AAR : Filing of Return is Must for Non-Resident Even if No Tax is Liable on Capital Gains in India

Authority For Advance Rulings (Income-Tax) New Delhi

VNU International B.V., In Re

Section : 90,92 to 92F,139

Justice P.K. Balasubramanyan, Chairman J. Khosla And V.K. Shridhar, Member

AAR No. 871 Of 2010

March 28, 2011

RULING

V.K. Shridhar, Member. – The applicant, VNU International B.V., is a company incorporated in the Netherlands. The applicant states that it is a tax resident of the Netherlands and does not have any permanent establishment in India. It is a subsidiary of the Nielsen Company B.V. The applicant holds 100 per cent shares of AC Nielsen ONG-MARG Pvt. Ltd. (ACNOM), a company incorporated in India. It is stated that ACNOM is a solution provider of syndicated and non-syndicated information services in India that examines health care, consumer products, financial, retail, and business to business and media performance trends. ORG-IMS Research Pvt. Ltd. (ORG-IMS) is an Indian company which had entered into a scheme of arrangement with ACNOM in the year 2003 whereby the pharmaceutical industry retail research business of ACNOM got demerged. In the year 2004, the applicant transferred 50 per cent shares of ORG-IMS to IMS-AG, a company incorporated in Switzerland. After the said transfer, the applicant was left with 50,756 shares of ORG-IMS. The details of acquisition of 50,765 shares of ORG-IMS held by the applicant as per letter dated 25-3-2010 are as under :

Date of acquisition

Number of shares 

Cost of acquisition 

30 December, 2003

3,615 shares 

Rs. 3,61,500 

13 February, 2004

1,000 shares 

Rs.1,00,000 

30 September, 2006

46,150 shares (issued as bonus) 

Nil 

Total

50,765 shares 

Rs. 4,61,500 

2. The applicant executed a Share Purchase Agreement (SPA) whereby it sold these 50,765 shares of ORG-IMS to IMS-AG & Interstatistik AG (purchasers) for a consideration of USD 74,08,643. Earlier, in the proposed SPA, the sale consideration was of USD 70,00,000 plus additional payment. However, as per the executed SPA, the clause relating to additional payment was removed and the purchase consideration was revised to USD 74,08,643. Thus, 50,765 shares of the Indian company ORG-IMS acquired at a cost of Rs. 4,61,500 were sold for a consideration of USD 74,08,643.

3. In this background, the applicant seeks the ruling of this Authority on the following questions :

“1.On the facts and circumstances of the case, whether any capital gain earned by VNU International on transfer of 50,765 shares of ORG-IMS to the purchasers would be liable to tax in India as per the provisions of the Act and the Tax Treaty between India and the Netherlands.

2.On the facts and circumstances of the case, if the capital gain is not taxable in India, whether the applicant is required to file any return of income under section 139 of the Act?

3.On the facts and circumstances of the case, whether the proposed transfer of shares by the applicant to IMS AG attracts the transfer pricing provisions of sections 92 to 92F of the Act?

4.On the facts and circumstances of the case, whether IMS AG would be liable to withhold taxes under section 195 of the Act and if so, on what amount would the tax have to be deducted?”

As the applicant had already transferred shares of ORG-IMS to the purchasers, a request was made through letter dated 25-3-2010 seeking to amend questions at Sl. Nos. 3 and 4 as under :

“3.Based on the facts and circumstances of the case, whether the transfer of shares by the applicant to the purchasers would attract transfer pricing provisions under sections 92 to 92F of the Act?

4.On the facts and circumstances of the case, whether the purchasers were liable to withhold tax at source under section 195 of the Act and if so, on what amount should the tax have been deducted?”

4. The applicant submits that income which is received/deemed to be received in India or which accrues or arise/deemed to accrue or arise in India to a non-resident is liable to tax in India in view of section 5(2) of the Income-tax Act, 1961 (Act). Section 9(1) of the Act is a deeming provision which treats certain categories of income as accruing in India and therefore liable to tax in India. As per sub-clause (i) of section 9(1), all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of capital asset in India, will be taxable in India. The applicant submits that as ORG-IMS is an Indian company, the situs of its shares would be in India. Accordingly, any capital gain earned by the applicant on the transfer of shares of ORG-IMS would be taxable in India.

