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Neither
the capital receipts received by the Petitioner on issue of equity shares to
its holding company, a non-resident entity, nor the alleged 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.
The
assessee, an Indian company, issued equity shares at the premium of Rs.8591
per share aggregating Rs.246.38 crores to its holding company. Though the
transaction was reported as an “international transaction” in Form 3 CEB, the
assessee claimed that the transfer pricing provisions did not apply as there
was no income arising to it. The AO referred the issue to the TPO without
dealing with the preliminary objection. The TPO held that he could not go
into the issue whether income had arisen or not because his jurisdiction was
limited to determine the ALP. He held that the assessee ought to have charged
the NAV of the share (Rs. 53,775) and that the difference between the NAV and
the issue price was a deemed loan from the assessee to the holding company
for which the assessee ought to have received 13.5% interest. He accordingly
computed the adjustment for the shares premium at Rs. 1308 crore and the
interest thereon at Rs. 88 crore. The AO passed a draft assessment order u/s
144C(1) in which he held that he was bound u/s 92-CA(4) with the TPO’s
determination and could not consider the contention whether the transfer
pricing provisions applied. The assessee filed a Writ Petition challenging
the jurisdiction of the TPO/AO to make the adjustment. The High Court
directed the DRP to decide the assessee’s objection regarding chargeability
of alleged shortfall in share premium as a preliminary issue. Upon the DRP’s
decision, the assessee filed another Writ Petition. HELD by the High Court
allowing the Petition:
(1)
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.
(2)
The word income for the purpose of the Act has a well understood meaning as
defined in s. 2(24) of the Act. 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 u/s 56(2)(viib) of the Act
and the same is enumerated as Income in s. 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 a non-resident i.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 (Cadell Weaving Mill Co. vs. CIT 249 ITR 265 approved in CIT vs. D.P. Sandu Bros 273 ITR 1 followed);
(3)
In case of taxing statutes, in the absence of the provision by itself being
susceptible to two or more meanings, it is not permissible to forgo the
strict rules of interpretation while construing it. It was not open to the
DRP to seek aid of the supposed intent of the Legislature to give a wider
meaning to the word ‘Income';
(4)
The other basis in the impugned order, namely that as a consequence of under
valuation of shares, there is an impact on potential income and 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.
(5)
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 a subject-matter of
taxation;
(6)
The department’s method of interpretation 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.
(7)
In tax jurisprudence, it is well settled that following four factors are
essential ingredients to a taxing statute:- (a) subject of tax; (b) person
liable to pay the tax; (c) rate at which tax is to be paid, and (d) measure
or value on which the rate is to be applied. Thus, there is difference
between a charge to tax and the measure of tax (a) & (d) above;
(8)
The contention 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 is not acceptable
because 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.
(9)
W.e.f. 1 April 2013, the definition of income u/s 2(24)(xvi) includes within
its scope the provisions of s. 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.
(10)
Consequently, the 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. Thus, no occasion to apply Chapter X of the Act
can arise in such a case.
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