We issued shares to our foreign parent at a premium the Transfer Pricing Officer says is too low. Can he tax the shortfall as income under the transfer pricing provisions?
No. The Bombay High Court held that the issue of equity shares at a premium by an Indian company to its non-resident holding company is a capital account transaction that gives rise to no income, so Chapter X cannot be applied at all. Chapter X is a machinery provision for arriving at the arm's length price; the charge must be found in sections 4 and 5 and in one of the heads of income. There being no charge, express or implied, on the premium not received, the reference to the Transfer Pricing Officer, his order, the draft assessment order and the Dispute Resolution Panel's order were quashed as without jurisdiction.
Decided by the High Court (High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction; Mohit S. Shah, CJ and M.S. Sanklecha, J (judgment by the Chief Justice)) on 2014-10-10, reported as Writ Petition No. 871 of 2014 (Bombay High Court). It bears on section 92, section 92B, section 4, section 5, section 2(24), section 56(2)(viib) of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
This is the judgment that stopped the Revenue taxing share issue shortfalls as transfer pricing adjustments, and its reasoning reaches well beyond its own facts. It separates the charge from the measure: Chapter X supplies a measure, not a charge, and applying an arm's length price to a transaction does not convert a non-income into income. It fixes the boundary for capital account transactions - a transfer pricing adjustment can reach the income effects of such a transaction, such as under or over reported interest or excess depreciation, but not the capital consideration itself. It disposes of the argument that Chapter X is a self-contained code with an inherent charging provision, and of the fallback attempts under section 92(2) and section 56(1). It also treats the deliberate confinement of section 56(2)(viib), read with section 2(24)(xvi), to issues to residents as showing that Parliament chose not to tax capital coming in from abroad. For a practitioner it is the authority for the proposition that a computation provision cannot be made to do the work of a charging provision.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For assessment year 2009-10 the petitioner, a wholly owned subsidiary of a non-resident holding company, needed funds for its Indian telecommunications project. In August and November 2008 it received Rs.246.38 crores from the holding company against 2,89,224 equity shares of Rs.10 each issued at a premium of Rs.8,509 per share, allotted in February 2009. Fair market value of Rs.8,519 per share had been arrived at under the methodology prescribed under the Capital Issues (Control) Act, 1947. The transaction was reported in Form 3-CEB with a note that it did not affect income and was disclosed out of abundant caution. The Transfer Pricing Officer valued the shares at Rs.53,775 each on a net asset value basis after loading transfer pricing adjustments of earlier years, found a shortfall in premium of Rs.45,256 per share, and treated Rs.1,308.91 crores as income; the shortfall was further treated as a deemed loan to the holding company carrying deemed interest of Rs.88.35 crores. In an earlier round (Vodafone-III) the Court had held that a jurisdictional issue arose which neither officer had decided, and directed the Dispute Resolution Panel to decide it as a preliminary issue. By order of 11 February 2014 the Panel rejected the objection, holding that income does arise. That order was challenged in this petition under Article 226.
The petition was allowed. The Court held that the issue of shares at a premium to the non-resident holding company does not give rise to any income from the admitted international transaction, so no occasion to apply Chapter X arises. Four orders were quashed and set aside as without jurisdiction, null and void: the Assessing Officer's reference of 11 July 2011 to the Transfer Pricing Officer, the Transfer Pricing Officer's order of 28 January 2013, the draft assessment order of 22 March 2013 under section 143 read with section 144C(1), and the Dispute Resolution Panel's order of 11 February 2014 on the preliminary issue of jurisdiction. Rule was made absolute. The Court declined to examine a submission made at the hearing about assessing the petitioner in a representative capacity for income earned by the holding company, since no notice had proposed that and the petitioner had had no occasion to meet it. It also rejected the Revenue's written objection about alternative remedy, observing that the Revenue's own resort at the hearing to grounds different from those in the impugned order showed how unsustainable that order was.
