemed Loan Rs.1308,91,21,344/- Period 6 months Arm's Length Interest Rate 13.50% p.a. Arm's Length Price @ 13.97% p.a. Rs.88,35,15,691/- 9.2.5 Price Received vis-A-vis the Arm's Length Price: The price charged by the assessee at Rs. Nil in the form of interest chargeable on the debts delayed from its Associated Enterprise is compared to the Arm's Length Price or interest as under: Arm's Length Interest Rs.88,35,15,691/- Interest received Rs. Nil Shortfall being adjustment u/s 92CA Rs.88,35,15,691/- The above amount of ₹ 88,35,15,691/- is treated as an adjustment u/s 92CA for the price chargeable as interest on the deemed loan t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ril 2013 the Petitioner filed its objection to the draft Assessment Order dated 22 March 2013 with the DRP under Section 144C of the Act. In its objections to DRP the Petitioner made it clear that the objection as filed was not with regard to the issue of jurisdiction but was only restricted to computation/ valuation/quantification of ALP in respect of the issue of shares to its holding company; (e) So far as the issue of jurisdiction is concerned, the Petitioner filed Vodafone-III Petition (W. P. No.1877 of 2013) in this Court. In the above Petition, the jurisdiction of the Respondent-Revenue to tax the issue of equity shares to its holding company under Chapter X of the Act was challenged. After hearing the parties, on 29 November 2013, this Court passed an order accepting the view that a jurisdictional issue arises for consideration. III. High Court order Vodafone-III Writ Petition : 8 In the above order dated 29 November 2013, this Court made the following observations in paragraph 32 :- 32. It is clear that in view of Section 92(1) , there must be income arising and/or affected or potentially arising and/or affected by an International Transaction for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration by the DRP, but even proceeding on the basis that transaction in question is an International Transaction since the preliminary objection raised by the Petitioner raises a question of law and does not involve disputed questions of fact and having regard to how the Petitioner's preliminary objection has so far not been dealt with by the Revenue, this appears to be a fit case to direct the DRP to decide the Petitioner's objection regarding chargeability of alleged shortfall in share premium as a preliminary issue and further to observe that in case the decision of the DRP on the preliminary issue is adverse to the Petitioner, it would be open to the Petitioner-assessee to challenge the decision of the DRP on the preliminary issue in a writ petition, in case the Petitioner makes out a case that stage that the decision of the DRP on the preliminary issue is patently illegal, notwithstanding the availability of alternate remedy before the ITAT. In paragraph 53, this Court disposed of the petition with the following directions:- 53:- (A) The Petitioner shall within two weeks from today submit before the DRP its preliminary objections to Draft Assessment Order and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objections on the issue of jurisdiction. 10 Broadly, the crux of the objections to jurisdiction taken by the Petitioner before the DRP, were as under:- (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; (ii) Chapter X of the Act will not apply as no expenditure is incurred that impacts computation of the taxable income; (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; and (iv) Other issues raised were with regard to no jurisdiction to split a single transaction of issue of shares into issue of shares and grant of financial accommodation. This re-characterizing/re-classifying a business transaction is not permitted. 11 So far as the revenue is concerned, the basis of its justification to exercise jurisdiction under Chapter X of the Act, taken by the TPO before the DRP, were as under:- (i) Chapter X of the Act is a separate code by itself and the difference in valuation between ALP and the contract/transaction price would give rise to income; (ii) Income as defined in Section 2( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioner is adopted, then purchase of marketable securities, could never give rise to Income, rendering the provision otiose. Similarly, impugned order also draws support from clause (e) to Explanation (i) of Section 92B of the Act which includes a transaction of business restructuring or reorganization entered into as an International Transaction. This provision, according to the impugned order enables the A.O. 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. On the aforesaid analysis, the impugned order holds that share premium not received on issue of shares is Income arising from International Transaction. 14 The impugned order further holds that as a consequence of the Petitioner's not receiving the ALP on the issue of shares, resulted in lesser premium being garnered by the Petitioner. This would result, in the Petitioner having less liquid funds available at its command which in turn could have reduced its debts or the excess funds could have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not designed to bring 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 the contracted/book value of said transaction but to reach the fair price/ consideration. Therefore, before any transaction could be brought to tax, a taxable income must arise. The interpretation in the impugned order to tax any amounts involved in International Transaction tantamount to imposing a penalty for entering into a transaction (no way giving rise to taxable income) at a value which the revenue determines on application of ALP; (d) The impugned order itself demonstrates the fact that the share premium on issue of shares is per se not taxable. This is so as the amounts received by the Petitioner on account of share premium has not been taxed