u The applicant submits that under section 90(2) of the Act, an assessee has an option to be governed by the provision of the Tax Treaty, if they are more beneficial than the provision of the Act. India has entered into a Tax Treaty with the Netherlands. The benefits of the Tax Treaty will be available to the applicant as it is a resident of the Netherlands as per Article 4(1) of the Tax Treaty. Accordingly, the applicant would be eligible to claim benefit of the Tax Treaty, where the same is favourable than the provision of the Act.

u The applicant submits that transfer of shares of ORG-IMS by the applicant would be governed by Article 13(5) of the Tax Treaty. Any capital gain earned by it would be taxable only in Netherlands. The said capital gain would not be taxable in India, as the shares of ORG-IMS are transferred to the purchasers who are residents of Switzerland.

u The applicant further submits that as per section 92 of the Act, any income arising from an international transaction has to be computed at the arm’s length price. Sections 92 to 92F of the Act are merely machinery sections and would apply only where the transaction entered by the foreign assessee is liable to tax in India. As the said transfer of shares of ORG-IMS by the applicant is not liable to tax in India, the transfer pricing regulation would not apply.

u The applicant then submits that section 195 of the Act would have no application as the capital gains on transfer of shares of ORG-IMS by the applicant is not taxable in India. If the Authority is of the view that capital gain earned is taxable in India, then the income-tax deducted by purchasers should be on the capital gain earned and not on entire sale consideration.

5. Article 13 of the Tax Treaty between India and the Netherlands is extracted below :

“Article 13 – CAPITAL GAINS”

“1.Gains derived by a resident of one of the States from the alienation of immovable property referred to in Article 6 and situated in the other State may be taxed in that other State.

2.Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of one of the States has in the other State or movable property pertaining to a fixed base available to a resident of one of the States in the other State for the purpose of performing independent personal services, including such gains from the alienation of such permanent establishment (alone or with the whole enterprise) or of such fixed base, may be taxed in that other State.

3.Gain from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft, shall be taxable only in the State in which the place of effective management of the enterprise is situated. For the purposes of this paragraph, the provisions of paragraph 3 of Article 8A shall apply.

4.Gains derived by a resident of one of the State from the alienation of shares (other than shares quoted on an approved stock exchange) forming part of a substantial interest in the capital stock of a company which is a resident of the other State, the value of which shares is derived principally from immovable property situated in that other State other than property in which the business of the company was carried on, may be taxed in that other State. A substantial interest exists when the resident owns 25 per cent or more of the shares of the capital stock of a company.

5.Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 4 shall be taxable only in the State of which the alienator is a resident. However, gains from the alienation of shares issued by a company resident in the other State which shares from part of at least a 10 per cent interest in the capital stock of that company, may be taxed in that other State if the alienation takes place to a resident of that other State. However, such gains shall remain taxable only in the State of which the alienator is a resident if such gains are realized in the course of a corporate organization, re-organization, amalgamation, division or similar transaction, and the buyer or the seller owns at least 10 per cent of the capital of the other.

6.The provisions of paragraph 3 shall not affect the right of each of the States to levy according to its own law a tax on gains from the alienation of the shares or “jouissance” rights in a company, the capital of which is wholly or partly divided into shares and which under the laws of that State is a resident of that State. Derived by an individual who is resident of the other State and has been a resident of the first-mentioned State in the course of the last five years preceding the alienation of the shares or “jouissance” rights.”

6. The Learned Advocate contended that as the shares of ORG-IMS are not immovable property or movable property forming part of the business property of a PE or any gain from alienation of ships or aircraft operated in international traffic or movable property pertaining to such business, the transfer of shares of ORG-IMS by the applicant would not be governed by Article 13(1) to (3) of the Tax Treaty. As the shares of ORG-IMS do not derive its value from any immovable property situated in India, Article 13(4) would also not apply to any capital gain earned by the applicant from sale of shares of ORG-IMS. The learned Advocate further contended that the capital gains earned by the applicant on transfer of shares would be covered by Article 13(5) of the Tax Treaty and shall be taxable only in the State in which the transferor is a resident. As the applicant is a resident of the Netherlands, any capital gain earned by it would be taxable in the Netherlands. Further condition under Article 13(5) that gains from alienation of shares issued by an Indian company forming part of at least 10 per cent interest in the capital stock of that Indian company can be taxed in India, if the transfer takes place to a resident of India is not attracted as the shares of ORG-IMS have been transferred to the purchasers who are residents of Switzerland.

