AAR : On the facts and circumstances of the case, whether the applicant is liable to tax in India in relation to the proposed contribution of shares of AFIIL ?

Authority For Advance Rulings

Amiantit International Holding Ltd., In Re

Section 45, 48, 92B, 195

P.V. Reddi, J., Chairman; J. Khosla, Member

AAR No. 817 of 2009

23rd February, 2010

Counsel Appeared :

Percy Pardiwalla with Ms. Aarti Sathe, Pierre Sommereigns, Vijay Dhingra & Aditya Patkar, for the Applicant : T.N.Chopra, Shivendra Kumar Singh & G. Gurusamy, for the CIT Concerned


P.V. Reddi, J., Chairman :

This application is filed by a non-resident company under s. 245Q(1) of the IT Act, 1961 (hereafter referred to as IT Act). The following facts are stated in the application :

1.1 The applicant (hereafter referred to as AIH) is a company incorporated in the Kingdom of Bahrain. AIH is an investment company having investments in various Asian, European as well as Latin American companies. AIH is owned 99 per cent by South Arabian Amiantit Company (“SAAC”), listed on the Saudi Stock Exchange and 1 per cent by a trustee acting on behalf of SAAC. Amiantit Fiberglass Industries (India) (P) Ltd. (“AFIIL”) is an Indian company engaged in the production of glass reinforced polyester pipes, storage tanks etc. AIH holds 70 per cent of equity capital of AFIIL and these shares are held as investments in physical form. Amitech Cyprus Holding Ltd. (“ACHL”) is a company incorporated in Cyprus and is a 100 per cent subsidiary of AIH. ACHL is an investment company and holds shares of various other group entities. The only income received by AIH from AFIIL is dividend. AIH does not have any other source of income from India.

1.2 AIH proposes to restructure the group and split AIH into two companies, one owning the business carried on in Europe (represented by investments made in operating companies incorporated in Europe) and the other owning business carried on in Asia, North Africa and Latin America (represented by investments made in operating companies incorporated in India, North Africa and Latin America).

1.3 As a part of the restructuring process, by end of 2009, AIH (the applicant) proposes to hold all international investments relating to pipe manufacturing through ACHL (Cyprus). This is mainly due to the following factors : Cyprus belongs to European Commission and enjoys the credibility of Western Europe directives, laws and regulations; Easier access to international banking and finance in a globally recognized jurisdiction; Cyprus is a Euro country—Many of SAAC international entities work in or are associated to the Euro zone; Cyprus is geographically close to the Middle-East; If any interest is shown by a prospective buyer in future in the international businesses of the group, a Cyprus entity might be more acceptable to a Western or Asian buyer than a Bahraini entity.

1.4 Therefore, AIH proposes to contribute shares of AFIIL (the Indian company) along with non-European investments to ACHL. AIH—the applicant will not receive any consideration for the contribution so made. Such a contribution akin to a gift is permissible under the Bahrain legislation. The shareholders’ approval would be taken for this purpose. In this connection, AIH would execute a contribution agreement outside India. A copy of the draft contribution agreement is filed.

1.5 It is recited in the draft contribution agreement as follows : AIH, the contributor holds 100 per cent of the issued share capital in ACHL (the company). The contributor also holds 70 per cent of the issued share capital in the subsidiary listed in the schedule (i.e. 17,500,000 equity shares at par value of Rs. 10 each in AFIL. The group has gone and is going through a reorganization process which includes, inter alia, holding of participation in the subsidiary in the company. Within the framework of the reorganization of Amiantit Group of Companies, the contributor proposes to contribute the shares in the subsidiary to the company by means of a contribution. The main operative clauses of the draft contribution agreement are :

3.1 The contributor does hereby transfer and set over unto the company, and the company does hereby accept, as of the effective date, all of the contributor’s present and future right, title and interest in, under and with respect to the contributed shares.

