The TPO says we issued shares to our parent too cheaply. Can he tax the shortfall?
No. The issue of equity to a non-resident parent is on capital account and gives rise to no income, and Chapter X is machinery for computing income at arm's length, not a charge. With no income there is nothing for the transfer pricing machinery to work on, and re-characterising the alleged shortfall as an interest-bearing loan has no statutory foundation.
Decided by the High Court (Bombay High Court — M. S. Sanklecha and S. C. Gupte JJ) on 2014-11-18, reported as Writ Petition No. 1205 of 2013; [2014] 51 taxmann.com 519 (Bombay) / [2014] 369 ITR 516 (Bombay) / [2015] 228 Taxman 99 (Bombay) / [2015] 273 CTR 161 (Bombay). It bears on section 92B, section 92CA, section 92CA(1), section 92CA(3), section 92E, section 2(24), section 143(3), section 144C of the Income Tax Act 1961, in Assessment & Scrutiny matters.
It disposes of both limbs of the standard share premium adjustment — the premium shortfall and the notional interest on it — as a jurisdictional matter rather than a valuation dispute. The court set the orders aside instead of remitting them, which is why the point is worth taking by writ at the TPO or draft order stage. It says nothing about the separate charge on share premium in the hands of the issuing company.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For AY 2009-10 the petitioner, an affiliate of the Shell group headquartered in Holland, issued 85,88,34,369 equity shares to two of its non-resident associated enterprises on 27 and 30 March 2009 at a face value of Rs. 10 per share. In its Form 3CEB filed with the return it disclosed other international transactions but not the share issue, taking the view that in the absence of income arising it was not an international transaction. On a reference under s.92CA(1) the Transfer Pricing Officer noticed the share issue and by show-cause notice of 24 January 2013 proposed an arm's length price of Rs. 622 per share. By order dated 30 January 2013 under s.92CA(3) the TPO held that once a transaction is an international transaction an adjustment may be made even on capital account, enhanced the issue price from Rs. 10 to Rs. 183.44 per share, charged interest on the amount short received and made a transfer pricing adjustment of Rs. 15,220 crores. The draft assessment order under s.143(3) read with s.144C(1) followed in March 2013, rejecting the contention that no income arose on the footing that s.2(24) is an inclusive definition and an adjustment may be made even where income is notional. The petitioner filed objections before the Dispute Resolution Panel and also came to the High Court on jurisdiction, undertaking to withdraw the jurisdictional objection before the Panel.
The jurisdictional requirement for Chapter X to apply is that income must arise out of the international transaction and be chargeable to tax under the Act; no income arises on the issue of equity shares by an Indian company to its non-resident associated enterprises, so Chapter X could not be applied. The Court followed its own decision in Vodafone India Services (P.) Ltd. v. Union of India, the Revenue having accepted that the issue was covered in principle while reserving its right to contest Vodafone in the Supreme Court. Relief was partial, not a wholesale quashing: the TPO's order of 30 January 2013 was set aside only to the extent it fixed the arm's length price of the share issue at Rs. 183.44 per share against Rs. 10 declared and brought deemed interest to tax, and the draft assessment order was set aside only to the extent it sought to tax that arm's length price and deemed interest. The petitioner's other objections before the Dispute Resolution Panel were left to be decided by the Panel on their merits. The Court expressly declined to decide whether the change in shareholding among the associated enterprises amounted to a restructuring within clause (e) of the Explanation to s.92B, holding that even if it did the jurisdictional requirement would still not be met (paras 11, 12).
The Court proceeded on the footing that the point was no longer res integra after Vodafone India Services (P.) Ltd. v. Union of India, and reproduced the summary of that decision's findings as culled out in the later Vodafone matter decided on 13 October 2014: that the sine qua non for Chapter X is income arising out of an international transaction chargeable under the Act; that the definition of income does not take in capital receipts from a capital account transaction unless s.2(24) so specifies; that there is no charge in ss.4, 5, 15, 22, 28, 45 or 56 on amounts received or arising on the issue of shares by an Indian entity to a non-resident, since these arise out of a capital account transaction; that Chapter X contains no charging provision but is machinery for arriving at the arm's length price between associated enterprises; and that Chapter X does not change the character of the receipt but permits re-quantification of income uninfluenced by the relationship (para 5). The Revenue accepted that the issue was covered in principle and pressed three distinctions, all of which failed. The alternative remedy before the Dispute Resolution Panel was no bar, the petitioner having undertaken to withdraw its jurisdictional objection there, and no purpose would be served by sending it to a Panel bound to follow Vodafone (para 9). The petitioner's failure to disclose the share issue in Form 3CEB did not create jurisdiction — the Court noted that the Revenue had argued the opposite in Vodafone, where the form had been filed, and observed that the State is expected to be consistent and not change its stand from case to case; whatever consequences the Act attaches to non-filing may follow, but non-filing cannot give the Revenue jurisdiction to tax what it has no jurisdiction to tax (para 10). The restructuring argument under clause (e) of the Explanation to s.92B was not examined, because even assuming an international transaction, no income had arisen and the jurisdictional requirement was unmet (para 11).