The Court reasoned from the structure of the Act. Section 92(1) requires income from an international transaction to be computed having regard to the arm's length price; the word income is not defined in Chapter X, and the Panel had widened it to cover all incomings by appealing to legislative intent. That, the Court held, is impermissible: in a taxing statute the intent cannot enlarge plain words, and Mathuram Agarwal requires the subject of tax, the person liable and the rate all to be conveyed clearly. Chapter X supplies the measure, not the charge. The four ingredients of a taxing statute include both the subject of tax and the measure, and Bombay Tyres shows they are distinct; applying an arm's length price to a transactional value does not convert a non-income into income. The charge must be found in sections 4 and 5 and the receipt must answer the definition in section 2(24) and find a home in one of the heads in sections 15, 22, 28, 45 or 56. A share premium is on capital account - income is the fruit, capital the tree, as Shaw Wallace put it - and it is brought into the definition of income only by section 56(2)(viib) read with section 2(24)(xvi), which Parliament confined to issues to residents, deliberately leaving capital inflow from abroad untaxed. Section 56(1) does not help, because it presupposes income. The contrast with section 42(2) of the 1922 Act, which expressly made notional profits chargeable to income tax, shows that words of charge absent from Chapter X cannot be read into it, and Vatika Township requires ambiguity in a tax statute to be resolved for the citizen. The Solicitor General's alternative case under section 92(2) failed both because it required words to be omitted from the provision, which is redrafting and not construction, and because that sub-section deals with allocating the cost of a benefit among associated enterprises, which does not arise here. Finally, B.C. Srinivasa Shetty was applied a fortiori: there a charge existed but computation failed; here there is no charge at all, so computation provisions cannot supply one.
There is no charge express or implied, in letter or in spirit to tax issue of shares at a premium as income.
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Handle my notice → Ask a CA on WhatsAppNo. The Bombay High Court held that the issue of equity shares at a premium by an Indian company to its non-resident holding company is a capital account transaction that gives rise to no income, so Chapter X cannot be applied at all. Chapter X is a machinery provision for arriving at the arm's length price; the charge must be found in sections 4 and 5 and in one of the heads of income. There being no charge, express or implied, on the premium not received, the reference to the Transfer Pricing Officer, his order, the draft assessment order and the Dispute Resolution Panel's order were quashed as without jurisdiction. This was decided by the High Court (High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction; Mohit S. Shah, CJ and M.S. Sanklecha, J (judgment by the Chief Justice)) and bears on section 92, section 92B, section 4, section 5, section 2(24), section 56(2)(viib) of the Income Tax Act 1961. It is reported as Writ Petition No. 871 of 2014 (Bombay High Court). This is the judgment that stopped the Revenue taxing share issue shortfalls as transfer pricing adjustments, and its reasoning reaches well beyond its own facts. It separates the charge from the measure: Chapter X supplies a measure, not a charge, and applying an arm's length price to a transaction does not convert a non-income into income. It fixes the boundary for capital account transactions - a transfer pricing adjustment can reach the income effects of such a transaction, such as under or over reported interest or excess depreciation, but not the capital consideration itself. It disposes of the argument that Chapter X is a self-contained code with an inherent charging provision, and of the fallback attempts under section 92(2) and section 56(1). It also treats the deliberate confinement of section 56(2)(viib), read with section 2(24)(xvi), to issues to residents as showing that Parliament chose not to tax capital coming in from abroad. For a practitioner it is the authority for the proposition that a computation provision cannot be made to do the work of a charging provision. If it applies to you, the first step is this: Take the jurisdictional point first and separately: say that no income arises, so Chapter X does not apply, and press for it to be decided as a preliminary issue rather than left to the assessment.
