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IN THE HIGH COURT OF BOMBAY
Mohit S. Shah, C.J. and M.S. Sanklecha, JJ.
Vodafone India Services Pvt. Ltd. – Appellants
Vs.
Union of India – Respondent
Writ Petition No. 871 of 2014
Decided On: 10.10.2014
Whether the issue of equity shares by the Petitioner to its holding company at a premium to the extent the premium is not received under Chapter X of the Act, as income arises in the above International Transaction.
Fact of the Case:
The Petitioner issued 2,89,224 equity shares of a face value of Rs. 10/- each at the premium of Rs. 8,519/- per share to its holding company. This resulted in the Petitioner receiving at the rate of Rs. 8519/- per share a total consideration of Rs. 246.38 crores from its holding company on issue of shares. The Petitioner received an amount of Rs. 86.93 crores on 21 August 2008 and the balance amount of Rs. 159.46 crores on 5 November 2008 from its holding company. The allotment of the 2,89,224 equity shares was made on 5 February 2009.
Finding of the Court:
The Court held that the issue of shares at a premium is a capital account transaction and not income. The classical distinction between income and capital is that which exists between fruits and tree. Income is a flow while capital is a fund. The Privy Council in CIT v/s. Shaw Wallace & Co., Ltd. 6 ITC 178 (PC) has colourfully 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."
Issues: Whether the issue of equity shares by the Petitioner to its holding company at a premium to the extent the premium is not received under Chapter X of the Act, as income arises in the above International Transaction.
Ratio Decidendi: The Court held that the issue of shares at a premium is a capital account transaction and not income. The classical distinction between income and capital is that which exists between fruits and tree. Income is a flow while capital is a fund. The Privy Council in CIT v/s. Shaw Wallace & Co., Ltd. 6 ITC 178 (PC) has colourfully 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."
Final Decision: 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 A.O. 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; (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.
Mohit S. Shah, C.J.
1. At the request of the learned Counsel for both the sides the petition was taken up for final disposal.
2. The Petitioner, Vodafone India Services Pvt. Ltd., is a wholly owned subsidiary of a non-resident company,Vodafone Tele-Services (India) Holdings Limited (the holding company). The Petitioner required funds for its telecommunication services project in India from its holding company during the financial year 2008-09 i.e. Assessment Year (AY) 2009-10. On 21 August 2008, the Petitioner issued 2,89,224 equity shares of the face value of Rs. 10/- each on a premium of Rs. 8,509/- per share to its holding company. This resulted in the Petitioner receiving a total consideration of Rs. 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 Rs. 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 Rs. 53,775/- as against the aforesaid valuation done under the Capital Issues (Control) Act, 1947 at Rs. 8,519/- and on that basis shortfall in premium to the extent of Rs. 45,256/- per share resulted into total shortfall of Rs. 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 Rs. 1308.91 crores is income. Further, as a consequence of the above, this amount of Rs. 1308.91 crores is required to be treated as deemed loan given by the Petitioner to its holding company and periodical interest thereon is to be charged to tax as interest income of Rs. 88.35 crores in the financial year 2008-09 i.e. A. Y. 2009-10.
According to the Petitioner, the Act does not tax inflow of capital into the country so as to impede its coming into India. Nor does the Act create any legal fiction to treat such alleged shortfall in capital receipt on issue of equity shares by an Indian company to its non-resident holding company, as income. The Petitioner also contends that consequently, there could be no question of treating the alleged shortfall as a deemed loan or taxing the alleged deemed interest on a deemed loan. The Petitioner has, therefore, moved this Court under Article 226 of the Constitution of India challenging the jurisdiction of the respondent-authorities to tax an International Transaction such as the present one which has not generated any income as defined under the Act. In short, the Petitioner's contention is that absent income arising from an International Transaction, Chapter X of the Act has no application. The Assessment Year involved in this proceeding is A.Y. 2009-10.
3. This petition is a sequel to the order dated 29 November 2013 passed by this Court in Writ Petition No. 1877 of 2013 (Vodafone-III) filed by the present Petitioner. In Vodafone-III, the challenge by the Petitioner was to the order dated 28 January 2013 of the TPO passed in terms of Section 92CA of the Act and the consequent draft assessment order dated 22 March 2013 passed by the AO in terms of Section 143(3) read with Section 144(C)(1)of the Act, relating to A.Y. 2009-10.
4. The basis of the challenge in Vodafone-III was that the issue of equity shares by the Petitioner to its holding company did not give rise to any income from International Transaction, so as to attract the provisions of Chapter X of the Act. This on the ground that arising of income on account of International Transaction is a condition precedent for application of Chapter X of the Act. Thus, it was a jurisdictional issue. However, the jurisdictional issue was neither determined by the TPO or the AO in spite of the
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