However, in the present facts we need not examine this for the reason that 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.
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Handle my notice → Ask a CA on WhatsAppNo. The issue of equity to a non-resident parent is on capital account and gives rise to no income, and Chapter X is machinery for computing income at arm's length, not a charge. With no income there is nothing for the transfer pricing machinery to work on, and re-characterising the alleged shortfall as an interest-bearing loan has no statutory foundation. This was decided by the High Court (Bombay High Court — M. S. Sanklecha and S. C. Gupte JJ) and bears on section 92B, section 92CA, section 92CA(1), section 92CA(3), section 92E, section 2(24), section 143(3), section 144C of the Income Tax Act 1961. It is reported as Writ Petition No. 1205 of 2013; [2014] 51 taxmann.com 519 (Bombay) / [2014] 369 ITR 516 (Bombay) / [2015] 228 Taxman 99 (Bombay) / [2015] 273 CTR 161 (Bombay). It disposes of both limbs of the standard share premium adjustment — the premium shortfall and the notional interest on it — as a jurisdictional matter rather than a valuation dispute. The court set the orders aside instead of remitting them, which is why the point is worth taking by writ at the TPO or draft order stage. It says nothing about the separate charge on share premium in the hands of the issuing company. If it applies to you, the first step is this: Frame the objection as a want of jurisdiction over a capital account transaction, not as a quarrel with the valuation.
For AY 2009-10 the petitioner, an affiliate of the Shell group headquartered in Holland, issued 85,88,34,369 equity shares to two of its non-resident associated enterprises on 27 and 30 March 2009 at a face value of Rs. 10 per share. In its Form 3CEB filed with the return it disclosed other international transactions but not the share issue, taking the view that in the absence of income arising it was not an international transaction. On a reference under s.92CA(1) the Transfer Pricing Officer noticed the share issue and by show-cause notice of 24 January 2013 proposed an arm's length price of Rs. 622 per share. By order dated 30 January 2013 under s.92CA(3) the TPO held that once a transaction is an international transaction an adjustment may be made even on capital account, enhanced the issue price from Rs. 10 to Rs. 183.44 per share, charged interest on the amount short received and made a transfer pricing adjustment of Rs. 15,220 crores. The draft assessment order under s.143(3) read with s.144C(1) followed in March 2013, rejecting the contention that no income arose on the footing that s.2(24) is an inclusive definition and an adjustment may be made even where income is notional. The petitioner filed objections before the Dispute Resolution Panel and also came to the High Court on jurisdiction, undertaking to withdraw the jurisdictional objection before the Panel. The matter was decided on 2014-11-18 by the High Court (Bombay High Court — M. S. Sanklecha and S. C. Gupte JJ). On those facts the High Court held as follows. The jurisdictional requirement for Chapter X to apply is that income must arise out of the international transaction and be chargeable to tax under the Act; no income arises on the issue of equity shares by an Indian company to its non-resident associated enterprises, so Chapter X could not be applied. The Court followed its own decision in Vodafone India Services (P.) Ltd. v. Union of India, the Revenue having accepted that the issue was covered in principle while reserving its right to contest Vodafone in the Supreme Court. Relief was partial, not a wholesale quashing: the TPO's order of 30 January 2013 was set aside only to the extent it fixed the arm's length price of the share issue at Rs. 183.44 per share against Rs. 10 declared and brought deemed interest to tax, and the draft assessment order was set aside only to the extent it sought to tax that arm's length price and deemed interest. The petitioner's other objections before the Dispute Resolution Panel were left to be decided by the Panel on their merits. The Court expressly declined to decide whether the change in shareholding among the associated enterprises amounted to a restructuring within clause (e) of the Explanation to s.92B, holding that even if it did the jurisdictional requirement would still not be met (paras 11, 12).