For assessment year 2009-10 the petitioner, a wholly owned subsidiary of a non-resident holding company, needed funds for its Indian telecommunications project. In August and November 2008 it received Rs.246.38 crores from the holding company against 2,89,224 equity shares of Rs.10 each issued at a premium of Rs.8,509 per share, allotted in February 2009. Fair market value of Rs.8,519 per share had been arrived at under the methodology prescribed under the Capital Issues (Control) Act, 1947. The transaction was reported in Form 3-CEB with a note that it did not affect income and was disclosed out of abundant caution. The Transfer Pricing Officer valued the shares at Rs.53,775 each on a net asset value basis after loading transfer pricing adjustments of earlier years, found a shortfall in premium of Rs.45,256 per share, and treated Rs.1,308.91 crores as income; the shortfall was further treated as a deemed loan to the holding company carrying deemed interest of Rs.88.35 crores. In an earlier round (Vodafone-III) the Court had held that a jurisdictional issue arose which neither officer had decided, and directed the Dispute Resolution Panel to decide it as a preliminary issue. By order of 11 February 2014 the Panel rejected the objection, holding that income does arise. That order was challenged in this petition under Article 226. The matter was decided on 2014-10-10 by the High Court (High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction; Mohit S. Shah, CJ and M.S. Sanklecha, J (judgment by the Chief Justice)). On those facts the High Court held as follows. The petition was allowed. The Court held that the issue of shares at a premium to the non-resident holding company does not give rise to any income from the admitted international transaction, so no occasion to apply Chapter X arises. Four orders were quashed and set aside as without jurisdiction, null and void: the Assessing Officer's reference of 11 July 2011 to the Transfer Pricing Officer, the Transfer Pricing Officer's order of 28 January 2013, the draft assessment order of 22 March 2013 under section 143 read with section 144C(1), and the Dispute Resolution Panel's order of 11 February 2014 on the preliminary issue of jurisdiction. Rule was made absolute. The Court declined to examine a submission made at the hearing about assessing the petitioner in a representative capacity for income earned by the holding company, since no notice had proposed that and the petitioner had had no occasion to meet it. It also rejected the Revenue's written objection about alternative remedy, observing that the Revenue's own resort at the hearing to grounds different from those in the impugned order showed how unsustainable that order was.
The Court reasoned from the structure of the Act. Section 92(1) requires income from an international transaction to be computed having regard to the arm's length price; the word income is not defined in Chapter X, and the Panel had widened it to cover all incomings by appealing to legislative intent. That, the Court held, is impermissible: in a taxing statute the intent cannot enlarge plain words, and Mathuram Agarwal requires the subject of tax, the person liable and the rate all to be conveyed clearly. Chapter X supplies the measure, not the charge. The four ingredients of a taxing statute include both the subject of tax and the measure, and Bombay Tyres shows they are distinct; applying an arm's length price to a transactional value does not convert a non-income into income. The charge must be found in sections 4 and 5 and the receipt must answer the definition in section 2(24) and find a home in one of the heads in sections 15, 22, 28, 45 or 56. A share premium is on capital account - income is the fruit, capital the tree, as Shaw Wallace put it - and it is brought into the definition of income only by section 56(2)(viib) read with section 2(24)(xvi), which Parliament confined to issues to residents, deliberately leaving capital inflow from abroad untaxed. Section 56(1) does not help, because it presupposes income. The contrast with section 42(2) of the 1922 Act, which expressly made notional profits chargeable to income tax, shows that words of charge absent from Chapter X cannot be read into it, and Vatika Township requires ambiguity in a tax statute to be resolved for the citizen. The Solicitor General's alternative case under section 92(2) failed both because it required words to be omitted from the provision, which is redrafting and not construction, and because that sub-section deals with allocating the cost of a benefit among associated enterprises, which does not arise here. Finally, B.C. Srinivasa Shetty was applied a fortiori: there a charge existed but computation failed; here there is no charge at all, so computation provisions cannot supply one. In the words reproduced by the source cited on this page: "There is no charge express or implied, in letter or in spirit to tax issue of shares at a premium as income."
