Bombay HC rules in favor of Vodafone in 3,200 crore tax claim; Says no IT liability in issuance of shares at premium [READ judgment]

In a judgment carrying large commercial implications, the Bombay High Court has ruled in favour of telecommunications giant, Vodafone in a tax dispute. The Bombay High Court has held that, “There is no taxable income on share premium received on the issue of shares.” The judgment was pronounced by a Bench of Chief Justice Mohit Shah and Justice M.S. Sanklecha while hearing a 3,200 crore tax dispute between Vodafone and the IT Department..Vodafone was represented by Senior Counsel Harish Salve along with Anuradha Dutt, Fereshte Sethna, Gayatri Goswami, Tushar Jerwal, Adhiraj Malhotra and Khushboo Satia. The Respondents were represented by Solicitor General Ranjit Kumar, Senior Advocate Ben Chatterjee along with Benu Tamtar, Abhay Ahuja, Girish Dave and Tejveer Singh. .The dispute can be traced back to August 2008, when Vodafone issued close to 300,000 shares at a premium to its holding company. It was the revenue department’s claim that these shares were grossly undervalued and that the difference in premium ought to be taxable as income..The IT department also claimed that,.Further, as a consequence of the above, this amount of Rs.1308.91 crores is required to be treated as deemed loan given by the Petitioner to its holding company and periodical interest thereon is to be charged to tax as interest income of Rs.88.35 crores in the financial year 2008-09 i.e. A. Y. 2009-10..In February this year, the dispute resolution panel chose to accept Revenue’s claim and held that,.“Section 92(1) of the Act, mandates computation of income arising out of International Transaction be determined, having regard to the arms-length price (ALP). It further holds that the term ‘Income’ has not been defined in Chapter X of the Act unlike International Transaction. Therefore, the impugned order holds that term ‘Income’ is to be construed in a broad manner embracing all types of receipts or incomings.”.Setting aside the findings of the DRP, the High Court held that,.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. 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..With respect to Revenues argument with respect to Arms Length Pricing, the Court held that..In this case also the charge is on income as understood in the Act, and where income arises from an International Transaction, then the measure is to be found on application of ALP so far Chapter X of the Act is concerned. The arriving at the transactional value/ consideration on the basis of ALP does not convert non-income into income. The tax can be charged only on income and in the absence of any income arising, the issue of applying the measure of ALP to transactional value/consideration itself does not arise.