TMI Blog2010 (2) TMI 119X X X X Extracts X X X X X X X X Extracts X X X X ..... the total income of the previous year of any person - under section 115-O, PG India would be liable to pay tax on the distribution of profits by way of dividends to the applicant @ 15 per cent. However, such dividends received by the applicant (shareholder of PG India) would not be taxable in its hands under the IT Act. - The applicant is entitled to invoke the benefit of the provisions in the Treaty notwithstanding the provisions of the Income-tax Act, 1961 on the same subject. Section 90(2) of the IT Act recognizes this principle. It lays down that in relation to the assessee to whom the Agreement (Treaty) applies, the provisions of the Act shall apply to the extent they are more beneficial to the assessee - 818/2009 - - - Dated:- 25-2-2010 - Mr. Justice P.V. Reddi and Mr. J. Khosla, JJ. Present for the Applicant: Mr. Nishith Desai, Advocate, Mr. Bijal Ajinkya, Advocate, Mr. Mahesh Kumar, Advocate, Mr. Huzefa Tavawalla, Advocate, Mr. Vivek Narayanan, Representative of applicant Present for the Department: None RULING : In this application, filed u/s 245Q(1) of the Income-tax Act, 1961 (hereinafter referred to as 'IT Act'), the following facts are stated: T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital (hereinafter referred to as "India-Netherlands Treaty")? 3. Whether, on the facts and in the circumstances of the case, the transferor would be liable to tax in India on the capital gains that may accrue from a buyback of shares by its wholly owned Indian subsidiary, PG India as per the provisions of the ITA? 4. Whether, on the facts and in the circumstances of the case, the applicant would be liable to tax in India on the capital gains that may accrue from a buyback of shares by its wholly owned Indian subsidiary, PG India er the provisions of the India-Netherlands Treaty? 3. In the course of hearing, the learned counsel for the applicant has stated that question no. 4 need not be decided and it may be treated as not pressed. Question No.1 4. It relates to exigiblity of tax under the Income-tax Act in respect of dividends received by the applicant from its wholly owned subsidiary Pierburg India Pvt. Ltd. By virtue of section 9(1)(iv) of the IT Act, a dividend paid by an Indian company outside India is deemed to be taxable income. However, in vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 form part of at least a 10 per cent interest in the capital stock of that company may be taxed in the 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, reorganization, amalgamation, division or similar transaction, and the buyer or seller owns at least 10 per cent of the capital of the other." 8. It is the case of the applicant that the exception provided in the second part of para 5 is not attracted in a case of transfer of shares to a non-resident. Therefore, even if the quantum of shares transferred exceed 10% of the capital stock of PG India, the second condition for triggering the exception, namely, the alienation to a resident of India, is not satisfied. Thus, according to the applicant, the substantive part of Art.5 governs the present case. We find substance in the plea taken by the applicant. 9. It is beyond dispute that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shares and the capital gains that would accrue. The transferor i.e. the Netherlands Company though a subsidiary of the aforementioned Germany Company is a distinct legal entity having its own board of directors and management systems. The glaring fact which is to be taken note of in this context is that the applicant which was incorporated towards the end of 2008 made significant investments in the Indian Company. It is stated that from September 2009 onwards, it invested nearly 17 million Euros (110 crores) in Pierburg India. It is seen from the facts stated by the applicant that the applicant had initially acquired the shares of the Indian Company from Pierburg GMBH at a price determined as per the evaluation guidelines prescribed under the Foreign Exchange Management Act, 2000. The substantial investments it has made was with a view to broaden the capital base of the Indian company, as stated by the applicant. The implied suggestion of the Revenue that the applicant is a sham entity or a conduit company deliberately set up to avoid the tax liability relating to capital gains is wholly misconceived. It would be presumptuous to predicate that the gains accruing to the applicant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the foreign company (applicant-Company) will not be chargeable to capital gains tax under the IT Act. However, for the reasons stated in the following para, we refrain from giving a ruling on this aspect. 13. The relevant part of the definition of 'advance ruling' contained in Section 245N reads thus: "a determination in relation to the tax liability of a non-resident arising out of a transaction which has been undertaken or proposed to be undertaken by a non-resident". 14. The transaction of buy-back of shares as and when it takes place, would be an altogether different transaction from the transfer of shares embraced within Question No.2. The transferee will be PG India whereas in the transaction falling under Question No.2, the transferee is a non-resident entity. The buy-back is within the volition and decision of PG India which is not the case in regard to Question No.2. Moreover, the buy-back of shares is not something which is integrally connected with the first transaction resulting from the investments it made in the Indian company. We are of the view that the applicant has to make a separate application at the appropriate time. It would not be proper and approp ..... 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