It was decided by the High Court on 2014-10-10 and is reported as Writ Petition No. 871 of 2014 (Bombay High Court). 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 92, section 92B, section 4, section 5, section 2(24), section 56(2)(viib), 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 petition was allowed. The Court held that the issue of shares at a premium to the non-resident holding company does not give rise to any income from the admitted international transaction, so no occasion to apply Chapter X arises. Four orders were quashed and set aside as without jurisdiction, null and void: the Assessing Officer's reference of 11 July 2011 to the Transfer Pricing Officer, the Transfer Pricing Officer's order of 28 January 2013, the draft assessment order of 22 March 2013 under section 143 read with section 144C(1), and the Dispute Resolution Panel's order of 11 February 2014 on the preliminary issue of jurisdiction. Rule was made absolute. The Court declined to examine a submission made at the hearing about assessing the petitioner in a representative capacity for income earned by the holding company, since no notice had proposed that and the petitioner had had no occasion to meet it. It also rejected the Revenue's written objection about alternative remedy, observing that the Revenue's own resort at the hearing to grounds different from those in the impugned order showed how unsustainable that order was. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 92, section 92B, section 4, section 5, section 2(24), section 56(2)(viib) of the Income Tax Act 1961, and was decided by High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction; Mohit S. Shah, CJ and M.S. Sanklecha, J (judgment by the Chief Justice). 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. Report the transaction in Form 3-CEB if you must, but append a note that it does not affect income and is disclosed out of abundant caution - the Court held that such a filing does not concede jurisdiction. Identify the head of income the Revenue says the receipt falls under; if it cannot name a charging provision in sections 4, 5, 15, 22, 28, 45 or 56, the adjustment fails at the threshold. Separate the capital consideration from its income effects - concede that interest, depreciation or similar consequences of a capital transaction can be adjusted, and confine the argument to the consideration itself. Before relying on this judgment for a current year, check whether section 56(2)(viib) still applies only to issues to residents; the reasoning leans on that limit.
Still good law. Eight High Court decisions cite this judgment. The Bombay High Court applied its central holding in Godrej Projects Development Pvt Ltd v ITO (1 February 2024), treating it, together with CBDT Circular No. 2 of 29 January 2015, as concluding that 'receipt of share premium being on a capital account and cannot be subjected to tax as income' (paras 3 and 10), and quashing the reassessment notice on that footing; the same Court took the same course in Prasoon Properties Ltd v ITO (29 April 2024). One qualification a practitioner should know: in M/s Shri Vishnu Eatables (India) Ltd v DCIT (Punjab and Haryana High Court, 3 October 2016) the Bench accepted the Bombay line that the Assessing Officer must decide an objection to the applicability of Chapter X before making a reference, but at para 35 declined to follow the direction that the authorities stall proceedings - 'We see no reason for these authorities to stall the proceedings if they come to the conclusion that the transactions are international transactions.' That divergence is on the procedural direction, not on the charge; the holding that a share-premium receipt is capital and outside the charging sections is untouched. No Supreme Court decision cites the judgment and no pending challenge is traceable - consistently with the Revenue having accepted it. 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.
The harvested text is badly clipped: about 44,418 characters from the middle of a 53 page judgment are not reproduced. What is missing is the remainder of the narrative of the proceedings before the Transfer Pricing Officer and the Dispute Resolution Panel, the parties' submissions in full, and the opening of the Court's findings, including whatever it said about the earlier decisions cited by the petitioner. The opening facts, the Court's findings from paragraph 28 onwards and the operative order at paragraphs 49 to 51 were all read. The batch line lists sections 92B, 92, 92C, 4, 5 and 2(24); section 92C is nowhere discussed in the text read, while section 56(2)(viib) is central and has been added. The judgment does not decide whether the petitioner could be assessed in a representative capacity for income of the holding company, and expressly declines to examine it. It also does not deal with the correctness of either valuation, since the whole matter falls at the jurisdictional threshold. 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 petition was allowed. The Court held that the issue of shares at a premium to the non-resident holding company does not give rise to any income from the admitted international transaction, so no occasion to apply Chapter X arises. Four orders were quashed and set aside as without jurisdiction, null and void: the Assessing Officer's reference of 11 July 2011 to the Transfer Pricing Officer, the Transfer Pricing Officer's order of 28 January 2013, the draft assessment order of 22 March 2013 under section 143 read with section 144C(1), and the Dispute Resolution Panel's order of 11 February 2014 on the preliminary issue of jurisdiction. Rule was made absolute. The Court declined to examine a submission made at the hearing about assessing the petitioner in a representative capacity for income earned by the holding company, since no notice had proposed that and the petitioner had had no occasion to meet it. It also rejected the Revenue's written objection about alternative remedy, observing that the Revenue's own resort at the hearing to grounds different from those in the impugned order showed how unsustainable that order was.
TaxSphere, “Vodafone India Services P Ltd v Union of India”, https://taxnotice.vittsphere.com/caselaw/case/vodafone-india-services-p-ltd-v-union-of-india/ (validity last checked 2026-08-29)
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