The Union Cabinet, chaired by the Prime Minister Shri Narendra Modi, in a major decision, has decided to accept the order of the High Court of Bombay in the case of Vodafone India Services Private Limited (VISPL) dated 10.10.2014. This is a major correction of a tax matter which has adversely affected investor sentiment.
Based on the opinion of Chief Commissioner of Income-tax (International Taxation), Chairperson (CBDT) and the Attorney General of India, the Cabinet decided to:
i. accept the order of the High Court of Bombay in WP No. 871 of 2014, dated 10.10.2014; and not to file SLP against it before the Supreme Court of India;
ii. accept of orders of Courts/ IT AT/ DRP in cases of other taxpayers where similar transfer pricing adjustments have been made and the Courts/ IT AT/ DRP have decided/decide in favour of the taxpayer.
The Cabinet decision will bring greater clarity and predictability for taxpayers as well as tax authorities, thereby facilitating tax compliance and reducing litigation on similar issues. This will also set at rest the uncertainty prevailing in the minds of foreign investors and taxpayers in respect of possible transfer pricing adjustments in India on transactions related to issuance of shares, and thereby improve the investment climate in the country.
The Cabinet came to this view as this is a transaction on the capital account and there is no income to be chargeable to tax. So applying any pricing formula is irrelevant.
VISPL is a wholly owned subsidiary of a non-resident company, Vodafone Tele-Services (India) Holdings Limited, Mauritius. On 21.8.2008, VISPL issued shares (at a premium of Rs.8509/-) which resulted in VISPL receiving a total consideration of Rs.246.39 crore from Vodafone Mauritius, on issue of shares and this was shown as "Capital Receipts" in the books of accounts. VISPL reported this transaction as an "International Transaction" and stated that this transaction does not affect its income.
The Transfer Pricing Officer (TPO), vide order dated 28.01.2013, determined the Arm's Length Price of the shares issued by VISPL on the basis of Net Asset Value, at Rs.53,775/- per share and made an upward adjustment of Rs.1,308.91 crore. In addition, the difference Rs.1,308.91 crore between the transaction price and the Arm's Length Price was treated as 'deemed loan' given by VISPL to the holding company; and interest that would have been payable on the loan in an arm's length transaction was computed at Rs.88.35 crore. In total, transfer pricing adjustment of Rs.1,397.26 crore was proposed by the TPO for Assessment Year 2009-10. The matter was agitated by VISPL at the stage of Draft AO itself and therefore the tax payable could not be crystallized. However, the tax rate of 33 percent was applicable for Assessment Year 2009-10.
The DRP, on 11.2.2014, held that the premium determined by the TPO, to the extent not received, is an income arising from issue of shares, and that the AO and the TPO have jurisdiction.
VISPL filed a 2nd Writ Petition in the High Court of Bombay. The High Court, on 10.10.2014, has amongst other things observed:
a) "Section 92(2) of the Act deals with a situation where two or more AEs enter into an arrangement whereby they receive a benefit, service or facility then the allocation, apportionment or contribution towards the cost or expenditure is to be determined in respect of each AE having regard to ALP. It would have no application in the cases like the present one, where there is no occasion to, allocate, apportion or contribute any cost and/ or expenses between the Petitioner and the holding company."
b) The crucial words “shall be chargeable to income tax” which are found in Section 42(2) of the 1922 Act are absent in Chapter X of the Act..... Therefore it is clear that the deemed income which was charged to tax under Section 42(2) of 1922 Act was done away with under this Act."
c) The tax can be charged only on income and in the absence of any income arising, the issue of applying the measure of Arm's Length Pricing to transactional value/ consideration itself does not arise."
d) If its income which is chargeable to tax, under the normal provisions of the Act, then alone Chapter X of the Act could be invoked. Sections 4 and 5 of the Act brings /charges to tax total income of the previous year. This would take us to the meaning of the word income under the Act as defined in Section 2 (24) of the Act. The amount received on issue of shares is admittedly a capital account transaction not separately brought within the definition of Income, except in cases covered by Section 56(2)(viib) of the Act. Thus such capital account cannot be brought to tax as already discussed herein above while considering the challenge to the grounds as mentioned in impugned order."
e) The issue of shares at a premium is on Capital account and gives rise to no income. The submission on behalf of the revenue that the shortfall in the ALP as computed for the purposes of Chapter X of the Act is misplaced. The ALP is meant to determine the real value of the transaction entered into between AEs. It is a re-computation exercise to be carried out only when income arises in case of an International transaction between AEs. It does not warrant re-computation of a consideration received / given on capital account.