3.2 The contributor will at any time and from time to time, after the effective date, execute and deliver such further instruments of conveyance and/or transfer and take such other action as and when requested by the company as may be necessary to convey and transfer to the company good title in, and possession of, the contributed shares. All the rights, benefits, interests and burdens of the contributed shares will be for the account of the company as of the effective date.

4. The contribution is made free of consideration and therefore the company is not due at the effective date and shall not be due at any time in the future to compensate the contributor for the contribution.

1.6 In reply to the query raised by the Revenue, the managing director of applicant has certified that “there is no transfer by ACHL or on its behalf or at its behest, of any shares, to AIH i.e, the applicant.

2. The following questions are formulated by the applicant for seeking advance ruling from this Authority :

“(1) On the facts and circumstances of the case, whether the applicant is liable to tax in India in relation to the proposed contribution of shares of AFIIL ?

(2) On the facts and circumstance of the case, whether the proposed contribution of shares by AIH to ACHL attracts the transfer pricing provisions of s. 92 to 92F of the Act ?

(3) On the facts and circumstances of the case, whether ACHL, the recipient company, is required to withhold tax in accordance with the provisions of s. 195 of the Act ?

(4) On the facts and circumstances of the case, if the contribution is not taxable in India, then, whether AIH, the applicant, is required to file any return of income under s. 139 of the Act ?” The learned counsel for the applicant has stated that the last question need not be answered and it may be deleted.

2.1 The core question raised in the application is whether capital gains tax is liable to be paid in relation to the transfer of 17.5 million shares held by the applicant in an Indian group company in favour of its subsidiary in Cyprus without stipulating any consideration therefor, as a part of reorganization of business of the group.

3. The following are the contentions advanced by both sides with reference to Question No. 1 :

3.1 The contentions of the applicant are two-fold. Firstly, no profit or gain has accrued or arisen to the applicant on account of transfer as no consideration which can be evaluated in terms of money will be received or receivable by the applicant as a result of transfer of shares. Hence, the liability to pay capital gains tax does not arise under s. 45 r/w s. 48 of the IT Act. Secondly, the transfer/contribution of shares (in the course of reorganization) is in the nature of gift within the contemplation of cl. (iii) of s. 47 and therefore the charging provision under s. 45 stands excluded. In the application, stress was laid on the second aspect i.e, the transfer being in the nature of gift. However, in the course of hearing, arguments were advanced by the learned counsel for the applicant on both the points.

3.2 The Revenue contends that the charge under s. 45 is squarely attracted and that the mere fact that money consideration has not passed would not put the transfer out of the domain of s. 45. The purported transfer is not without consideration and it is not gratis; it is based on business considerations aimed at deriving certain financial advantages as a part of reorganization process. Though the proposed contribution of shares has been given the form of gift, there is in substance no gift because, in ultimate analysis, the donor will not be poorer to the extent of assets he parted with. It is contended that the expression ‘gift’ has to be assigned the meaning which it has under the general law, i.e. Transfer Pricing Act. In the view we have taken, there is no need for us to discuss whether s. 47(iii) is also attracted in the instant case

4. We shall, before proceeding further, refer to the relevant provisions of IT Act : “Sec. 45. Capital gains—(1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in ss. 54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H, be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place. (1A) Notwithstanding anything contained in sub-s. (1), where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of— (i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; or (ii) riot or civil disturbance; or (iii) accidental fire or explosion ; or (iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head “Capital gains” and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of s. 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset. Explanation : For the purposes of this sub-section, the expression “insurer” shall have the meaning assigned to it in cl. (9) of s. 2 of the Insurance Act, 1938 (4 of 1938). Sec. 47. Transactions not regarded as transfer.—Nothing contained in s. 45 shall apply to the following transfers : (i) any distribution of capital assets on the total or partial partition of an HUF; (iii) any transfer of a capital asset under a gift or will or an irrevocable trust: Provided that this clause shall not apply to transfer under a gift or an irrevocable trust of a capital asset being shares, debentures or warrants allotted by a company directly or indirectly to its employees under any Employees’ Stock Option Plan or Scheme of the company offered to such employees. Sec. 48. Mode of computation.—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 the following amounts, namely : (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto.” The expression ‘income’ includes profits and gains vide s. 2(24).

