No income means no international transaction.

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 trade.

There is no charge express or implied, in a letter or spirit to the tax issue of shares at a premium as income. In this case, the revenue seems to be confusing the action to a charge and calling the measure a hypothetical income. We find that there is the absence of any charge in the Act to the subject issue of shares at a premium to tax, was the decision of the Mumbai high court.

The decision by the bench comes as a boost not only to Vodafone but will directly help Shell India which has related issues pending in court, It would also help several other multinationals which have Indian subsidiaries whose capital financing transactions, the Income Tax authorities are bringing under an income scanner.

Victory for Vodafone
On the transfer pricing issue it is a pleasant conclusion as the deal of issue of shares by Vodafone was nothing but a capital account transaction, and consequently the share premium, if any, ought to be capital receipt.

The transfer pricing provisions permit the operation to be re-quantified but not to be re-characterized. Hence, there was no question of the operation resulting in 'income' taxable in India. The judgment will not only serve as a precedent in the legal arena but will also lend the much-needed boost to foreign investors.

The verdict not only spells victory for Vodafone but also holds hope for other companies that are facing a similar dispute. One has to wait and see whether the tax department accepts this order or decides to appeal before the Supreme Court.

Equity was not recharacterized as a loan
The tax department sought to bring the operation of issue of share capital within the transfer pricing ambit. It held that the differential between the price at which shares were issued by Vodafone India and the valuation done by the tax office to be in the nature of a loan to the Mauritius-based parent company. In other words, equity was recharacterized as a loan. The tax office raised a demand of around Rs 3,200 crores.

In a victory for Vodafone, the Bombay high court on Friday allowed a petition filed by the cellular service major challenging the order of an Income Tax authority in a transfer pricing case which held that issuance of shares in a capital financial transaction could be considered taxable income. The HC held that it could not be considered income.

There was a shortfall of about Rs 1,300 crore; the IT department had suggested and said such under-pricing would amount to transfer of benefit and hence arm’s length pricing could be determined for such stock transfers.

No question of any transfer pricing adjustment
Vodafone had challenged the order initially of the transfer pricing officer. Last November the HC had directed the Dispute Resolution Panel of the Income Tax department to decide the preliminary question of its jurisdiction in the matter. Now when the panel upheld the order of the transfer pricing officer, Vodafone came back to HC again against the government and Income Tax department.

For the purpose of application of transfer pricing rules, one of the prerequisites is that there must be an international transaction between associated enterprises (Vodafone India and the Mauritius Company in this case).

Vodafone said in a statement on Friday that the company "has maintained consistently throughout the legal proceedings that this transaction was not taxable. We welcome the decision today in the Bombay high court".

Shell and two Essar Group companies are among several other MNCs contesting similar transfer pricing cases.

Source. The Times of India
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