The Bombay High Court quashed the reference dated 11.7.2011 by the AO to the TPO, order dated 28.1.2013 of the TPO, draft AO dated 22.3.2013 of the AO and order dated 11.2.2014 of the DRP on the preliminary issue of jurisdiction to tax, setting them aside as being without jurisdiction, null and void.
Acceptance of the Order of the High Court of Bombay in the case of Vodafone India Services Private Limited
Written By Views maker on Saturday, January 31, 2015 | 2:31 AM
Vodafone judgement
Written By Views maker on Thursday, January 26, 2012 | 10:41 PM
The recent supreme court judgement in Vodafone case has laid down some important guidelines to decide tax evasion and colourable device adopted in tax evasion. The judgement has been praised and applauded by many imminent lawyers <<<read more on analysis of judgement>>>
Purchase of peace cannot escape the penalty under section 217(1)(c) of the Income Tax
Written By Views maker on Tuesday, July 12, 2011 | 11:00 PM
Senthamarai Constructions v CIT
High Court of Madras
ITA No. 178 to 180 of 2005 and TCMP Nos. 138 to 140 of 2005
Decided on: 20 June 2011
Judgment
Chitra Venkataraman, J
1. These three Tax Case Appeals are filed by the assessee as against the order of the Tribunal relating to the assessment years 1990-91, 1991-92 and 1992-93 raising the following questions of law:
“1. Whether in the facts and circumstances of the case the Tribunal was right in holding that the revised return filed by the asessee to purchase peace and avoid litigation would amount to concealment in the instant case attracting penalty under section 217(1)(c) of the Income Tax?
2.(a) Whether on the facts and in the circumstances of the case the Tribunal is right in law in holding that the revised return filed by the assessee would constitute a valid, legal and proper basis for levy of penalty under section 271(1)(c) of the Act, particularly since the assessment was based only on the said return and not on any evidence or material on record, justifying the assessment of the income, in respect of which the penalty was levied.
(b) Whether on the facts and in the circumstances of the case the Tribunal was right in its view that a mere admission by the assessee establishes concealment, Authority regarding the discharge of the burden of proof in respect of the Explanation to section 271 or any specific finding in this regard in the order of penalty?
(c) Whether on the facts and in the circumstances of the case, the Tribunal is right in confirming the levy of penalty under section 271(1)(c) of the Act?”
2. It is seen from the facts projected herein that the assessee is a registered firm consisting of three partners. In respect of the assessment year 1990-91, the assessee filed its return originally admitting a total income of Rs.1,45,830/-; for the assessment year 1991-92 Rs.1,56,189/- and for the assessment year 1992-93, the assessee did not file any return. There was a search in the premises of one R.Sonai, who happens to be the Managing Partner of the assessee company, on 27.3.1992. The search resulted in the seizure of bank deposits and jewellery. The Managing Partner R.Sonai admitted that the unexplained investments were out of the undisclosed income of the firm. Following this, a revised return was filed in respect of the first two assessment years and for the third year, the firm filed a return admitting the total income. The assessee offered the income, which was stated to be undisclosed income of the firm to be distributed among the above said three assessment years. After completing the assessment, proceedings were initiated to levy penalty under section 271(1)(c) of the Income Tax Act. The assessee stated that it offered to agree the income only to purchase peace from the Department. As such, there was no wilful concealment at all warranting levy of penalty under section 271(1)(c) of the Income Tax Act. Taking the view that the assessee had admitted the income as undisclosed and it was made use to make undisclosed investments by the Managing Partner, the Assessing Authority levied minimum penalty of Rs.60,000/- for the assessment year 1990-91 as against the maximum penalty leviable at Rs.1,52,500/-; Rs.1,00,000/- for the assessment year 1991-92 as against the maximum penalty of Rs.2,70,000/- and for the last assessment year 1992-93 Rs.1,75,000/- as against the maximum penalty of Rs.4,74,708/-.
3. The assessee preferred appeals before the Commissioner of Income Tax (Appeals), who agreed with the view of the assessee and by following the decision of the Supreme Court in the case of Sir Sadilal Sugar and General Mills Ltd. and another v CIT reported in 168 ITR 705 (SC), held that when the assessee had offered the income voluntarily, penalty could not be levied on the assessee. Thus, in respect of all the three assessment years, the Commissioner of Income Tax (Appeals) cancelled the levy of penalty. As against this order, the Revenue went on appeal before the Income Tax Appellate Tribunal.
