Case of Authority for Advance Rulings, February 23, 2010 (case Amiantit International Holding Ltd. Vs Director of Income Tax (International Taxation))
| President | P.V. Reddi, J. (Chairman) and J. Khosla, Member |
| Resolution Date | February 23, 2010 |
Judgment:
P.V. Reddi, J. (Chairman), (New Delhi)
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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.
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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:
3.1. 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.
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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.
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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.
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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...
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