The Union Cabinet decided not to file SLP against the order of the Bombay High Court in the case of Vodafone India Services Private Limited (VISPL) dated 10.10.2014.   

Facts of the case:

VISPL is a wholly owned subsidiary of a non-resident company, Vodafone Tele-Services (India) Holdings Limited, Mauritius. VISPL issued shares at a premium of Rs.8509 on 21.8.2008. A total consideration of Rs.246.39 crore was received by VISPL from Vodafone Mauritius, on issue of shares. VISPL reported it as an “International Transaction”. VISPL showed it as “Capital Receipts” in the books of accounts and stated that this transaction does not affect its income.

 

The Arm’s Length Price of the issued shares was determined by the Transfer Pricing Officer (TPO) on the basis of Net Asset Value. TPO determined the value at at Rs.53,775/- per share. An upward adjustment of Rs.1,308.91 crore was made. The TPO considered the difference of Rs.1,308.91 crore between the transaction price and the Arm’s Length Price as ‘deemed loan’ given by VISPL to the holding company. The interest on the loan in an arm’s length transaction was computed at Rs.88.35 crore. For Assessment Year 2009-10, transfer pricing adjustment of Rs.1,397.26 crore was proposed by the TPO.

Aggrieved by the Draft Assessment Order, the assessee(VISPL) went to DRP. The DRP in his order dated 11.02.2014 stated that the premium, to the extent not received, shall be considered as income of the assessee.

VISPL filed a 2nd Writ Petition in the High Court of Bombay.

 

It was held that:

The High Court on 10.10.2014, highlighted the provision of Section 92 of the Income Tax Act, 1961:

where two or more AEs enter into an arrangement whereby they receive a 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.

In simple words it mean that:

Not only the income from an international transaction is to be computed as per arm’s length price but also any expense or cost to be incurred in an international transaction in connection with a benefit or service or facility to be provided will be computed as per arm’s length price.

The amount received on issue of shares is a capital receipt. It shall not be brought within the definition of Income, except in cases covered by Section 56(2)(viib) of the Act.

As per Section 56(2)(viib), consideration received in excess of FMV of shares issued by a closely held company to be treated as income of such company, where shares are issued at a premium.

The tax can be charged only on income. In the absence of any income arising, the issue of applying the measure of Arm’s Length Pricing to transactional value/ consideration itself does not arise.

Thus, the issue of shares at a premium is a Capital account transaction and does not result in income to the issuing company. ALP is computed when income arises in case of an International transaction between AEs. In the given case, issuing of shares at premium, consideration received is a capital account transaction. Henc, ALP shall not be computed of such transaction.

The Bombay High Court held the case in the favor of the assessee.

The said order is accepted by the Union Cabinet and thus, decided not to file SLP before the Supreme Court. This will bring clarity to the tax authorities and also to the taxpayers. Ultimately, this will reduce the litigations on similar issues.

Now, the foreign investors will have a clear picture about the transfer pricing adjustments regarding issue of shares. Thus, such decision will surely increase the foreign investments in the country.

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