4. It is seen from the order of the Tribunal that by a common order, it considered the claim of the assessee that there was no wilfulness as regards the offering of an additional income at the hands of the assessee; that the same was offered only to purchase peace and hence, in the circumstances, the assessee contended that the question of levy of penalty did not arise. The Tribunal, however, rejected the claim of the assessee by following the decision of this Court reported in (2000) 244 ITR 510 (P.Govindaswamy v CIT), where under similar circumstances following the decision of the Supreme Court in the case of K.P.Madhusudhanan v CIT reported in (2001) 251 ITR 99, this Court confirmed the levy of penalty. The Tribunal held that in view of the introduction of Explanation to section 271(1)(c) of the Income Tax Act, the reliance placed by the assessee as regards the decision reported in (2001) 251 ITR 9 (CIT V. Suresh Chandra Mittal) is no longer sustainable in law.
5. The Tribunal pointed out that after the decision of the Supreme Court in the case of K.P.Madhusudhanan v CIT reported in (2001) 251 ITR 99 and with the introduction of Explanation to section 271(1)(c) of the Income Tax Act, the decision reported in 168 ITR 705 (SC) (Sir Sadilal Sugar and General Mills Ltd. and another v CIT), has no relevance to the case on hand. Thus the Tribunal allowed the appeals filed by the Revenue, thereby restored the order of penalty made by the Assessing Officer. Aggrieved by the same, the present appeals have been filed by the assessee.
6. Learned counsel appearing for the assessee pointed out that when the assessee had voluntarily offered the income of the firm, in the absence of any wilfulness in not disclosing the same, the question of levy of penalty did not arise. She pointed out that there was no concealment as such as had been viewed by the assessing authority and as confirmed by the Tribunal.
7. Per contra, learned standing counsel appearing for the Revenue brought to our attention the decisions of this Court reported in 283 ITR 254 (M.S.Mohammed Marzook (Late) and another v Income Tax Officer); 292 ITR 585 (M.Shahul Hameed Batcha v Income Tax Officer) and 283 ITR 230 (M.Sajjanraj Nahar v Commissioner of Income Tax), to which one of us was a party, wherein this Court had elaborately considered the case law on the subject and pointed out to the decision in the case of K.P.Madhusudhanan v CIT reported in (2001) 251 ITR 99, rendered after the introduction of Explanation to Section 271(1)(c) of the Income Tax Act and this Court held that when the concealment of the income was with reference to the original return and there was no explanation at all as regards the non-disclosure, the mere claim that the income was offered in the revised return, as a matter of purchasing peace, by itself, would not exonerate the assessee from the culpability. Having regard to the fact that the assessee had not disclosed any reason for the omission in the original return and that the revised return was filed only after the search, this Court held that penalty was leviable.
8. The facts herein are no different from the above said decision. As seen from the narration in the order of the Tribunal as well as that of the other authorities, the assessee filed the revised return in respect of the first two assessment years and filed the return for the first time for the last of the assessment year only after search in the Managing Partner’s residence, wherein undisclosed cash and investments were found. The conduct of the assessee, hence, assumes significance in coming forward to disclose the income of the firm, which are relatable to the investments made by the Managing Partner.
9. As rightly pointed out by the learned standing counsel appearing for the Revenue that when there is no satisfactory explanation as regards its non-disclosure of the income in the original return and that the undisclosed income came to be shown only in the revised return, rightly the Tribunal applied the law as declared by the Apex Court and by this Court.
10. In the circumstances, we do not find any justification to cancel the penalty levied by the Assessing Officer, which is admittedly a minimum penalty. Accordingly, all the appeals fail and the same are dismissed. No costs. Consequently, T.C.M.P.Nos.138 to 140 of 2005 are also dismissed.
Revised Monetary limits for Income tax appeals
Written By Views maker on Thursday, June 9, 2011 | 12:06 AM
INSTRUCTION NO. 3/2011 [F. NO. 279/MISC. 142/2007-ITJ], DATED 9-2-2011
Reference is Invited to Board’s instruction No. 5/2008 dated 15-5-2008 wherein monetary limits and other conditions for filing departmental appeals (In Income-tax matters) before Appellate Tribunal, High Courts and Supreme Court were specified.
2. In supersession of the above instruction, it has been decided by the Board that departmental appeals may be filed on merits before Appellate Tribunal, High Courts and Supreme Court keeping in view the monetary limits and conditions specified below.
3. Henceforth appeals shall not be filed in cases where the tax effect does not exceed the monetary limits given hereunder:—
S. No.
Appeals in Income-tax matters
Monetary Limit (In Rs.)
1.
Appeal before Appellate Tribunal
3,00,000
2.
Appeal u/s 260A before High Court
10,00,000
3.