5. Leaving apart the controversy whether s. 47(iii) is attracted, the answer to the question can be found within the realm of ss. 45 and 48. The relevant questions which need to be answered for resolving the controversy are :

(i) Did any profit or gain arise from the transfer of capital asset (in the form of shares of AFIL) ?

(ii) Is it possible to identify or quantify the value of the consideration received or accruing to the applicant as a result of the transfer ?

It is obvious that these questions are based on the language of ss. 45 and 48 respectively. In our view, the answer to these questions could only be in the negative. We reach this conclusion by interpreting the language employed in the charging provision (s. 45) as well as the computation provision (s. 48), drawing support from binding precedents.

5.1 It is settled law that the charging section relating to capital gains and the computation provisions together constitute an integrated code. All transactions encompassed by s. 45 must fall under the governance of its computation provision. When there is a case to which the computation provision cannot be at all applied, it is not intended to fall within the charging section [Vide the observations of Supreme Court in CIT vs. B.C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC)—a decision which has been constantly followed till date]. Therefore, it is permissible, perhaps, imperative to read both the provisions together to test the correctness of the contentions advanced. For this purpose, we have to explore the scope and meaning of the expressions

‘profits’ and ‘gains’ and ‘accrue’ and ‘arise’ in the light of decided cases.

5.2 In Calcutta Co. Ltd. vs. CIT (1959) 37 ITR 1 (SC), the Supreme Court having stated that the expression ‘profits and gains’ has to be understood in its commercial sense, approvingly referred to the following observations of Lord Herschell in Russel vs. Town & Country Bank Ltd. (1888) 13 AC 418 at 424 : “The profit of a trade or business is the surplus by which the receipts from the trade or business exceed the expenditure necessary for the purpose of earning those receipts. That seems to me to be the meaning of the word ‘profits’ in relation to any trade or business. Unless and until you have ascertained that there is such a balance, nothing exists to which the name

‘profits’ can properly be applied.”

5.3 It is also relevant to notice what Fletcher Moulton, L.J. said in Spanish Prospecting Co. Ltd., In re (1911) 1

Ch. 92— “The word ‘profits’ has… a well defined legal meaning, and this meaning coincides with the fundamental conception of profits in general parlance, although in mercantile phraseology the word may at times bear meanings indicated by the special context which deviate in some respects from this fundamental signification.

‘Profits’ implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the asset of the business at the two dates.” This passage was quoted with approval by the Supreme Court in CIT vs. Ashokbhai Chimanbhai (1965) 56 ITR 42 (SC).

5.4 Broadly speaking, ‘gains’ is really the equivalent of profits (vide Mersey Docks Board vs. Joseph Lucas 8 App. Cases 891 (HL). However, as observed by the Rajasthan High Court in the case of CIT vs. Hycron India Ltd. (2008) 219 CTR (Raj) 288 : (2008) 13 DTR (Raj) 13 : (2008) 308 ITR 251 (Raj) the word ‘gain’ is not limited to pecuniary gain unlike ‘profits’, though profit includes an element of gain.

5.5 It is clarified in more than one decision that ‘income’ is a more general term than profits or gains and the expression income is not limited by the words ‘profits and gains’ [Vide the observations of Privy Council in Raja Bahadur Kamakshya Narain Singh of Ramgarh vs. CIT (1943) 11 ITR 513 (PC) at 522].

5.6 In Poona Electric Supply Co. Ltd. vs. CIT (1965) 57 ITR 521 (SC), the Supreme Court clarified that “income- tax is a tax on real income i.e. the profits arrived at on commercial principles subject to the provisions of the IT Act”. The same idea was expressed in different words in CIT vs. Shoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC). It was said that income-tax is a levy on income. “No doubt, the IT Act takes into account two points of time at which the liability to tax is attracted, viz. the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialize”.