and only the amount of share premium which is deemed not to have been received on application of ALP, has alone been brought to tax ; (e) In case of issue of shares, it comes into existence for the first time only when shares are alloted. It is the creation of the property for first time. This is different from the transfer of an existing property. An issue of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e interest paid/interest received etc., Similarly, Explanation (i)(e) to Section 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 whether in present or in future. In this case, such a contingency does not arise as there is no impact on Income which would be chargeable to tax due to issue of shares. RESPONDENTS' SUBMISSIONS:- 17(a) As against the above, Mr. Ranjit Kumar, learned Solicitor General appearing on behalf of the respondent-revenue sought to support the impugned order dated 11th February, 2014 on completely new grounds i.e. grounds completely different from the grounds in the impugned order. However, as the new grounds were being canvassed only on legal issues, we were of the view that the same could be canvassed before us rather then sending it to the DRP for fresh consideration. This view was taken by us also bearing in mind that in Vodafone-III, the revenue refused to make any submission on merits of jurisdictional issue on the grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oscrutinize the same and when found that the ALP determined by the Petitioner- Company is not correct, the AO and the TPO were mandated to apply Chapter X of the Act and compute the correct ALP. Therefore, the Petitioner should be relegated to the alternate remedy of approaching the Authorities under the Act; (c) The issue of Chapter X of the Act being applicable is no longer res integra as identical provision as found in Section 92 of the Act was available in Section 42(2) of the Income Tax Act, 1922 (1922 Act). The Supreme Court in Mazagaon Dock Ltd. v/s. CIT (1958) 34 ITR 368 upheld the action of revenue in seeking to tax a resident in respect of profit which he would have normally made but did not make because of his close association with a non-resident. Further, the Court observed that it is open to tax notional profits and also impose a charge on the resident. The aforesaid provision of Section 42(2) of the 1922 Act were incorporated in its new avtar as Section 92 of the said Act. It was thus emphasized that the legislative history supports the stand of the respondent-revenue that even in the absence of actual income, a notional income can be brought to tax; (d) Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it dated 9 September, 2014 filed by the revenue. It was pointed out that Section 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 Section 92(2) of the Act is only to ensure that profits are not understated nor losses over stated by disclosing higher cost or expenditure, then the benefit received. Therefore, it is submitted that Section 92(2) of the Act has no application to the present facts. 20 Thereafter, we adjourned the hearing to enable the respondentrevenue to respond to the above submission by the Petitioner which were in the nature of reply to the new ground taken up by the revenue, in its reply at the hearing. However, the respondent-revenue chose to file their written submissions. The written submissions have been filed and submissions therein have already been taken note of herein above. STATUTORY PROVISIONS :- 21 Before considering rival submission, it would be useful to set out the relevant provision of the Act which would have bearing to decide the controversy which arises before us as under:- Section 2(24) In this Act, unless to context ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . (3) . . Meaning of International Transaction. Section 92B (1) - For the purposes of this section and sections 92, 92C, 92D and 92E, International Transaction means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises 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. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duced with effect for A. Y. 2002-03 as a part of Chapter X of the Act. The aim being to have well defined rules to tax transactions between AEs and not left to the discretion of the A.O. and bring out uniformity in treatment to tax of International Transaction between AEs. The Explanatory Notes to the Finance Act, 2001 brings out the objectives as indicated in the Circular No.14 of 2001 which read as under:- 55.3:- With a view to provide a detailed statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India. In the case of such multinational enterprises, the Act has substituted section 92 with a new section and has introduced new sections 92A to 92F in the Income-tax Act, relating to computation of income from an International Transaction having regard to the arm's length price, meaning of associated enterprise, meaning of International Transaction, computation of arm's length price, maintenance of information and documents by persons entering into International Transactions, furnishing of a report from an accountant by persons entering into International Transactions and definitions of certain expressions occurring in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. However, we are conscious of the fact 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. We are governed by the off quoted passage of Rowlatt J. to the following effect: In a taxing Act, one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about tax. There is no presumption as to tax. Nothing is to be read in nothing is to be implied. One can only look fairly at the language employed . The above principle was restated by Justice J. C. Shah (as he then was) in Sales Tax Commissioner v/s. Modi Sugar Mills AIR 1961 page 1047 in following words:- In Interpreting a taxing statute, equitable consideration are out of place. Nor