Appeal before Supreme Court
25,00,000
It is clarified that an appeal should not be filed merely because the tax effect in a case exceeds the monetary limits prescribed above. Filing of appeal in such cases is to be decided on merits of the case.
4. For this purpose, “tax effect” means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issues against which appeal is intended to be filed (hereinafter referred to as “disputed Issues”). However the tax will not include any interest thereon, except where chargeability of interest itself is in dispute. In case the chargeability of interest is the issue under dispute, the amount of interest shall be the tax effect. In cases where returned loss is reduced or assessed as income, the tax effect would include notional tax on disputed additions. In case of penalty orders, the tax effect will mean quantum of penalty deleted or reduced in the order to be appealed against.
5. The Assessing Officer shall calculate the tax effect separately for every assessment year in respect of the disputed issues in the case of every assessee. If, in the case of an assessee, the disputed issues arise in more than one assessment year, appeal, can be filed in respect of such assessment year or years in which the tax effect in respect of the disputed issues exceeds the monetary limit specified in para 3. No appeal shall be filed in respect of an assessment year or years in which the tax effect is less than the monetary limit specified in para 3. In other words, henceforth, appeals can be filed only with reference to the tax effect in the relevant assessment year. However, in case of a composite order of any High Court or appellate authority, which involves more than one assessment year and common issues in more than one assessment year, appeal shall be filed in respect of all such assessment years even if the ‘tax effect’ is less than the prescribed monetary limits in any of the year(s), if it is decided to file appeal in respect of the year(s) in which ‘tax effect’ exceeds the monetary limit prescribed. In case where a composite order/judgment involves more than one assessee, each assessee shall be dealt with separately.
6. In a case where appeal before a Tribunal or a Court is not filed only on account of the tax effect being less than the monetary limit specified above, the Commissioner of Income-tax shall specifically record that “even though the decision is not acceptable, appeal is not being filed only on the consideration that the tax effect is less than the monetary limit specified in this instruction”. Further, in such cases, there will be no presumption that the Income-tax Department has acquiesced in the decision on the disputed issues. The Income-tax Department shall not be precluded from filing an appeal against the disputed issues in the case of the same assessee for any other assessment year, or in the case of any other assessee for the same or any other assessment year, if the tax effect exceeds the specified monetary limits.
7. In the past, a number of instances have come to the notice of the Board, whereby an assessee has claimed relief from the Tribunal or the Court only on the ground that the Department has implicitly accepted the decision of the Tribunal or Court in the case of the assessee for any other assessment year or in the case of any other assessee for the same or any other assessment year, by not filing an appeal on the same disputed issues. The Departmental representatives/counsels must make every effort to bring to the notice of the Tribunal or the Court that the appeal in such cases was not filed or not admitted only for the reason of the tax effect being less than the specified monetary limit and, therefore, no inference should be drawn that the decisions rendered therein were acceptable to the Department. Accordingly, they should impress upon the Tribunal or the Court that such cases do not have any precedent value. As the evidence of not filing appeal due to this instruction may have to be produced in courts, the judicial folders in the office of CsIT must be maintained in a Systemic manner for easy retrieval.
8. Adverse judgments relating to the following issues should be contested on merits notwithstanding that the tax effect entailed is less than the monetary limits specified in para 3 above or there is no tax effect.
(a) Where the Constitutional validity of the provisions of an Act or Rule are under challenge, or
(b) Where Board’s order, Notification, Instruction or Circular has been held to be illegal or ultra vires, or
(c) Where Revenue Audit objection in the case has been accepted by the Department.
9. The proposal for filing Special Leave Petition under Article 136 of the Constitution before the Supreme Court should, in all cases, be sent to the Directorate of Income-tax (Legal & Research), New Delhi and the decision to file Special Leave Petition shall be in consultation with the Ministry of Law and Justice.
10. The monetary limits specified in para 3 above shall not apply to writ matters and direct tax matters other than Income-tax, filing of appeals in other direct tax matters shall continue to be governed by relevant provisions of statute and rules. Further, filing of appeal in cases of Income-tax, where the tax effect is not quantifiable or not involved, such as the case of registration of trusts or institutions under section 12A of the IT Act, 1961, shall not be governed by the limits specified in para 3 above and decision to file appeal in such cases may be taken on merits of a particular case.
11. This instruction will apply to appeals filed on or after 9th February 2011. However, the cases where appeals have been filed before 9th February 2011 will be governed by the instructions on this subject, operative at the time when such appeal was filed.
12. This issues under section 268A(1) of the Income-tax Act, 1961.