7. Conceding the applicant’s contentions to question Nos. 1, 3 and 4, the revenue submits that as per the facts provided by the applicant, it is apparent that Article 13(5) would be applicable as the purchaser companies are not the residents of India. The taxability of the capital gains would arise only in the Netherlands and the transaction would not be liable to tax in India. The transfer pricing provisions from sections 92 to 92F of the Act would not be attracted as the sale and purchase of shares is between non- resident companies of the Netherland and Switzerland. Since there is no income chargeable to tax, there would be no liability to deduct tax under section 195 of the Act.

8. We are in agreement with the Learned Advocate that the capital gains earned by the applicant on transfer of shares would be covered by Article 13(5) of the Tax Treaty and shall be taxable only in the Netherlands, the State in which the transferor is a resident. The revenue has also conceded the applicant’s contentions to question Nos. 1, 3 and 4. We accordingly answer question Nos. 1, 3 and 4 in favour of the applicant.

9. Regarding filing of return of income, the applicant is of the view that as the income is not taxable in India, it is not under any obligation to file the return of income under section 139(1) of the Act. The learned Advocate argued that section 139(1) of the Act is merely a machinery section and would apply only where the transaction entered into by the foreign assessee is liable to be taxed in India. In this connection, reliance is placed on the AAR Rulings in the cases of Veneburg Group, In re [2007] 289 ITR 464 ; Dana Corpn., In re [2010] 321 ITR 178 ; Amiantit International Holding Ltd., In re [2010] 322 ITR 678. It is submitted that in all these Rulings, the Authority took the view that section 139(1) is a “machinery provision and would not apply in the absence of liability to tax. The learned Advocate further stated that the very purpose of coming before the AAR would be defeated if the applicant is faced with the hardship of filing of return.

10. In response, the learned CIT appearing on behalf of the revenue strenuously urged that first step to proceed is to see whether a particular source of income is taxable in India. If that particular source of income is also taxable in the other country, then the second step is to see whether there is a compromise between tax claims of the two concerned Governments. The relief by way of compromise is then achieved by referring to DTAA. According to the learned CIT, this exercise, from start to finish, is carried out under the Act. While doing so, the compliance to machinery provisions under section 139(1) assumes importance especially when the non-resident applicant raises questions on the basis of a single transaction. The argument that it would be burdensome to comply with the formalities of filing the return is not a valid excuse.

11. We think that submissions made by the learned CIT are sound and need to be accepted. It appears to us that this Authority formed the view in the rulings cited supra on the basis that the expression “income” appearing in section 139 is not used in a sense wider than or different from its scope and connotation elsewhere in the Act. A ruling under the Act is confined to the facts projected in the application leading to the ruling and binding only on that party and the Revenue. In a case where, there is a liability to tax under the Income-tax Act and that liability is removed only by virtue of the provision in the Treaty, we think it proper to re-examine the question.

12. Let us refer to section 139(1) which deals with the filing of return of income.

The relevant portion of section 139(1) of the Act is extracted below :

“139 Return of income.—(1) Every person.

(a)being a company [or a firm]: or

(b)being a person other than a company [or a firm], if his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax,

shall, on or before the due date, furnish a return of his income or the income of such other person during the previous year, in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed :

Provided that ******

Provided further ******

Provided also that every company [or a firm] shall furnish on or before the due date the return in respect of its income or loss in every previous year.”

13. As is noticed, while casting obligation to file return of income by a company, the Legislature in its wisdom has omitted to include the expression ‘exceeded the maximum amount which is not chargeable to income-tax’. Then, as per the third proviso, every company is required to file its return of income, whether it has an income or a loss. The applicant being a foreign company, is covered within the definition of a company under section 2(17) of the Act. The applicant does not dispute that the income arising from the sale of shares is liable to be taxed in India by virtue of section 5(2) of the Act, though no tax is actually paid in India. It is a different matter that by virtue of DTAA the applicant is actually paying tax in the Netherlands. If the power to tax be granted it is difficult to appreciate the argument that when the resulting income is nil, there is no obligation to file return of income. It may be mentioned that where it is not necessary for a non-resident to furnish return under section 139(1) of the Act, the statute has specifically provided, as is the case under section 115AC(4) of the Act. Apart, it is necessary to have all the facts connected with the question on which the ruling is sought or is proposed to be sought in a vide amplitude by way of a return of income than alone by way of an application seeking advance ruling in Form 34C under IT Rules, 1962. Instead of causing inconvenience to the applicant, the process of filing of return would facilitate the applicant in all future interactions with the Income-tax Department.

14. We are therefore not inclined to accept the contention of the applicant and accordingly answer the question No. 2 against the applicant.

[Citation : 334 ITR 56]

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