5.7 We shall now look to the meaning of the expressions ‘accrue or arise’. The dicta of Mukherji, J. in Rogers Pyatt Shellac vs. Secretary of State for India ILR 52 Cal 1 has been quoted with approval in a series of decisions of the Supreme Court [Vide E.D. Sassoon & Co. Ltd. & Ors. vs. CIT (1954) 26 ITR 27 (SC) etc.] : “Now what is income ? The term is nowhere defined in the Act….In the absence of a statutory definition we must take its ordinary dictionary meaning………… The word clearly implies the idea of receipt, actual or constructive. The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively.

‘Accrues’, ‘arises’ and ‘is received’ are three distinct items. So far as receiving of income is concerned, there can be no difficulty; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning plainer than the word ‘receiving’ itself. The words ‘accrue’ and ‘arise’ also are not defined in the Act. The ordinary dictionary meanings of these words have to be taken as the meanings attaching to them. ‘Accruing’ is synonymous with ‘arising’ in the sense of springing as a natural growth or result. The three expressions ‘accrues’, ‘arises’ and ‘is received’ having been used in the section, strictly speaking, ‘accrues’ should not be taken as synonymous with ‘arises’ but in the distinct sense of growing up by way of addition or increase or as an accession or advantage; while the word ‘arises’ means comes into existence or notice or presents itself. The former connotes the idea of growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable.” Then, in Sassoon’s case (supra), the observation of Fry LJ in Colquhoun vs. Brooks to the effect that the words “arising or accruing” are general words descriptive of a “right to receive profits” was also referred to. The Supreme Court then observed that if the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income.

5.8 In CIT vs Ashokbhai Chimanbhai (supra), J.C. Shah, J. observed that the words accruing and arising are used to contra-distinguish the word “receive”. “Income is said to be received when it reaches the assessee: when the right to receive the income becomes vested in the assessee, it is said to accrue or arise”.

5.9 In CIT vs. Ahmedbhai Umarbhai & Co. (1950) 18 ITR 472 (SC) which is a decision of a five Judge Bench of the Supreme Court, M.C. Mahajan, J. observed at p. 496 thus— “Whether the words ‘derive’ and ‘produce’ are or are not synonymous with the words ‘accrue’ or ‘arise’ it can be said without hesitation that words ‘accrue’ and ‘arise’ though not defined in the Act are certainly synonymous and are used in the sense of ‘bringing in as a natural result.’ Strictly speaking, the word ‘accrue’ is not synonymous with ‘arise’, the former connoting the idea of growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. There is a distinction in the dictionary meaning of these words, but throughout the Act they seem to denote the same idea or ideas very similar and the difference only lies in this that one is more appropriate when applied to a particular case.” In the context of ss. 45 and 48, the expression ‘arising’ employed therein may very well comprehend actual receipt of income. At the same time, the primary meaning of these words as connoting a ‘right to receive’ still holds good. In the light of above analysis of the expressions ‘profits and gains’ and ‘accruing or arising’, we have to examine the issue that has presented itself in the instant case. Viewed from any angle, we are unable to perceive as to how any profit or gain has accrued or arisen to the applicant by virtue of the transfer of shares to its subsidiary company. It is not possible to identify or pinpoint anything which has the characteristic of profit or gain or any consideration which is capable of being valued in praesenti. As pointed out earlier, the income in the sense of profit and gain should be real but not hypothetical income. We may take it that the income may be in cash or in kind and need not necessarily be pecuniary in nature. As stated in the Law and Practice of Income-tax (by Kanga, Palkhivala and Vyas) income, profits and gains may be realized in the form of money’s worth as well as money, in kind as well as in cash. Even then, the alleged consideration for which the shares are to be transferred should be capable of being evaluated on commercial and accounting principles. The possibility of applicant-transferor improving its overall business by virtue of re-organization and the mere possibility or chance of the applicant making better returns in the near or distant future as a consequence of reorganization can hardly be regarded as a consideration accruing or arising to the transferor when he has no right to receive a definite or an ascertainable amount or benefit from the transferee. A capital gain, cannot arise on the basis of uncertain and indefinite future contingencies or hypothetical and imaginary estimations. There is really no effective answer from the Revenue’s side to the question as to what is the valuable consideration that has accrued or arisen to the transferor and how it can be converted into money’s worth for the purpose of computing the alleged capital gain. The only endeavor of Revenue’s counsel was to take a plea that the “benefits and advantages” mentioned by the applicant in para H of p. 7 of the application represent the valuable consideration for transfer. This is the stand taken at pp. 11-12 of written submissions of Revenue’s counsel. Thus, the full value of consideration for the transfer of shares is sought to be deduced from the overall objectives of reorganization and the resultant changes in investment. It is not explained how they can be evaluated in terms of money or to borrow the words of P.N. Bhagwati, J., in Acharya D.V. Pande vs. CIT (1965) 56 ITR 152 (Guj) how they are capable of being turned to pecuniary account. Viewed from another angle, has the transferor acquired any right to receive an identifiable and monetarily convertible benefit though not money from the transferee ? Is there anything concrete or definite which the transferee gives or makes over to the transferor as a quid pro quo for the receipt of shares ? The answers to all these questions could only be in the negative. One has to grope in darkness to find valuable consideration for the transfer. By transferring the Indian company’s shares to its 100 per cent subsidiary, the applicant, in our view, will derive no profit and make no gain. Nothing in the form of money or money’s worth or nothing capable of being turned into money will accrue or arise to the applicant on the date of transfer. Therefore, the contention of the Revenue has to be rejected.

