Case: Vodafone India Services (P) Ltd Vs. Union of India

1. In this petition under Art. 226 of the Constitution of India, petitioner challenges the show-cause notice dt. 17th Jan., 2014 and the order dt. 30th Jan., 2014 issued by respondent No. 2-Transfer Pricing Officer (TPO) under s. 92CA(3) of the IT Act, 1961 (the Act). Brief facts leading to this petition are as under : (a) The petitioner is a wholly-owned subsidiary of a Mauritian entity namely Vodafone Teleservices (India) Holdings Ltd. (the Holding Company); (b) On 16th July, 2009, the petitioner allotted 4,58,372 equity shares of Rs. 10 each at premium of Rs. 7,100 per share (total price being Rs. 7,110 per share), aggregating to a total consideration of Rs. 325.90 crores to its holding company; (c) On 24th Jan., 2010, the petitioner allotted further 1,02,659 equity shares of Rs. 10 each at premium of Rs. 6,437 per share (total price being Rs. 6,447 per share) aggregating to total consideration of Rs. 66.18 crores to its holding company. Thus, in the financial year 2010-11, the petitioner allotted an aggregate of 5,61,031 equity shares at an aggregate consideration of Rs. 392.08 crores after determining its valuation in terms of CCI guidelines; (d) On 14th Oct.. 2010, the petitioner filed its return of income for asst. yr. 2010-11. Along with its return of income, the petitioner filed Form 3CEB in relation to its international transaction. However, by way of abundant caution, the petitioner appended a note thereto as under : Note 1 : The company has issued equity shares of Rs. 10 each fully at a premium. As per s. 92(1) of the IT Act, 1961 any income arising from an international transaction shall be computed having regard to the ALP. This transaction of issue of equity shares does not affect income of the company. However, out of abundant caution, the same is reported here. The company has also received share application money for issue of equity shares.(e) Respondent No. 3-AO issued notice dt. 27th Aug., 2011 under s. 143(2) of the Act, directing the petitioner to submit certain details for carrying out a scrutiny assessment under s. 143(3) of the Act; (f) Thereafter on 28th March. 2012, the AO made a reference to the TPO under s. 92CA(1) of the Act to determine the ALP with reference to transaction reported in Form 3CEB; (g) On 17th Jan., 2014, the TPO issued a show-cause notice to the petitioner to show cause why the transfer price as fixed at Rs. 7,110 and Rs. 6,447 per share in respect of equity shares issued in asst. yr. 2009-10 should not be adjusted taking into account the ALP at Rs. 60,445 per share; and (h) The petitioner filed its preliminary reply dt. 22nd Jan., 2014 objecting to the jurisdiction of the Department to initiate any proceeding under Chapter X of the Act. In the circumstances, the petitioner requested the TPO to decide the preliminary issue of jurisdiction viz.,: whether Chapter X of the Act is at all applicable in respect of issue of shares by the petitioner to its non-resident holding company. 2. The present petition was filed on 27th Jan., 2014, challenging the show-cause notice dt. 17th Jan., 2014, as being without jurisdiction. At the hearing of the petition, on 30th Jan., 2014, learned counsel for the respondents stated that the TPO had already decided the show-cause notice dt. 17th Jan., 2014 by an order on 29th Jan., 2014. In the circumstances, the petitioner was granted leave to amend the petition to mount a challenge to the order dt. 29th Jan., 2014 of TPO. Accordingly, petitioner amended the petition by challenging the order dt. 29th March (sic--Jan.), 2014 of the TPO, making the following adjustments : 3. It is not necessary to set out any other fact or to refer to the grounds on which the TPO passed the above order, as the controversy which is the subject-matter of the present petition was also subject-matter of Writ Petn. No. 871 of 2014 filed by this petitioner in respect of the asst. yr. 2009-10. In the asst. yr. 2009-10 the petitioner had issued 2,89,224 equity shares of face value of Rs. 10 at a premium of Rs. 8509 per share to its holding company and had thus received a total consideration of Rs. 246.28 crores from its holding company. The AO referred the matter to the TPO who passed an order on 28th Jan., 2013, taking a view that the petitioner ought to have valued each equity share at Rs. 53,775 resulting in shortfall to the extent of Rs. 45,256 per share, aggregating to Rs. 1,308.91 crores. TPO further held that this difference between the ALP and the issue price (including premium) was required to be treated as deemed loan given by the petitioner to its holding company and deemed interest on such deemed loan at Rs. 88.35 crores was also treated as interest income. The issue of jurisdiction was decided as a preliminary issue by the Dispute Resolution Panel (DRP) by its order dt. 11th Feb., 2014 in favour of the respondent-Revenue. 4. After hearing the learned counsel for the petitioner and the learned Solicitor General of India, this Court by judgment dt. 10th Oct., 2014 [reported as Vodafone India Services (P) Ltd. v. Union of India (2014) 271 CTR (Bom) 488 : (2014) 110 DTR (Bom) 1- Ed.] has held that issue of shares at premium by the petitioner to its non-resident holding company does not give rise to income in an international transaction. In the circumstance, the application of Chapter X of the Act to such transaction is without jurisdiction. Accordingly, this Court quashed and set aside the order of reference made by the AO to the TPO, the order of the TPO, the draft assessment order under s. 144C(1) of the Act and order dt. 11th Feb., 2014 of the DRP. 5. Since the petitioner challenged the order dt. 29th Jan., 2014 of the TPO and this Court granted interim relief against further proceeding, the matter did not reach the stage of draft assessment order under s. 144C(1) of the Act or the stage of DRP. 6. Learned counsel for the parties agree that the controversy raised in the present petition is squarely covered by the aforesaid judgment dt. 10th Oct., 2014. 7. In the aforesaid judgment, we have inter alia, held that: (i) The sine qua non to apply Chapter X of the Act would be arising of income under the Act out of an international transaction. This income should be chargeable under the Act, before Chapter X can be applied; (ii) The definition of income does not include within its scope capital receipts arising out of capital account transaction unless so specified in s. 2(24) of the Act as income; (iii) There is no charge in the Act to tax amounts received and/or arising on account of issue of shares by an Indian entity to a non-resident entity in ss. 4, 5, 15, 22, 28, 45 and 56 of the Act. This is as it arises out of capital accounts transaction and, therefore, is not income; (iv) Chapter X of the Act does not contain any charging provision but is a machinery provision to arrive at ALP of a transaction between AE; and (v) Chapter X of the Act does not change the character of the receipts but only permits re-qualification of income uninfluenced by the relationship between the AEs.

Decision reasoning: 1[ds]6. Learned counsel for the parties agree that the controversy raised in the present petition is squarely covered by the aforesaid judgment dt. 10th Oct., 2014.7. In the aforesaid judgment, we have inter alia, held that:(i) The sine qua non to apply Chapter X of the Act would be arising of income under the Act out of an international transaction. This income should be chargeable under the Act, before Chapter X can be applied;(ii) The definition of income does not include within its scope capital receipts arising out of capital account transaction unless so specified in s. 2(24) of the Act as income;(iii) There is no charge in the Act to tax amounts received and/or arising on account of issue of shares by an Indian entity to a non-resident entity in ss. 4, 5, 15, 22, 28, 45 and 56 of the Act. This is as it arises out of capital accounts transaction and, therefore, is not income;(iv) Chapter X of the Act does not contain any charging provision but is a machinery provision to arrive at ALP of a transaction between AE; and(v) Chapter X of the Act does not change the character of the receipts but only permits re-qualification of income uninfluenced by the relationship between the AEs.