The Court proceeded on the footing that the point was no longer res integra after Vodafone India Services (P.) Ltd. v. Union of India, and reproduced the summary of that decision's findings as culled out in the later Vodafone matter decided on 13 October 2014: that the sine qua non for Chapter X is income arising out of an international transaction chargeable under the Act; that the definition of income does not take in capital receipts from a capital account transaction unless s.2(24) so specifies; that there is no charge in ss.4, 5, 15, 22, 28, 45 or 56 on amounts received or arising on the issue of shares by an Indian entity to a non-resident, since these arise out of a capital account transaction; that Chapter X contains no charging provision but is machinery for arriving at the arm's length price between associated enterprises; and that Chapter X does not change the character of the receipt but permits re-quantification of income uninfluenced by the relationship (para 5). The Revenue accepted that the issue was covered in principle and pressed three distinctions, all of which failed. The alternative remedy before the Dispute Resolution Panel was no bar, the petitioner having undertaken to withdraw its jurisdictional objection there, and no purpose would be served by sending it to a Panel bound to follow Vodafone (para 9). The petitioner's failure to disclose the share issue in Form 3CEB did not create jurisdiction — the Court noted that the Revenue had argued the opposite in Vodafone, where the form had been filed, and observed that the State is expected to be consistent and not change its stand from case to case; whatever consequences the Act attaches to non-filing may follow, but non-filing cannot give the Revenue jurisdiction to tax what it has no jurisdiction to tax (para 10). The restructuring argument under clause (e) of the Explanation to s.92B was not examined, because even assuming an international transaction, no income had arisen and the jurisdictional requirement was unmet (para 11). In the words reproduced by the source cited on this page: "However, in the present facts we need not examine this for the reason that 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 decision followed or applied Vodafone India Services (P.) Ltd. v. Union of India [2014] 368 ITR 1 / 50 taxmann.com 300 (Bom.) — followed; Vodafone Services (P.) Ltd. v. Union of India, W.P. No. 583 of 2014, decided 13 October 2014 (Bom.) — relied on for the summary of the findings in the earlier decision.
It was decided by the High Court on 2014-11-18 and is reported as Writ Petition No. 1205 of 2013; [2014] 51 taxmann.com 519 (Bombay) / [2014] 369 ITR 516 (Bombay) / [2015] 228 Taxman 99 (Bombay) / [2015] 273 CTR 161 (Bombay). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 92B, section 92CA, section 92CA(1), section 92CA(3), section 92E, section 2(24), section 143(3), section 144C, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The jurisdictional requirement for Chapter X to apply is that income must arise out of the international transaction and be chargeable to tax under the Act; no income arises on the issue of equity shares by an Indian company to its non-resident associated enterprises, so Chapter X could not be applied. The Court followed its own decision in Vodafone India Services (P.) Ltd. v. Union of India, the Revenue having accepted that the issue was covered in principle while reserving its right to contest Vodafone in the Supreme Court. Relief was partial, not a wholesale quashing: the TPO's order of 30 January 2013 was set aside only to the extent it fixed the arm's length price of the share issue at Rs. 183.44 per share against Rs. 10 declared and brought deemed interest to tax, and the draft assessment order was set aside only to the extent it sought to tax that arm's length price and deemed interest. The petitioner's other objections before the Dispute Resolution Panel were left to be decided by the Panel on their merits. The Court expressly declined to decide whether the change in shareholding among the associated enterprises amounted to a restructuring within clause (e) of the Explanation to s.92B, holding that even if it did the jurisdictional requirement would still not be met (paras 11, 12). It arises in Assessment & Scrutiny matters, on section 92B, section 92CA, section 92CA(1), section 92CA(3), section 92E, section 2(24), section 143(3), section 144C of the Income Tax Act 1961, and was decided by Bombay High Court — M. S. Sanklecha and S. C. Gupte JJ. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Take the point against the TPO's order and the draft order together, since both were set aside here. Deal separately with any notional interest adjustment, which falls with the re-characterisation rather than on its own arithmetic. Check whether the same issue of shares is also being examined under the premium charging provision for that year.
