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Background
In a recent ruling, the Authority for Advance Rulings (“AAR”), in the matter of Amiantit International Holding Ltd.1, examined whether the transfer of shares of an Indian company without consideration, by a Bahrain based company to its Cyprus subsidiary under a Group reorganisation, was taxable in India. The AAR held that in the absence of a consideration, or if the consideration was not ascertainable on the date of transfer, the charging provisions of section 45 of the Indian Income-tax Act, 1961 (“the Act”) failed, and, hence no income tax was payable in India. By placing reliance on its decision in case of Dana Corporation2, the AAR further ruled that the Transfer Pricing provisions (Chapter X of the Act) will also not apply, since the income is not chargeable to tax at all.
1 Amiantit International Holding Ltd. v. DIT (IT) [2010-TIOL-07-ARA-IT]
2 Dana Corporation, In re [2009] 227 CTR 441 (AAR)
Facts
In this case, the Applicant, Amiantit International Holdings Ltd. (“AIH”), a company incorporated in the Kingdom of Bahrain, was a subsidiary of SAAC, a company listed on the Saudi Arabian Stock Exchange.
AIH was an investment company and had investments in various Asian, European and Latin American countries, including a 70% stake in an Indian company, viz. Amiantit Fiberglass Industries (India) Pvt. Ltd.
(“AFIIL”)3. AIH also had a 100% subsidiary in Cyprus viz. Amitech Cyprus Holding Ltd. (“ACHL”)3, which was also an investment company, holding shares in various other Group entities.
As part of a Group restructuring, it was proposed that AIH would hold all the European investments, whereas all the non-European investments relating to pipe manufacturing, including India, would be held by ACHL.
3 Being subsidiaries of a listed company (SAAC), AFIIL and ACHL would be considered as companies in which public are substantially interested
Taxability of transfer of shares of an Indian company without consideration between two non-residents Tax & Regulatory Services
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4 March, 2010
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As part of the Group restructuring, it was proposed to contribute shares of AFIIL (along with other non-European investments) to ACHL without any consideration. No shares of ACHL were to be received by AIH for such contribution.
Issue
AIH approached the AAR and formulated the following questions for seeking advance ruling:
1. Whether AIH was liable to tax in India in relation to the contribution of shares of AFIIL to ACHL?
2. Whether the Indian Transfer Pricing provisions were applicable to the proposed contribution of shares of AFIIL?
3. Whether ACHL was required to withhold tax in India on the proposed contribution of shares to it by AIH?
Applicant’s contentions
No profit or gain had accrued or arisen on account of the transfer as no consideration (which could be evaluated in terms of money) would be received or receivable as a result of the transfer. Hence, no capital gains liability arose under section 45 read with section 48 of the Act.
Also, the transfer / contribution was in the nature of a gift within the contemplation of section 47(iii) of the Act, and, therefore, the charging provisions of section 45 stood excluded.
Revenue’s contentions
The transfer was not without consideration or gratis, as it was based on business considerations aimed at deriving financial advantages as part of the reorganisation process.
Though the proposed contribution of shares was in the form of a gift, in substance, there was no gift, because, since ACHL was a subsidiary of AIH, the gift would not result in AIH being poorer to the extent of the assets parted with.
AAR Ruling
At the outset, the AAR held that there was no need for it to refer to the provisions of section 47(iii) of the Act.
Section 45 of the Act charges profits or gains arising from transfer of capital asset to income tax. Section 48 of the act provides for mode of computation of capital gains. It is settled in law that all transactions encompassed by section 45 of the Act must fall under the governance of its computation provision. Relying on the Supreme Court decision in the case of B. C. Srinivasa Shetty4, the AAR held that when there is a case to which the computation provision cannot be applied at all, it is not intended to fall within the charging section.
Hence, if the consideration is such that it is incapable of being valued in definite terms or is unascertainable on the date of the transfer, section 45 read with section 48 of the Act cannot be applied.
Income in the sense of profit or gains should be real and not hypothetical income. It may be in cash or in kind, i.e. money or money’s worth, but the consideration should be capable of being evaluated on commercial and accounting principles.
4 CIT v. B. C. Srinivasa Shetty [1981] 128 ITR 294 (SC) Contribution/Gift of
shares of AFIIL without consideration
70% 100%
99%
AIH (Bahrain)
AFIIL (India)
ACHL (Cyprus) SAAC
(Saudi Arabia) Listed Company
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The possibility of AIH improving its overall business by virtue of reorganisation, and the mere possibility of it making better returns in the future as a consequence of reorganisation, could not be regarded as a consideration accruing or arising to AIH when it has no right to receive a definite or ascertainable amount or benefit from ACHL. There was no identifiable or monetarily convertible benefit that ACHL gave to AIH as a quid pro quo for the transfer and it was thus not possible to pinpoint any consideration which was capable of being valued in praesenti.
By transferring the shares of AFIIL to its 100% subsidiary ACHL, AIH did not derive any profit or gain, as nothing in the form of money or money’s worth, or capable of being turned into money, accrued to it on the date of transfer.
Hence, the charging provisions of section 45 of the Act failed, and, therefore, AIH was not liable to capital gains tax in India on the transfer of shares of AFIIL to ACH.
As regards the applicability of section 92 of the Act to this transaction, relying upon its view in the case of Dana Corporation (above), the AAR held that in a case where income was not chargeable to tax at all, the provisions of Chapter X (transfer pricing provisions) are not attracted.
Further, the AAR held that no taxes were required to be withheld in India, since the income was not chargeable to tax.
Conclusion
The ruling5 once again upholds the principle laid down by the Supreme Court in the case of B. C. Srinivasa Shetty (above) that the charging provisions under Section 45 of the Act, and the computational provisions under section 48 of the Act need to be read together. If the computational provisions cannot be given effect to, the charge under section 45 of the Act fails. The AAR also ruled that the Transfer Pricing provisions (Chapter X of the Act) will also not apply, since there was no income chargeable to tax at all. Similarly, the withholding tax provisions will also not be applicable.
5 Under Section 245S, a ruling of the AAR is binding only with reference to the specific assessee
It is pertinent to note that as per the amendment proposed by the Finance Bill, 20106, the transfer of shares of a company in which public are not substantially interested to a firm / company in which public are not substantially interested, without consideration, or for inadequate consideration, would be taxable in the hands of the recipient firm / company (at fair market value), subject to any treaty benefits as may be available to any foreign recipient firm / company.
6 Insertion of clause (viia) in Section 56 (2) of the Act, with effect from June 1, 2010 by Finance Bill, 2010.
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