Sunday, October 12, 2014

Vodafone Transfer Pricing Verdict: High Court Mocks Dept’s ‘Unique’ Interpreta​tion Of Law

Vodafone India Services Pvt. Ltd vs. UOI (Bombay High Court)

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.

Friday, October 10, 2014

Microsoft case - Service provided to Principal situated in Singapore to market products in India - Is Export of Services

In the famous Microsoft case reported by us almost three years ago,due to divergent views of the Members constituting the Division Bench, the following was the difference of opinion framed for decision by the Third Member -
(i) Whether the impugned Business Auxiliary Service of promotion of market in India for foreign principal made in terms of Article 2 and 3 of the Agreement dated 01/07/2005 amounts to export of service considering Article 286 (1) (b) of the Constitution of India read with Apex decisions in the case of State of Kerala and Others Vs. The Cochin Coal Company Ltd. - (1961) 12 STC 1 (SC) , Burmah Shell Oil Storage and Distributing Co, of India Ltd. and Other Vs. Commercial Tax Officers and Others - 2002-TIOL-966-SC-CT-CB and the provisions of Export Service Rules, 2005 as well as Circular No. 141/10/2011 - TRU dated 13.05.2011 issued by CBE & C?
(ii) Whether the impugned Business Auxiliary Service of promotion of market in India for foreign principal made in terms of Article 2 and 3 of the Agreement dated 01/07/2005 was delivered outside India and used thereat and is immune from levy of service tax as export of service in terms of the provisions of Export Service Rules, 2005 read with circulars issued by CBE & C excluding Circular No.141/10/2011 - TRU dated 13.05.2011?
(iii) Whether the impugned Business Auxiliary Service provided in terms of Agreement dated 01/07/2005 is governed by the principles of equivalence and destination based consumption tax as well as law laid down by Apex Court in All India Federation of Tax Practitioners - 2007-TIOL-149-SC-STand Association of Leasing and Financial Services Companies Vs. UOI - 2010-TIOL-87-SC-ST-LB.
(iv) The Appeal in Appeal No. ST-828/2010 without being argued by both sides whether can be said to have involved the issue that output service was exported or conclusion is to be arrived at upon hearing both sides?
(v) Whether demand for the normal period sustains subject to grant of cum-tax benefit and CENVAT Credit?
We had reported this order as - 2011-TIOL-1508-CESTAT-DEL.
The Third Member has passed an order recently.
After hearing lengthy submissions by both sides, the Member (J) inter alia observed that in view of the Majority decision in Paul Merchants Ltd. - 2012-TIOL-1877-CESTAT-DEL it has to be held that services were being exported in terms of Export of Services Rules, 2005 and not liable to Service Tax.
The third Member also observed –
++ Even otherwise also, I find that the disputed service is the service being provided by the appellant to his principal located in Singapore. The marketing operations done by the appellant in India cannot be said to be at the behest of any Indian customer. The service being provided may or may not result in any sales of the product on Indian soil. The transactions and activities between the appellant and Singapore principal company are the disputed activities. As such, the services are being provided by the appellant to Singapore recipient company and to be used by them at Singapore, may be for the purpose of the sale of their product in India, have to be held as export of services.
Noting that in the case of Larsen & Toubro - 2013-TIOL-1458-CESTAT-DEL it is held that a majority decision is Larger Bench decision having the same binding criteria as that of Larger Bench, the Member (J) opined that the majority decision in the case of Paul Merchants is required to be followed.
The third Member also adverted to the decisions in Gap International Sourcing (India) Pvt. Ltd.- 2014-TIOL-465-CESTAT-DEL, Vodafone Essar Cellular Ltd.- 2013-TIOL-566-CESTAT-MUM, Bayer Material Science Pvt. Ltd.- 2014-TIOL-1084-CESTAT-MUM to conclude that Business Auxiliary services provided by the appellant to their principal company located in Singapore is to be considered as export of services.
Observing that the Revenue representative had not brought to notice any decision which is contrary to the law declared in the above referred decisions, the third Member agreed with the findings of the Member (Technical) of the referral Bench.
Inasmuch as the services provided by the appellant are covered by the Export of Service Rules, 2005 and are not liable to service tax is the Majority view.
The Appeal was allowed.
Source: TIOL

Thursday, October 9, 2014

Clarification on Transfer of Employees from STPI/Other Units to SEZ - Sec 10AA (Increased from 20% to 50%)

Dated: October 8, 2014
Subject: Clarification regarding allowability of deduction under section 10A/10AA on transfer of Technical Man-Power in the case of software industry.
CBDT had issued Circular No.12/2014 dated 18th July, 2014 to clarify that mere transfer or re-deployment of existing technical manpower from an existing unit to a new SEZ unit in the first year of commencement of business will not be construed as splitting up or reconstruction of an existing business, provided the number of technical manpower so transferred does not exceed 20 per cent of the total technical manpower actually engaged in developing software at any point of time in the given year in the new unit.
2. Representations have been received stating that the aforesaid limit of 20% is inadequate and restrictive since it impacts the competitiveness of Indian Software Industry in global market in terms of quality of product and delivery time-lines. Global competitiveness can be ensured only when highly skilled and experienced manpower is deployed for software development. Requests have, therefore, been made seeking enhancement of the limit of 20% in line with the recommendation of Rangachary Committee, which was set up to review the taxation of IT Sector and Development Centers.
3. The matter has been re-examined by the Board. In supersession of the Circular No.12/2014 dated 18th July, 2014, It has now been decided that the transfer or re-deployment of technical manpower from existing units(s) to a new unit located in SEZ, in the first year of commencement of business, shall not be construed as splitting up or reconstruction of an existing business, provided the number of technical manpower so transferred as at the end of the financial year does not exceed 50 per cent of the total technical manpower actually engaged in development of software or IT enabled products in the new unit.
4. Further, in the alternative, if the assesses (enterprise) is able to demonstrate that the net addition of the new technical manpower in all units of the assessee (enterprise) is at least equal to the number that represents 50% of the total technical manpower of the new SEZ unit during such previous year, deduction under section 10A/10AA would not be denied provided the other prescribed conditions are also satisfied.
5. For the sake of clarity, it is stated that the assessee will have a choice of complying with any one of the two alternatives given in Paras 3 and 4 above.
6. It is also clarified that this Circular shall be applicable only in the case of assessees engaged in the development of software or in providing IT Enabled Services in SEZ units eligible for deduction u/s 10A or u/s 10AA of the Act.
7. This Circular shall not apply to the assessments which have already been completed Further, no appeal shall be filed by the Department in cases where the issue is decided by an appellate authority in consonance with this Circular.
(Deepshikha Sharma)
Deputy Secretary to the Government of India


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