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Bombay HC Sends Vodafone TP Case to DRP

Published on Mon, Dec 02,2013 | 15:57, Updated at Mon, Dec 02 at 19:26Source : 

By: Rahul Mitra, Leader - Transfer pricing, PwC India

The much awaited ruling of the Bombay High Court in the context of the writ application filed by Vodafone India, challenging the transfer pricing (TP) adjustments made by the Revenue Officer on account of -

(a)alleged undervaluation of shares issued by Vodafone India in favour of its overseas parent company; and

(b)imputing notional interest on such alleged undervaluation of shares, by treating the said shortfall as loan advanced by Vodafone India to its overseas parent company, as being patently illegal & without jurisdiction on the ground that the said undervaluation, if at all any, could never have been brought under the ambit of taxation by taking course to TP, as the same was on capital account, had been released yesterday, wherein the Bombay High Court has directed the taxpayer to first file its objections on the basic issue of per se taxability of the impugned amount, before the dispute resolution panel (DRP); and the future course of action could be decided once the DRP would deal with such objection, including the option available to the taxpayer to approach the High Court again under a writ application, instead
of filing an appeal with the Tax Tribunal, should the interests of the taxpayer remain prejudiced even after disposal of such objection by the DRP.

Incidentally, the said type of TP adjustments are more familiarly referred to as being related to the "Shell case", for which, it is understood, similar writ application is pending before the Bombay High Court. The point to note is that the High Court did not dismiss the writ application on the ground of availability of alternative remedy before the taxpayer against such impugned TP adjustments, in the form of filing objections before the DRP; and thereafter filing appeal before the Tax Tribunal.

The High Court was pleased not to intervene at the present stage of the matter since the nether the Assessing Officer (AO) nor the transfer pricing officer (TPO) had dealt with such primary objection raised by the taxpayer that such alleged undervaluation could never have been brought under the ambit of taxation by applying the TP provisions, since the same did not have an insignia of income embedded in it for a charge of income tax to be levied u/s 4 of the IT Act, 1961; and further, the taxpayer, in its wisdom, had decided not to raise such primary objection before the DRP, under the notion that the DRP was not competent to deal with such fundamental objection.

The High Court held that the DRP process is a continuation of the assessment proceedings, as it is only after the order of the DRP that an appealable order comes into existence; and thus the DRP is very much competent to deal with the fundamental objection raised by the taxpayer on per se taxability of the impugned or alleged undervaluation of shares issued by the taxpayer.

The High Court further mentioned that if the taxpayer remained prejudiced even after disposal of such objection of the taxpayer by the DRP, then notwithstanding the alternative remedy available before the taxpayer for challenging the prejudicial findings/ observations of the DRP in an appeal before the Tribunal, the taxpayer would also have the right to invoke the writ jurisdiction of the High Court, if a case could be made out that the decision of the DRP was patently illegal.

For the reasons above, the High Court did not adjudicate upon the merits of the case, however, it did make a very important observation that in case it is found that in an international transaction, there is no income or potential of any income arising and/ or being affected on determination of the arm's length price (ALP), then the entire exercise of applying TP to determine an ALP would become merely academic; and therefore redundant.

The above was an obvious & only form of jurisprudence in matters relating to taxation & TP, however, it was extremely assuring that the High Court made such positive comment, in an environment when the Revenue seeks to levy income tax even on share capital.

The High Court further observed that though as a rule, the AO is not required to give any opportunity of hearing to an assessee, while referring its case to the TPO for computing ALPs with respect to international transactions entered into by it with its related parties, presumably with reference to the accountant's report filed by such assesssee with the AO, where however, the assessee raises an objection with respect to per se applicability of TP for any transaction on the ground that the said transaction could not have been taxable in the first instance, in absence of having any insignia of income, in that case the AO should provide an opportunity of hearing to the taxpayer & dispose such fundamental objection of the assessee. In case the AO fails to carry out such obligation, then such preliminary or fundamental objection would need to be heard & adjudicated by the DRP.

As mentioned earlier, the High Court did not adjudicate upon the merits of the case, since the situation did not warrant such action. On the merits of the relevant issue, we remain very clear that :

(a)There is no way that the principal amount, namely representing the alleged undervaluation of shares issued by the taxpayer in favour of its overseas parent company, can be subjected to income tax, since the same is on capital account, not having any insignia or characteristics of income; and further TP cannot be forcibly invoked to enlarge the scope of the charging section, i.e. section 4 of the IT Act, 1961, since if a receipt is per se not taxable as income, then application of the TP methodology on the same is an empty formality or ritual; and a merely academic exercise, which cannot & should not be resorted to;

(b)Since the principal amount itself cannot be the subject matter of taxation, far from any TP adjustment, there is no question of treating any such alleged undervaluation or shortfall as loan advanced by the Indian company in favour of its overseas parent company, for imputing any notional interest on the same; and

(c)Further, any attempt to re-characterise even any possible primary TP adjustment, which is absent in the present case, as there is no valid primary TP adjustment in the first instance; and then imputing any resultant TP adjustment with respect to the same, say in the form of notional interest, which is referred to as infliction of "secondary adjustment" in the parlance of TP, cannot be made under the TP provisions of India, since as per guidelines of the OECD & also provisions of taxation in various other countries, resorting to "secondary adjustment" is not possible, absent any express enabling provision contained in the domestic taxation laws of any country; and it is clear that the domestic tax laws of India do not contain any such express provision.


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