2014 (12) TMI 58 - HC - Income Tax

Applicability of Chapter X - Issue of equity shares to AE Conversion of preference shares into equity shares held by AE Held that - Following the decision in Vodafone India Services Pvt. Ltd. Versus Union of India, Addl. Commissioner of Income Tax, Dy. Commmissioner of Income Tax 2014 (10) TMI 278 - BOMBAY HIGH COURT - there is a short fall in the amounts received on issue of equity shares and conversion of Preference shares into equity shares when benchmarked against the Arm s Length Price (ALP) to be received on issue and conversion - This short fall is characterized as income arising from International Transactions and is being subjected to tax for Assessment Year 2010-11 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 order of the Tribunal is upheld Decided against assessee.

Summary

Issues:
1. Whether the issue of equity shares to non-resident Associated Enterprises and the conversion of preference shares into equity shares would attract the provisions of Chapter X of the Income Tax Act, 1961 for A.Y. 2010-11.

Analysis:
The High Court of Bombay, in a judgment delivered by M. S. Sanklecha and S.C. Gupte, JJ., addressed the issue concerning the taxation implications of issuing equity shares to non-resident Associated Enterprises and converting preference shares into equity shares for the assessment year 2010-11 under the Income Tax Act, 1961. The Court noted that the matter was previously settled in favor of the petitioner in the case of Vodafone India Services Pvt. Ltd. vs. Union of India, commonly known as Vodafone IV. The petition challenged the order of the Transfer Pricing Officer and the Draft Assessment Order, which alleged a shortfall in the amounts received on the issue and conversion of shares compared to the Arms Length Price (ALP), treating the shortfall as income from International Transactions subject to tax.

The petitioner had also raised objections to the draft assessment order before the Dispute Resolution Panel (DRP), with a scheduled hearing on the objections set for November 24, 2014. Despite the pending objections, the Court found no reason to entertain the petition, emphasizing that the DRP would decide the objections based on the agreed position between the parties. The agreed position stated that no income would arise from issuing equity shares to non-resident shareholders or converting preference shares into equity shares, aligning with the precedent set in Vodafone IV.

In conclusion, the Court disposed of the petition with directions for the DRP to consider the agreed position and make a decision accordingly, without imposing any costs on either party. The judgment reaffirmed the applicability of the Vodafone IV decision in determining the tax implications of issuing equity shares and converting preference shares for non-resident Associated Enterprises, providing clarity on the tax treatment for the petitioner in the present case.