In another interesting decision favouring the Assessee, the AAR concluded that there was to be no tax deducted as Capital gains on the transfer of shares held of an Indian Company by two or more non-resident companies without any consideration or without any such consideration which could not be valued at money’s worth. The AAR in the case Amiantit International Holding Limited, elaborated that since no profit could be accounted for by such a transfer of shares, the revenue could not make such a transaction liable to tax. The Tribunal based its decision on the settled law (CIT vs B.C. Srinivasa Setty) that s.45, the charging section and s.48, the computation section of the Income Tax Act, 1961 have to be read in conjunction. Therefore based on its findings, it concluded that since no profit or gain could have accrued or arisen in such a transaction and since the same could not be quantified, it was not taxable in nature.
In the instant case the Applicant, an investment company owned shares in several Indian as well as European and Latin American Companies. Subsequently the Applicant decided on a restructuring process to improve its economic and business holdings. As part of the restructuring process it decided to transfer all international investments in Pipe 2 manufacturing to its Wholly Owned Subsidiary in Cyprus. All shares held by the Applicant in the three Indian Companies proposed to be contributed to the Cyprus WOS without receiving any consideration for the same by an agreement signed outside India. The revenue raised the contention that such a transfer was not without consideration as it was for gaining business advantage through transactions in the future. It is pertinent to note that the fundamental question before the tribunal was whether there was any accrual of income within the ambit of such a transaction which was subsequently answered in the negative.
In order to understand the deductions made by the tribunal it is necessary to review the two provisions governing Capital gains. s.45 states “Any profits or gains arising from the transfer of a capital asset effected...be chargeable to income-tax under the head “Capital gains”. Further s.48 states “the income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset…”.When these two sections are read in conjunction it becomes apparent that there can be no computation of tax unless there is an accrual income in the form of profits or gains. Based on this deduction the Tribunal went on to further elaborate the necessity of accrual of profits and gains as being a quantifiable part of the term income within the ambit of a business transaction. It disregarded the contentions of the Revenue stating that there was no possible means of calculating a real income based on a hypothetical presumption of benefits which could arise by the restructuring process. Such an accrual of income is necessarily to be determined on the day the transaction took place. Since there existed no consideration in money’s worth, no capital gains could be charged. The Tribunal went on to reiterate the principle laid down in the Dana Corporation case that the provisions of Transfer Pricing under s. 92 were not applicable in the present instance as there was no income had arisen, there could be no computation of the same. Therefore the second contention of the Revenue was also rejected by the AAR.
Pursuant to the above, it is interesting to note that this case has successfully managed to put forth certain decisive principles encompassing all such transactions. In my view, a correct interpretation of the taxing provisions has been taken by the AAR as it prevents the Revenue from taxing innocent Companies entering into such transactions for restructuring purposes. The Tribunal has been correct in holding that if during the time of the transaction there was no consideration which could be quantified; it would be unfair for the Revenue to levy taxes based on presumptions of business gain in the future. Not only would such Companies be at a disadvantage but it would also deter foreign investors as every time such a transaction for restructuring were to take place, non-resident companies would have to pay Capital gains on an undetermined hypothetical amount irrespective of any gains. In another interesting perspective, this judgment also concurs with the view taken by the Supreme Court in the Azadi Bachao Andolan case thereby reiterating that if a transaction is“commercially”justifiable, any incidence of tax exemption would not render it being an evasion of tax.
Pertinent to note is the Finance Bill 2010 which through its amendment vide s.56(2) (viiA) states that in any such transfer without any consideration, tax will be imposed on the recepient as Income from Other Sources.
another interesting decision favouring the Assessee, the AAR concluded that there was to be no tax deducted as Capital gains on the transfer of shares held of an Indian Company by two or more non-resident companies without any consideration or without any such consideration which could not be valued at money’s worth.
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