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2019 (11) TMI 1585 - AAR - Income TaxAdvance ruling - Income accrued in India - applicant liable to tax in respect of the proposed receipt of equity shares of MTIN under the Double Tax Avoidance Agreement entered into between India and Switzerland ? - tax avoidance arrangement - transfer pricing provisions Applicability - whether the proposed share transfer transaction results in any taxable income? - shares of Indian Company MTIN or asset situated in India - whether MTH-Swiss is required to deduct any tax under section 195 of the Act in relation to the proposed contribution of shares of MTIN to the applicant ? - HELD THAT:- HELD THAT:- It is not really correct in contending that if the assessee has not reported any income from a particular international transaction, the arm's length price adjustment cannot compute the same. No movement of consideration between AEs is not a decisive factor in application of Transfer Pricing provisions. The decision in Castleton, even goes to the extent of saying that the transfer pricing provisions should be applicable even if the transaction is exempt under treaty provisions. The facts in our case are on much better footing as the capital gains arising after determination of arm's length price is not exempt under Indo-Swiss treaty. An applicant can manage its business affair in any manner it likes but the tax authorities will have to apply appropriate tax provisions under the Act. An applicant can transfer shares at no consideration but in case of international transaction provisions of sections 92 to 92F would be applicable and the arm's length price has to be ascertained. Transfer pricing provisions are attracted and arm's length price has to be determined. Once arm's length price is determined which would certainly be having some value as it is in connection with shares of running Indian concern, the capital gain liability would arise in the hands of transferor, i. e., MTH-Swiss. Capital gains treaty provisions which are contained in article 13 of the treaty and the relevant clause is 13(5) - The proposed transaction would give right to India to tax capital gains tax from alienation of Indian shares and consequently tax is required to be deducted under section 195 by the applicant. The applicant can seek set off of Swiss taxes, if any, under article 23(1)(b). Whether the proposed transaction is a tax avoidance device or not? - Apart from the proposed share transfer of the Indian Company, there is no other change in 20 companies of the group worldwide and the note does not specify any business gains/economic rationale/synergies for such transaction. The learned authorised representative has also failed to provide any evidence to establish commercial substance in regard to the purported transaction. The transaction relates to transfer of assets of substantial value at no consideration and is designed to give rise to income from other sources under the Income-tax Act in the hands of applicant knowing fully well that the income from other sources is exempt under Indo-Swiss treaty. Further, the transfer at no consideration would not lead to any capital gains in the hands of the transferor as the charging provisions under section 45 read with section 47(iii) would obviate capital gain liability. In our considered view, it is a clear case of tax avoidance. By designing the transaction in such a manner there is clear avoidance of capital gain tax in hands of transferor. The transaction is exempt from securities transfer tax in Switzerland if the transfer of securities is for lack of consideration. Thus by proposed transfer at no consideration avoids payment of taxes in India as well as in Switzerland. It is also observed that despite having more than 20 subsidiaries globally, the Mettler-Toledo group has proposed only single share transfer transaction from MTH-Swiss to MT-AG and there is no other changes in the group structure, allocation or movement of assets and other intangibles and that too the shares of an Indian entity MTIN and that too for no consideration. The transfer is between a Swiss company to another Swiss company and for both of them it is investment and this transfer without any concomitant transfer of any assets, rights, brands, etc., from the recipient or from any other entity to the transferor defies logic and the scheme prima facie is without any commercial logic or substance and falls under scheme for tax avoidance. The application thus falls under clause (iii) to proviso to section 245R(2). We conclude that the proposed transaction is a tax avoidance device. There are number of other arguments and contentions preferred before us such as whether this is a case of genuine gift transaction from one company to another or whether a company can gift shares to another company. In our determination once it is held that transfer pricing provisions are applicable and arm's length price is computed, the capital gain arising in the hands of MTH Swiss would be taxable in India. Also, we are not adverting to the contentions relating to application of section 50CA/50D which are not relevant for deciding the questions raised in the application. Ruling:- (1) and (2) Capital gains tax is exigible in the hands of transferor, i. e., MTH-Swiss in view of application of transfer pricing provisions to the transaction. (3) As per section 195(1), the applicant is liable to deduct TDS on the capital gains arising to the transferor. (4) The proposed share sale transaction is a tax avoidance arrangement and falls under clause (iii) to proviso to section 245R(2).
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