7.1 The exposition of law in the case of Acharya D.V. Pande vs. CIT (supra) is quite instructive. The question in that case was whether the household expenses defrayed out of the funds of the institution of which the assessee was the Acharya can be considered to be his income. The following observations of P.N. Bhagwati, J. speaking for the Division Bench of Gujarat High Court (at p. 165) are quite apposite in deciding the issue in the present case : “But, howsoever broad may be the connotation of the word ‘income’, one thing is clear that income for tax purposes must be money or money’s worth. It is not necessary that income must be received in cash. It may also be received in kind but that must represent money’s worth, that is, something which is capable of being converted in terms of money. As observed by Lord Halsbury L.C. in Tennant vs. Smith (1892) AC 150 : 3 Tax Cases 158, “income” includes anything capable of being turned into money from its own nature. Of course there are certain things which are not capable of being turned into money from their own nature and yet they have by statute been artificially deemed to be ‘income’, but the general principle is clear that income must be money or money’s worth. There must be, as observed by the Privy Council in Raja Raghunandan Prasad Singh & Anr. vs. CIT (1933) 1 ITR 113 (PC) at 119, “an actually realized or realizable profit or loss”. If, therefore, a benefit or advantage is received by an assessee, he would be assessable in respect of the value of such benefit or advantage if it consists of money or money’s worth. Where the benefit or advantage consists of money, there is no difficulty, but where it does not consist of money, the test would be, is it something capable of being turned to pecuniary account ? If it is, then its value would be the income of the assessee. Of course there may be cases where the assessee may receive a benefit or advantage in the shape of satisfaction of pecuniary obligation which the assessee has incurred. Such a benefit or advantage would give an immunity to the assessee against pecuniary obligation already incurred and would, therefore, represent money’s worth and would, as such, be chargeable to tax. This statement of the law is amply borne out by the decisions which were cited before us.”

7.2 Applying the legal position enunciated in the above passage and the test laid down by the learned Judges in the above case, we have no hesitation in holding that no consideration would accrue or arise to the applicant by the transfer of shares and the applicant cannot be said to have derived any profit or gain from the transaction. We may add that if the ‘consideration’ is such that it is incapable of being valued in definite terms or it remains unascertainable on the date of occurrence of taxable event, the question of applying s. 45 r/w s. 48 of the IT Act does not arise.

