P.V. Reddi, J. (Chairman) -
(1.) THIS application is filed by a non -resident Company under Section 245Q(1) of the Income -tax 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% by South Arabian Amiantit Company ("SAAC"), listed on the Saudi Stock Exchange and 1% by a trustee acting on behalf of SAAC. Amiantit Fiberglass Industries (India) Private Limited ("AFIIL") is an Indian company engaged in the production of glass reinforced polyester pipes, storage tanks etc. AIH holds 70% of equity capital of AFIIL and these shares are held as investments in physical form. Amitech Cyprus Holding Limited ("ACHL") is a company incorporated in Cyprus and is a 100% 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 & Latin America (represented by investments made in operating companies incorporated in India, North Africa & 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.
(2.) IT is recited in the draft Contribution agreement as follows:
AIH, the contributor holds 100% of the issued share capital in ACHL (the Company). The contributor also holds 70% 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 thorough 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:
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.
(3.) 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.
1.9 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 Section 92 to 92F of the ITA?
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 Section 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 Section 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 therefore, 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 Section 45 read with Section 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 Clause (iii) of Section 47 and therefore the charging provision under Section 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 Section 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 Section 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 ultimately 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. T.P. Act. In the view we have taken, there is no need for us to discuss whether Section 47(iii) is also attracted in the instant case.
4. We shall, before proceeding further, refer to the relevant provisions of IT Act:
Section 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 Sections 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 -section (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 Section 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 Clause (9) of Section 2 of the Insurance Act, 1938 (4 of 1938).]
Section 47. Transactions not regarded as transfer.
Nothing contained in Section 45 shall apply to the following transfers:
(i) any distribution of capital assets on the total or partial partition of a Hindu undivided family ;
(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.
Section 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 Section 2(24).;