Case: Vodafone India Services Private Limited Vs. Union of India

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 of the Act. We can do no better than refer to the following observations of the five Member Bench of the Apex Court in CIT v. Vatika Township (P.) Ltd. [2011] 49 taxmann.com 249:—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 Billings v. U. S, the Supreme Court clearly acknowledged this basic and long-standing rule of statutory construction:Tax Statutes …. should be construed, and, if any ambiguity be found to exist, it must be resolved in favour of the citizen. Eidman v. Martinez 184 U.S. 578, 583; …Again in Unites States v. Merriam, the Supreme Court clearly stated at pages 187-88:"On behalf of the Government it is urged that taxation is a practical matter and concerns itself with the substance of the thing upon which the tax is imposed, rather than with legal forms or expressions. But, 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. Gould v. Gould 245 U.S. 151, 153."As Lord Cairns said many years ago in Partington v. Attorney-General: As I understand the principle of all fiscal legislation it is this: If the person sought to be taxed comes within the letter of the law he must be taxed, however, great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.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.45. 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 A.E. 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.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. B.C. Srinivasa Shetti [1981] 128 ITR 294 /5 taxmann.com 1, "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 occasion to invoke the computation provisions does not arise. We, therefore, find no substance in the aforesaid submission made on behalf of the Revenue.47. During the course of 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, we see no reason to examine the issue.48. Before parting, we may point out that 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.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]24. A plain reading of Section 92(1) of the Act very clearly brings out that income arising from a International Transaction is a condition precedent for application of Chapter X of the Act. This has already been so held by the order dated 29 November 2013 of this Court inBut we have examined the issue afresh. The word income for the purpose of the Act has a well understood meaning as defined in Section 2(24) of the Act. This even when the definition in Section 2(24) of the Act is an inclusive definition. It cannot be disputed that income will not in its normal meaning include capital receipts unless it is so specified, as in Section 2(24) (vi) of the Act. In such a case, 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. 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. 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 ai.e. premium allegedly not received on application of ALP. Therefore, absent express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as Income. This is settled by the decision of this Court in Cadell Weaving Mill Co. v. CIT [2011] 249 ITR 265/116 Taxman 77   was upheld by the Apex Court in CIT v. D.P Sandu Bros. Chember (P.) Ltd. [2005] 273 ITR 1  /142 Taxman 713  .We shall now consider the submissions on behalf of the Revenue in the context of the statutory provisions. At one point of time we were toying with the idea of only dealing with the new grounds in support of the impugned order, as canvassed before us by the learned Solicitor General. This was for the reason that the revenue itself did not adopt the basis/grounds found in the impugned order viz. the short receipt of share premium being sufficient justification to invoke Section 92(1) in Chapter X of the Act. The ground found in the impugned order was substituted/replaced at the hearing with a new ground viz: benefit given by the Petitioner to its holding company on application of Section 92(2) of the Act. However, on further consideration to comprehensively dispose of the proceedings, we decided to deal with both i.e. the grounds found in the impugned order as well as the reasons/grounds urged in support of the impugned conclusions by the learned Solicitor General at the hearing before us, as submissions made in the alternative.27.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 theAct. The contention has to be stated to be rejected. Mr. Salve rightly submitted that ex abundanti cautela, the Petitioner had submitted Form 3CEB and informed theabout the International 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 inby 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.e 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 theAct. The contention has to be stated to be rejected. Mr. Salve rightly submitted that ex abundanti cautela, the Petitioner had submitted Form 3CEB and informed thet the International 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 inby 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.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 92B of the Act for the purposes of Chapter X of the Act, the words Income has not been defined. Thereafter, the impugned 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 Section 92B of the Act.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 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. 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 aof taxation. 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.33. Before dealing with the submissions advanced by the learned Solicitor General in his reply, to support the impugned order on grounds different from those found therein, it would be necessary to note that taxing of premium not received as the ground in the impugned order is given up and the jurisdiction to tax a transaction of issue of shares is on the basis of benefit given to the holding company. The basis/justification of the impugned order is based upon Section 92(1) of the Act, while beforeus the learned Solicitor General places reliance upon Section 92(2) read with 92(1) of the Act to subject the transaction to tax on the basis of the cost of the benefit passed.Therefore, many of the decisions cited by the Petitioner in its opening submissions are no longer relevant and therefore, not dealt with in this order.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. 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.36. Be that as it may, Section 92(2) of the Act deals with a situation where two or more AEs 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. Thus, to illustrate, the cost of research carried on by an AE for the benefit of three AEs, 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. Therefore, we find no substance in the above submission.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 Act. 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. 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. 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.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)(viib) 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 Revenues case is that the issue price of equity share is below the fair market value of the shares issued to aThus Parliament has consciously not brought to tax amounts received from afor 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.42.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 whicharises. As pointed out above, the issue of shares at a premium is on Capital Account and gives rise to no income. The submission on behalf of the revenue that theshortfall in theALP as computed for the purposes of Chapter X of the Act give rise to income is misplaced. The ALP is meant to determine the real value of the transaction entered into between AEs. It is aexercise to be carried out only when income arises in case of an International transaction between AEs. It does not warrantof a consideration received/given on capital account. It permitsof 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. This is not the revenues 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 thecan 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. Theto 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 of the Act.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 A.E. 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.46.It was next submitted that the machinery Section of the Act cannot be readg 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. B.C. Srinivasa Shetti [1981] 128 ITR 294  /5 taxmann.com 1, "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 athen the occasion to invoke the computation provisions does not arise. We, therefore, find no substance in the aforesaid submission made on behalf of the Revenue.47. During the course of 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, we see no reason to examine the issue.48. Before parting, we may point out that 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 patentof the impugned order. The preliminary objection, not raised at the hearing, is, completely devoid of any substance.