AAR : The investment held by the Applicant in equity shares of GlaxoSmithKline Asia Private Limited (hereinafter referred to as ‘GSKAPL’) would be considered as ‘capital asset’ under Section 2(14) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’)

Authority For Advance Rulings (Income Tax), New Delhi

Smithkline Beecham Port Louis Ltd., In Re

Section 9, 2(14), 92 TO 92F, 115JB, 139 AND 195

Justice P.K. Balasubramanyan, Chairman

A.A.R. No. 1004 Of 2010

August  16, 2012 

RULING

1. The applicant is a company incorporated in Mauritius in the year 1995. It is a tax resident of Mauritius. It is part of GlaxoSmithKline Group of companies. Its shares are held by Set First Limited, United Kingdom. The applicant has, on 23.7.1996, acquired 99.99% of the shares of an Indian company, GlaxoSmithKline Asia Private Limited (GSKAPL). The Indian company is also a part of the GlaxoSmithKline Group. The applicant has since held the said shares as a capital asset.

2. GlaxoSmithKline (Pte.) Limited, Singapore is also a company that is a part of the GlaxoSmithKline group. As a part of global reorganization of the group businesses, the applicant proposes to transfer the shares in GSKAPL held by it to GSK(Pte.) Singapore. The transfer is for cash consideration at fair market value. It is in that context that the applicant approached this Authority with the present application.

3. After hearing the applicant and the Revenue, this Authority allowed the application under section 245R(2) of the Act to render rulings under section 245R(4) of the Act. This Authority also kept open for consideration the question whether the transaction was one designed for avoidance of payment of tax in India. The following questions were accepted:

1. Whether on the facts and circumstances of the case the investment held by the Applicant in equity shares of GlaxoSmithKline Asia Private Limited (hereinafter referred to as ‘GSKAPL’) would be considered as ‘capital asset’ under Section 2(14) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’)?

2. Based on the facts and circumstances of the case, if answer to Question 1 is in the affirmative, whether capital gains arising from transfer of shares of GSKAPL by the Applicant to GlaxoSmithKline (Pte) Limited, Singapore (hereinafter referred to as ‘GSK Pte’), would be subject to tax in India?

3. Based on the facts and circumstances of the case, if the answer to Question 1 is in the negative, whether gains arising to the Applicant from the sale of equity shares of GSKAPL will be taxable in India in the absence of a Permanent Establishment of the Applicant in India and in the light of the provisions of Article 7 read with Article 5 of the India Mauritius Double Taxation Avoidance Agreement (hereinafter referred to as ‘India-Mauritius DTAA’)?

4. Based on the facts and circumstances of the case, if the transfer of shares by the Applicant to GSK Pte is not taxable, whether the provisions of Section 92 to section 92F of the Act relating to transfer pricing would be applicable?

5. Based on the facts and circumstances of the case, whether the sale consideration receivable by the Applicant would suffer any withholding tax as per Section 195 of the Act?

6. Based on the facts and circumstances of the case, if the transfer of shares of GSKAPL is not taxable in India, whether the Applicant is required to file any return of income under Section 139 of the Act?

7. Whether the provisions of section 115JB of the Act shall be applicable to the Applicant?

4. According to the applicant the income derived by the proposed sale would be capital gains and though it is taxable in India under the Income-tax Act, it is not taxable in this country in view of paragraph 4 of Article 13 of the Double Taxation Avoidance Convention (DTAC) between India and Mauritius. The applicant is entitled to take advantage of the DTAC by virtue of section 90(2) of the Act. The Revenue has raised the plea that this was not a bonafide transaction and is one designed for the purpose of avoidance of tax in India. It is also submitted that question No. 2 formulated by the applicant for ruling and accepted by this Authority does not seek a ruling on the applicability of Article 13 of the DTAC between India and Mauritius and hence that aspect cannot be considered while giving the rulings.