can a taxing statute be interpreted or any presumption or assumptions. It must interpret a taxing statute in the light of what is clearly expr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as expressly stated, inter alia, that income shall include any capital gains chargeable under section 45. Under Section 2(24)(vi), the Legislature has not included all capital gains as income. It is only capital gains chargeable under Section 45 which has been treated as income under Section 2(24). If the argument of the Department is accepted then all capital gains whether chargeable under section 45 of not, would come within the definition of the word income under section2(24). Further, under section 2(24)(vi) the Legislature has not stated that any capital gains will be covered under the word income. On the contrary, the Legislature has advisedly stated that only capital gains which are chargeable under Section 45 of the Act could be treated as income. In other words, capital gains not chargeable to tax under section 45 fall outside the definition of the word income in section 2(24) of the Act. It is true that section 2(24) of the Act is an inclusive definition However, in this case, we are required to ascertain the scope of Section 2(24)(vi) and for that purpose we have to read the sub section strictly. We cannot widen the scope of sub section by saying that the definitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational Transaction of issue of share capital, while denying any income arises from the International Transaction. After accepting the above defence of the Petitioner, this Court in Vodafone-III by its order dated 29 November 2012 concluded that the issue of jurisdiction as raised by the Petitioner of income arising, is a condition precedent for applicability of Section 92(1) of the Act. We directed the above issue of jurisdiction be placed before DRP to examine the same as a preliminary issue of jurisdiction. 28 We shall first deal with the grounds recorded in the impugned order to justify the conclusion that the Revenue has jurisdiction to apply Chapter X of the Act to the transaction of issue of shares by the Petitioner to its holding company. This conclusion has been reached on application of Section 92(1) of the Act. Section 92 of the Act provides for computation of income from International Taxation having regard to ALP. Section 92(1) of the Act states that while determining /computing/assessing income from an International Taxation regard shall be had to ALP. The impugned order correctly holds that although the words International Taxation has been defined in Section 92 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter. 30 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'. 31 Similarly, the reliance by the revenue upon the definition of International Taxation in the sub clause (c) and (e) of Explanation (i) to Section 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. 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. It is that income 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. 32 The other basis in the impugned order is that as a consequence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the benefit accrued to the holding company as set out in the affidavit dated 9 September, 2014 in the following manner:- (a) Cost incurred by Petitioner for a corresponding benefit to holding company i.e. it gets shares worth ₹ 53,775 each at a price of ₹ 8519/- each; and (b) The valuation of holding company goes up in International Market due to holding of undervalued shares of the Petitioner. In support the learned Solicitor General wanted us to read Section 92(2) of the Act in the following manner:- 92(2)Wherein an International Transaction..., two or more associated enterprises enter into a mutual .arrangement for.. any contribution to, any cost..incurred ..in connection with a benefit, .....provided... to any one or more of such enterprises, the cost...., contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit... (The dotted words are omitted for the purpose of construction/interpretation). 35 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 absen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esident or not ordinarily resident produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business, the profits derived therefrom, or which may reasonably be deemed to have been derived therefrom, shall be chargeable to income tax in the name of the resident person who shall be deemed to be, for all the purpose of this Act, the assessee in respect of such income tax. (emphasis supplied) 38 If the above provision 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. We 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated Thus income has been likened pictorially to the fruit of a tree or the crop of a field. It is essentially the produce of something which is often loosely spoken of as capital. 40 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. 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. 41 We also find 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. In the instant case, the Revenue's case i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ALP and the contract price is an income, as it arises even if not received and the same must be subjected to tax. 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. We, thus do not find substance in the above submission. 44 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome 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. 46 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 v/s. B. C. Srinivasa Shetti 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. 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. In fact, in B. C. Srinivasa Shetti (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 occasio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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