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2014 (11) TMI 897 - HC - Income TaxJurisdiction of the revenue to bring to tax amounts received on capital account namely issue of equity shares to its non-resident Associated Enterprises Held that - Following the decision in Vodafone Services Pvt. Ltd. v. Union of India 2014 (11) TMI 881 - BOMBAY HIGH COURT wherein it has been held that the sine-qua-non to apply Chapter X of the Act would be arising of Income under the Act out of an International Transaction -This income should be chargeable under the Act, before Chapter X can be applied - the definition of income does not include within its scope capital receipts arising out of capital account transaction unless so specified in Section 2(24) of the Act as income - there is no charge in the Act to tax amounts received and/or arising on account of issue of shares by an Indian entity to a nonresident entity in Sections 4,5,15,22,28,45 and 56 of the Act - This is as it arises out of Capital Accounts transaction and, therefore, is not income - Chapter X of the Act does not contain any charging provision but is a machinery provision to arrive at ALP of a transaction between Associated Enterprises; and Chapter X of the Act does not change the character of the receipts but only permits re-quantification of income uninfluenced by the relationship between the Associated Enterprises. Revenue does not dispute the fact that the issue with regard to chargeability to tax in respect of amounts not received on issue of shares to non-resident AE's being on capital account - the distinction sought to be made on the ground of alternative remedy is not such as to warrant not entertaining the petition - The fact that the assessee chose not to declare issue of shares to its non-resident AE's in Form 3CEB as in its understanding it fell outside the scope of Chapter X of the Act - If the assessee did not file a particular transaction in Form 3CEB when so required to be filed, the consequences of the same as provided in the Act would follow - the mere not filing of Form 3CEB on the part of the assessee would not give jurisdiction to the revenue to tax an amount which it does not have jurisdiction to tax. Even if it is assumed that it is an International Transaction, the jurisdictional requirement for Chapter X of the Act to be applicable is that Income must arise - the jurisdictional requirement for application of Chapter X of the Act is not satisfied thus, the order of the TPO is set aside to the extent it holds that ALP of issue of equity shares is ₹ 183.44 per share as against ₹ 10 per share and deemed interest brought to tax on the amount not received when benchmarked to the ALP Decided partly in favour of assessee.
Issues Involved:
1. Jurisdiction of the revenue to tax amounts received on capital account under Chapter X of the Income Tax Act. 2. Applicability of the decision in Vodafone India Services Pvt. Ltd. v. Union of India (Vodafone-IV) to the present case. 3. Alternative remedy available to the petitioner. 4. Non-disclosure of the transaction in Form 3CEB. 5. Variation in shareholding pattern and its implications under Section 92B of the Act. Detailed Analysis: 1. Jurisdiction of the Revenue to Tax Amounts Received on Capital Account: The petitioner challenged the jurisdiction of the revenue to tax amounts received on capital account, specifically the issue of equity shares to its non-resident Associated Enterprises (AEs), under Chapter X of the Income Tax Act. The petitioner argued that the transaction did not give rise to any income and thus fell outside the scope of Chapter X. The Court referenced the Vodafone IV case, which established that Chapter X applies only when income arises out of an international transaction and is chargeable under the Act. The Court ruled in favor of the petitioner, setting aside the Transfer Pricing Officer's (TPO) order that had revalued the shares and imposed additional tax. 2. Applicability of Vodafone IV Decision: The Court acknowledged that the issue at hand was covered by the Vodafone IV decision, which held that capital receipts arising from capital account transactions are not income and thus not taxable under Chapter X. The Court reiterated that Chapter X is a machinery provision for determining the Arm's Length Price (ALP) and does not contain any charging provision. The Court found no reason to deviate from this precedent and applied it to the present case. 3. Alternative Remedy Available to the Petitioner: The revenue argued that the petitioner had an alternative remedy by raising objections before the Dispute Resolution Panel (DRP). However, the petitioner undertook to withdraw its objections from the DRP, which the Court accepted. The Court noted that directing the petitioner to pursue the DRP would serve no useful purpose, as the issue was already settled by the Vodafone IV decision. 4. Non-Disclosure of the Transaction in Form 3CEB: The revenue contended that the petitioner failed to disclose the transaction of issuing shares to its non-resident AEs in Form 3CEB, which should disqualify them from relief. The Court found this argument inconsistent with the revenue's stance in Vodafone IV, where the disclosure of the transaction was used to argue jurisdiction. The Court held that the non-disclosure did not grant the revenue jurisdiction to tax an amount it otherwise had no jurisdiction to tax. 5. Variation in Shareholding Pattern: The revenue argued that the variation in shareholding among the petitioner's AEs constituted an international transaction under Section 92B of the Act, which includes restructuring or reorganization. The petitioner countered that there was no restructuring, only a change in shareholding. The Court did not delve deeply into this issue, stating that even if it were considered an international transaction, no income had arisen, and thus Chapter X did not apply. Conclusion: The Court set aside the TPO's order that revalued the shares and imposed additional tax, as well as the draft assessment order that followed. The Court ruled that the jurisdictional requirement for applying Chapter X was not satisfied, as no income had arisen from the transaction. The petitioner's objections before the DRP, except for the jurisdictional issue covered by this order, would be considered on their merits. Rule was made absolute in these terms.
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