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Rajendra Nayak |
Ganesh Pai |
The Authority for Advance Rulings (AAR) in India, in the case of Amiantit International Holding Limited [2010-TIOL-07-ARA-IT] recently ruled on the issue of whether the transfer of shares in an Indian company for no consideration is taxable under the Income-tax Act, 1961 and whether transfer pricing provisions apply to such transfers.
The applicant, incorporated in Bahrain, is an investment company having investments in various Asian, European and Latin American companies. As part of an internal reorganisation process, Amiantit proposed to reorganise its shareholdings in various entities. Among other changes, it proposed to contribute its shareholding in an Indian company to its Cyprus subsidiary for no consideration.
The questions before the AAR were whether the applicant is liable to tax in India on the proposed transfer and whether transfer pricing provisions will get attracted on such transfer. In general, the transfer of shares of an Indian company is liable for capital gains tax under the Act. The excess of sale consideration over the cost basis in the shares are subject to tax. Further, under the transfer pricing provisions of the Act, income from transfer of shares between the associated enterprises (such as the applicant and its Cyprus subsidiary) is required to be computed at arm's length.
The AAR's observations and conclusions are summarised below.
It is a settled law that the charging provisions must be read harmoniously with the computation mechanism under the Act. If the computation provision cannot be given effect to, the charge fails;
The charging provision refers to actual receipt of income as well as a right to receive income. If consideration is incapable of being valued in definite terms or it remains unascertainable, the charging provisions and the computation mechanism cannot be applied;
There is nothing concrete or definite which the transferee (Cyprus subsidiary) gives or makes over to the transferor as consideration for the receipt of shares. Accordingly, there cannot be a consideration as contemplated in the charging provisions for capital gains;
The transfer pricing provisions can be applied only when there is income chargeable to tax. Therefore, the application of transfer pricing provisions was ruled out as there was no income chargeable to tax by the application of the charging provisions. In this regard, the AAR relied on an earlier AAR ruling in the case of Dana Corporation (2009-TIOL-29-ARA-IT), which held that transfer pricing provisions are not independent of charging provisions and where there is no income, transfer pricing provisions would not be applicable.
Rajendra Nayak (rajendra.nayak@in.ey.com) & Ganesh Pai (ganesh.pai@in.ey.com)