7.3 In the case of K.P. Varghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC), the Supreme Court laid stress on the words “full value of the consideration received or accruing” and observed what in fact never accrued or was never received cannot be computed as capital gains under s. 48. Considering the inter-play between sub-s. (2) of s. 52 and s. 48, the Supreme Court further observed : “Moreover, if sub-s. (2) is literally construed as applying even to cases where the full value of the consideration in respect of the transfer is correctly declared or disclosed by the assessee and there is no understatement of the consideration, it would result in an amount being taxed which has neither accrued to the assessee nor been received by him and which from no viewpoint can be rationally considered as capital gains or any other type of income. It is well settled rule of interpretation that the Court should as far as possible avoid that construction which attributes irrationality to the legislature. Besides, under entry 82 in List I of the Seventh Schedule to the Constitution, which deals with “taxes on income other than agricultural income” and under which the IT Act, 1961 has been enacted, Parliament cannot “choose to tax as income an item which in no rational sense can be regarded as a citizens’s income or even receipt. Sub-s. (2) would, therefore, on the construction of the Revenue, go outside the legislative power of Parliament.”

If the Revenue’s contention is to be accepted, the situation would more or less be the same as pointed out in the above decision and it would lead to irrational results. It is therefore, not possible to countenance the argument of the Revenue that valuable consideration within the meaning of s. 48 has to be attributed to the transfer in question. Such attribution would be inherently arbitrary and irrational and cannot be supported in law.

8. At p. 12 of the written submissions, the learned counsel for the Revenue has raised the contention that the shares of the Indian company have specific cost of acquisition and “the transfer of such shares with ‘nil’ consideration apparently leads to capital loss” which amounts to “negative capital gains” and therefore s. 45 is attracted. Reference in this connection is made to the decision of the Supreme Court in CIT vs. Harprasad & Co. (P) Ltd. 1975 CTR (SC) 65 : (1975) 99 ITR 118 (SC) wherein it was observed that the words “income, profits or gains” should be understood as including loss also so that in one sense profits and gains represent plus income whereas loss represents minus income. Then it was observed : “In other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter into computation wherever it becomes material.” In that case, in the relevant assessment year, capital gains or capital losses did not form part of the ‘total income’ of the assessee which could be brought to charge and were therefore not required to be computed under the Act. It was held that if the set off of loss was not permissible owing to the fact that the income or profits of the subsequent years were from a non-taxable source, there would be no point in allowing the loss to be carried forward. We do not see how this decision is of any relevance at all in deciding the issue. The observations made in a totally different context are sought to be pressed into service. The decision does not in any way support the contention of the Revenue’s counsel that if capital loss resulted to the applicant by reason of transfer of shares with ‘nil’ consideration, still, he must be deemed to have made some profit or gain.

8.1 The learned counsel for Revenue also referred to the decision of Punjab & Haryana High Court in Shreyans Industries Ltd. vs. Jt. CIT (2006) 200 CTR (P&H) 609 : (2005) 277 ITR 443 (P&H). In that case, the assessee sustained a loss on account of transfer of land to the Forest Department in lieu of the use of forest land for laying the drainage system. The AO treated the loss as capital loss whereas according to the assessee, it should have been allowed as business loss. The Tribunal upheld the view of AO and the High Court affirmed the order of the Tribunal. Thus, the character of loss whether it was capital loss or business loss, was the issue in that case.