5. Question No. 1 formulated for ruling is whether the shares of GSKAPL are held by the applicant as a capital asset in terms of section 2(14) of the Act. The shares have been held by the applicant from the year 1996 onwards. It has submitted that the shares were held as an investment. The Revenue has not seriously joined issue on this question. Taking note of the facts as a whole, the ruling on this question has to be that it is a capital asset of the applicant.

6. Question No. 2 raised is whether the capital gain arising out of the proposed sale of the shares of the Indian company by the applicant to GSK(Pte.) Singapore is chargeable to tax in India. The applicant concedes that it is taxable in India as capital gains under the Act. But, since the applicant, as a tax resident of Mauritius, (the Tax Residency Certificate covering the period 7.4.2012 to 6.4.2013 was also handed over at the hearing) is entitled to invoke the DTAC between India and Mauritius by invoking section 90(2) of the Act, the capital gain is not taxable in India by virtue of paragraph 4 of Article 13 of the DTAC.

7. The contention of the Revenue that the question as formulated does not invoke the DTAC cannot be accepted for the reason that in the application itself it is conceded that the income from the transaction would be chargeable to tax as capital gains in India under the Act, but that in view of paragraph 4 of Article 13 of the DTAC, it cannot be taxed in India. Section 90(2) of the Act has also been invoked and it is pleaded that the provision of the DTAC is more favourable to the applicant, thus invoking the DTAC. Hence a ruling on this question cannot be given without appreciating that argument and that argument has to be dealt with.

8. The second aspect attempted was to say that a scheme for avoidance of tax was involved. But, there is hardly any material in support of that plea. The applicant has in its submission in response to the comments of the Revenue, elaborated the circumstances which justified the transaction as pleaded in the application. Here again, there is no sufficient reason put forward by the Revenue to justify a detailed enquiry into this aspect by this Authority. Suffice it to say, the transaction proposed cannot be characterized as the devising of a scheme for avoidance of payment of tax in India.

9. Since there is also no material to rebut the presumption of tax residency of the applicant arising out of the tax residency certificate, the claim of the applicant that it is entitled to claim the benefit of the India-Mauritius DTAC by invoking section 90(2) of the Act has to be upheld. If so, it has to be ruled that Article 13 is attracted and going by paragraph 4 thereof, the capital gains is not chargeable to tax in India. On question No. 2 it is ruled that the capital gains that would arise is not chargeable to tax in India by virtue of paragraph 4 of Article 13 of the DTAC between India and Mauritius.

10. In view of the rulings on question Nos. 1 and 2, question No. 3 formulated does not arise for consideration.

11. On question No.4, though this Authority had earlier taken the view that sections 92 to 92F of the Act are attracted only when there is chargeable income arising under the Act, on the wording of section 92 and the definition of ‘income’ in the Act and the general meaning of income as per the dictionary, the said view cannot be agreed to. Section 92 to section 92F will be attracted since there is an international transaction between related parties. Whether that exercise is needed or would be fruitful in this case in view of the ruling on question No. 2 is a different matter. Strictly, the ruling on question No. 2 is that the income is chargeable under this Act but that it is taken out of its purview by the DTAC. So the ruling is that sections 92 to 92F would be applicable.

12. Since there is no chargeability to tax in India there will be no obligation on the applicant to withhold tax under section 195 of the Act. Question No. 5 is ruled on thus.

13. This Authority has taken the view in recent times that once there is chargeability to tax under the Act, a return of income under section 139 of the Act will have to be filed, even if the benefit of the DTAC is claimed or a ruling is given on that basis. The applicant will therefore have the obligation to file a return of income in terms of section 139 of the Act. Question No.6 is ruled on thus.

14. Question No. 7 relates to the applicability of section 115JB of the Act. This Authority has taken the view that it will have application. It is not necessary to repeat the reasons here, already given in the Ruling in AAR 999 of 2010 relating to a company that is said to be an associate enterprise and based on a transaction under the same scheme. Hence the ruling on question No. 7 is that section 115JB of the Act would be applicable.

15. Accordingly ruling is pronouced.

[Citation : 348 ITR 556]

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