Searched for later treatment; none was found. That is not the same as a source affirming it. No later judicial decision applying, following or affirming this judgment was found on the database, and the report carries no citator banner and no record of any SLP against it. The decision itself rests entirely on Vodafone India Services (P.) Ltd. v. Union of India, and the Court recorded at para 8 that the Revenue, while accepting that the issue was covered in principle, reserved its right to contest Vodafone before the Supreme Court. The administrative material previously relied on here — the Union Cabinet's decision of 28 January 2015 to accept the Bombay High Court's order in the companion Vodafone share-issue matter and not to file a Special Leave Petition, and to accept similar orders in other taxpayers' cases — bears on Vodafone rather than on this judgment, and an executive decision is not later judicial treatment. The status therefore stays unverified. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Writ Petition No. 1205 of 2013, decided 18 November 2014 for AY 2009-10; the shares were issued to two non-resident associated enterprises, not to a named parent company, and the arm's length price the TPO fixed was Rs. 183.44 per share, producing an adjustment of Rs. 15,220 crores. The judgment decides nothing of its own on Chapter X: it follows Vodafone India Services (P.) Ltd. v. Union of India, which the Revenue accepted covered the issue in principle while reserving its right to contest that decision in the Supreme Court (para 8). Two limits on how far the case can be taken: the relief was confined to the share-issue adjustment and the deemed interest, with the remaining objections left to the Dispute Resolution Panel, and the clause (e) restructuring question under the Explanation to s.92B was expressly not examined. There is a useful separate point at para 10, where the Court observed that the State is expected to be consistent and not change its stand from case to case, the Revenue having argued in Vodafone that filing Form 3CEB submitted the assessee to Chapter X and here that not filing it disentitled the assessee to relief. The administrative point previously recorded — the Union Cabinet's decision of 28 January 2015 to accept the Bombay High Court's order in the companion Vodafone matter and not to file an SLP — concerns Vodafone, not this judgment. Source note: this judgment is not carried on Indian Kanoon and could not be opened on any primary route. What has been verified comes from two Tribunal orders that reproduce it: Aries Agro Ltd. v. Dy. CIT, Mumbai Bench, order dated 28 November 2018, and SMC Pneumatics (India) (P.) Ltd., Delhi Bench, order dated 10 July 2015. Between them they confirm the identity (W.P. No. 1205 of 2013, decided 18.11.2014), the numbering of the paragraph from which the key quote is taken (para 11, which opens 'The last objection taken by the Revenue was that in view of the variation in the shareholding pattern amongst different shareholders of the petitioner during the year clearly brought the issue of shares within clause (e) of the Explanation to section 92B of the Act'), and the operative words: 'Therefore, following the aforesaid decision we set aside the order dated January 30, 2013, of the Transfer Pricing Officer to the extent it holds that the arm's length price of issue of equity shares is Rs. 183.44 per share as against Rs. 10 per share as declared by the petitioner and consequent deemed interest brought to tax on the amount not received when benchmarked to the arm's length price.' The two reproductions differ from each other on capitalisation in the quoted sentence ('International Transaction' and 'Income' in one, lower case in the other), so the capitalisation of the key quote on this page has not been settled against the judgment. The section list has likewise not been checked against the judgment's own text. Whether a change in shareholding among associated enterprises amounts to a restructuring within clause (e) of the Explanation to s.92B was raised and expressly left undecided (para 11). The judgment gives the date of the draft assessment order inconsistently — 28 March 2012 at para 1, 28 March 2013 at para 6(k) and 30 March 2013 at para 12 — so verify it before quoting. No later judicial treatment of this judgment was traced. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The jurisdictional requirement for Chapter X to apply is that income must arise out of the international transaction and be chargeable to tax under the Act; no income arises on the issue of equity shares by an Indian company to its non-resident associated enterprises, so Chapter X could not be applied. The Court followed its own decision in Vodafone India Services (P.) Ltd. v. Union of India, the Revenue having accepted that the issue was covered in principle while reserving its right to contest Vodafone in the Supreme Court. Relief was partial, not a wholesale quashing: the TPO's order of 30 January 2013 was set aside only to the extent it fixed the arm's length price of the share issue at Rs. 183.44 per share against Rs. 10 declared and brought deemed interest to tax, and the draft assessment order was set aside only to the extent it sought to tax that arm's length price and deemed interest. The petitioner's other objections before the Dispute Resolution Panel were left to be decided by the Panel on their merits. The Court expressly declined to decide whether the change in shareholding among the associated enterprises amounted to a restructuring within clause (e) of the Explanation to s.92B, holding that even if it did the jurisdictional requirement would still not be met (paras 11, 12).
TaxSphere, “Shell India Markets P Ltd v ACIT”, https://taxnotice.vittsphere.com/caselaw/case/shell-india-markets-v-acit-share-issue/ (validity last checked 2026-08-19)
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