The following observation of the High Court in the above case indicates that the test to be applied is the same as that formulated by Bhagwati, J. in the Gujarat decision : “The Tribunal has rightly observed that the said right can be assessed in monetary value which would be the consideration for the transfer of capital asset.” In the light of foregoing discussion, the 1st question is answered in the negative. Question No. 2

9. It is contended by the Revenue that “once transfer of capital asset by the applicant is admitted to be an international transaction by virtue of s. 92B(1) of the Act, it goes without saying that transfer pricing provisions would be applicable for computation of income having regard to the ALP”. It is further submitted that “there is scope for manipulation of consideration in the transfer of shares and accordingly the value of the consideration has to be determined in accordance with the transfer pricing provisions.”

9.1 This contention of Revenue is liable to be rejected in view of the recent ruling of this Authority in Dana Corporation, In re (2009) 227 CTR (AAR) 441 : (2009) 32 DTR (AAR) 1 : (2010) 186 Taxman 187 (AAR) wherein the application of s. 92B has been ruled out in a case where the income is not chargeable to tax at all. We would like to quote the relevant passages in that ruling : “……If no consideration had passed from or on behalf of the transferee companies to the transferor company and the charge under s. 45 fails to operate for want of consideration or determinable consideration, obviously, the provisions in s. 92 etc. do not come to the aid of the Revenue. It must be noted that s. 92 is not an independent charging provision. As the section heading itself shows, it is a provision dealing with ‘computation of income from international transactions’. The opening part of s. 92 says that ‘any income arising from an international transaction shall be computed having regard to the ALP’. The expression ‘income arising’ postulates that the income has arisen under the substantive charging provisions of the Act. In other words, the income referred to in s. 92 is nothing but the income captured by one or the other charging provisions of the Act. In such a case, the computation aspect is taken care of by s. 92 and other related provisions in Chapter X. It must be noted that the income chargeable under the Act is divided into various heads under s. 14. The heads of income specified in that section are….. The income in the present case, if at all, is traceable to ‘Capital gains’ which is one of the heads of income. If by application of the provisions of s. 45 r/w s. 48 which are integrally connected with each other, the income cannot be said to arise, s. 92 of the Act does not come to the aid of Revenue, even though it is an international transaction. The expression ‘income’ in s. 92 is not used in a sense wider than or different from its scope and connotation elsewhere in the Act. Sec. 92 obviously is not intended to bring in a new head of income or to charge the tax on income which is not otherwise chargeable under the Act. The interpretation sought to be placed by Revenue would amount to reading words into s. 92. I have, therefore no hesitation in rejecting the Revenue’s contention.

In the case of Vanenburg Group B.V., In re (2007) 208 CTR (AAR) 177 : (2007) 289 ITR 464 (AAR) at 472, this Authority while referring to the provisions in Chapter X, observed : ‘These are again machinery provisions which would not apply in the absence of liability to pay tax’.” Referring to the ruling of this Authority in Canoro Resources on which reliance has been placed in the present case as well, it was observed thus : “The learned counsel for the Revenue has relied on a recent decision of this Authority in the case of Canoro Resources Ltd., In re (2009) 223 CTR (AAR) 339 : (2009) 22 DTR (AAR) 188 wherein it was held that the transfer pricing provisions contained in Chapter X of the Act will override the computational provision in sub-s. (3) of s. 45 in the case of an international transaction. I do not think that the ruling in Canoro Resources runs counter to the view expressed by AAR as regards the applicability of s. 92 of the Act. The fact situation in Canoro Resources case (supra) is materially different and the real question which fell for consideration in that case is discernible from the following lines in para 10.1 “It is the common stand of both – the applicant and the Revenue, that the nature of income arising from the transfer of the applicant’s participating interest in Amguri block to the proposed partnership firm, shall be capital gains. Where they differ is regarding the mode of computation of that income”.

9.2 Therefore, we are of the view that the transfer pricing provisions in Chapter X are not attracted.

Question No. 3

10. In view of the answers to the question Nos. 1 and 2, ACHL is not obliged to withhold tax under s. 195 of IT Act. When the income is not chargeable to tax as per the findings recorded above, the question of withholding the tax does not arise.

11. In the result, all the three questions raised are answered in the negative.

[Citation : 322 ITR 678]

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