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2019 (7) TMI 1861 - AAR - Income TaxIncome taxable in India - transfer of shares of the Indian subsidiary - capital gains on transfer of equity shares of wholly owned subsidiary IEE Pvt.Ltd. will be taxable in the hands of the applicant at the rate of 10 per cent. in accordance with section 112(1)(c)(iii) of the Income-tax Act, 1961 - applicant is an Australian company and has sold the entire shareholding in its wholly owned Indian subsidiary to an entity of APXL group - applicant was controlling the affairs of the Indian subsidiary through its key managerial personnel (KMP) - applicant contends that it is a tax resident of Australia and as per article 13(5) of the India-Australia Tax Treaty on "Alienation of property", the sale of equity shares of IEE Pvt. Ltd. may be taxed in India HELD THAT:- Applicant is operating in India through wholly owned subsidiary (IEE Pvt. Ltd.) and on account of the world wide operations of applicant group, it has established supply agreements and the developed warehouse management, inventory control software and accounting system and the same practices were employed in running operations in India. It is also noticed that as part of business strategy the applicant group entered into strategic alliance with APXL group in 2006 (much before the impugned sale in 2012), sharing part of its supply chain and other practices. Along with the application what was submitted was share purchase agreement and clause 5.4 of the said agreement mentions that all strategic arrangements would cease with effect from the closing date of share purchase agreement. The Department's contention that the transaction is more than share transfer is thus not correct Slump sale - Argument of the Revenue that it is a case of slump sale is not borne out by facts. All the assets and liabilities IEE Pvt. Ltd. remain with IEE Pvt. Ltd. after the transfer and what has changed is the shareholding pattern. Further a perusal of the share purchase agreement, clause 5.4 reveals that all strategic agreement will automatically stand terminated with effect from closing of the share purchase agreement. Value of share of IEE Pvt. Ltd. is not ascertainable thus the fair market value of the capital assets on the date of transfer shall be deemed to be full value of the consideration received as per section 50D and also to ascertain the fair market value reference to valuation officer under section 55A is called for - The plea of the Department is not tenable as during the course of hearing the applicant has provided the valuation report prepared by BSR & Co. and the same was shared with the Department and their letter dated May 16, 2019 comments were also offered on the said valuation. The valuation report lists out various projections and assumptions and after employing the discounted cash flow method, the value of share was arrived at 5.34 AUD per share (₹ 372 per share). The actual share transfer has happened at ₹ 182 per share owing to hard bargaining by the buyer. Thus, the value of share was ascertained and pleas of the Department are rejected. Difference between ascertained price and the actual sale price is income of buyer as per section 56(2)(viia) - The said argument is really not pertinent to the case of the applicant as it is the seller of the shares. The referred section affects the buyer and the Department is at liberty to proceed against the buyer on the differential between fair market value and actual sale price. Substantial question raised in the application is answered in the affirmative, i. e., the capital gains on transfer of equity shares of IEE Pvt. Ltd. will be taxable in the hands of the applicant at the rate of 10 per cent. in accordance with section 112(1)(c)(iii) of the Income-tax Act, 1961.
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