2014 (10) TMI 278 - BOMBAY HIGH COURT

Transfer pricing adjustment - Whether issue of shares at a premium by the Petitioner to its non-resident holding company gave rise to any income from an admitted International Transaction - Held that:- The amounts received on issue of share capital including the premium is undoubtedly on capital account - Share premium have been made taxable by a legal fiction under Section 56(2)(viib) of the Act and the same is enumerated as Income in Section 2(24)(xvi) of the Act - 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 – following the decision in Cadell Weaving Mill Co. vs. CIT [2001 (2) TMI 105 - BOMBAY High Court] – the contention of the assessee is correct that neither the capital receipts received on issue of equity shares to its holding company, a non-resident entity, nor the 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.

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 receipts - 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.

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 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 - None of the notices issued to the Petitioner on the draft order passed by AO on the order passed by DRP even proposes to assess the Petitioner in its representative capacity - the Petitioner had no occasion to challenge the jurisdiction of the Revenue on the above aspect – thus, 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 – there is no occasion to apply Chapter X of the Act – Decided in favour of assessee.