International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Indian authority rules on transfer pricing provisions

In a recent ruling, the AAR (Authority for Advance Rulings) in India held that transfer pricing provisions are only computational provisions and in the absence of charge of tax under any particular head of income specified in the Income tax Act, 1961 (the Act), transfer pricing provisions are not applicable.

Facts of the case

As part of a reorganisation arising from bankruptcy proceedings Dana Corporation (DC), a US company, transferred shares in three Indian companies, along with the shares in other companies worldwide, to two of its subsidiary companies in the US. Subsequently, two new companies Dana Holding Company (DHC) and its 100% subsidiary Dana Companies Limited Liability Company (DC LLC) were set up in the US. The shares in the two subsidiary companies were then transferred to DHC, and DC was merged into DC LLC. In terms of the reorganisation proposal, liabilities of DC that were transferred to DHC were more than the assets that were transferred. Share transfer agreements were executed according to which the transfer was effected without consideration.

Question before AAR

DC LLC (as the successor of DC) filed an application with the AAR as to whether the transfer of shares of the Indian companies, by DC, is taxable under the Act.


Section 45 charges the profits or gains arising from the transfer of a capital asset to income tax and it shall be deemed to be the income of the previous year in which the transfer took place. Section 48 provides for “mode of computation” of capital gains. It is settled law that section 45 must be read with section 48 and if the computation provision cannot be given effect to for any reason, the charge under section 45 fails [reliance was placed on the Supreme Court decision in the case of CIT v BC Srinivasa Setty [(1981) 128 ITR 294] and Sunil Siddharthbhai v CIT [156 ITR 509].

The AAR held that the profit or gain arising to the transferor must be a distinctly and clearly identifiable component of the transaction. The consideration for the transfer of shares in terms of money or money’s worth is not something which can be implied or assumed. Shares may have been notionally valued for the purpose of preparing the financial statements of DHC or to facilitate the reorganisation process, however, it cannot be reasonably said that the book value or the market value of the shares really represents the consideration for the transfer or the profit arising from the transfer. In this context, DC had clarified that the valuation of individual assets was the value of the reorganised entity, that is, DHC, and had nothing to do with the value of the assets and liabilities of the entity under reorganisation, that is DC.

Where the application of transfer pricing regulations is concerned, the AAR held that section 92 of the Act is not an independent charging provision. It is a provision dealing with “computation of income from international transactions”. Meaning, the income referred in section 92 is nothing but the income captured by one or the other charging provisions of the Act. Section 92 is not intended to bring in a new head of income or charge the tax on income, which is otherwise not chargeable under the Act. If the charging section 45 fails, then section 92 does not come to the aid of the Revenue, even though it is an international transaction.

In view of this, the AAR held that the transfer of shares of the three Indian companies does not incur capital gains tax in India.

Scope of rules

This ruling emphasises that the transfer pricing provisions ought to apply only when income arises from an international transaction. Where no income arises under the charging provisions of the Act, the machinery provisions would not apply. The transfer pricing provisions of the Act are not intended to bring to charge income which is not otherwise chargeable.

It is interesting to note that the AAR also distinguished this ruling from another of its ruling in the case of Canoro Resources. The AAR held that the issue under consideration in this case was not about whether the income was taxable as capital gains but on the mode of computation.

Although, an AAR ruling is binding only on the applicant and the tax authority, it does have persuasive value and the revenue authorities and appellate authorities do take note of the principles laid down by the AAR in deciding similar cases.

Considering the significant transfer pricing adjustments in the recent past, this ruling provides a welcome relief to taxpayers for international transactions where no income arises under the charging provisions.

Samir Gandhi (, Manisha Gupta ( and Bhavik Mehta ( of Deloitte Haskins and Sells in India.

more across site & bottom lb ros

More from across our site

Premier League football clubs are accused of avoiding paying up to £470 million in UK tax, while Malta is poised to overhaul its unique corporate tax system.
Bartosz Doroszuk of MDDP offers insights on Poland’s new tax legislation on shifted profits, as the implementation deadline looms nearer.
Four tax specialists preview the UK’s transfer pricing requirements, which come into effect on April 1.
The rise of the QDMTT will likely change how countries compete on tax and transfer pricing policy, but it may not reverse decades of falling corporate tax rates.
ITR’s latest quarterly PDF is going live today, leading on the EU’s BEFIT initiative and wider tax reforms in the bloc.
COVID-19 and an overworked HMRC may have created the ‘perfect storm’ for reduced prosecutions, according to tax professionals.
Participants in the consultation on the UN secretary-general’s report into international tax cooperation are divided – some believe UN-led structures are the way forward, while others want to improve existing ones. Ralph Cunningham reports.
The German government unveils plans to implement pillar two, while EY is reportedly still divided over ‘Project Everest’.
With the M&A market booming, ITR has partnered with correspondents from firms around the globe to provide a guide to the deal structures being employed and tax authorities' responses.
Xing Hu, partner at Hui Ye Law Firm in Shanghai, looks at the implications of the US Uyghur Forced Labor Protection Act for TP comparability analysis of China.