TMI Blog2019 (11) TMI 1585X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). - A. A. R. No. 1224 of 2011 - - - Dated:- 21-11-2019 - G. Chockalingam J. (Vice-Chairman), Kishore Kumar Vyawahare Member Revenue And Inder Kumar Member Law For the Applicant : Percy Pardiwalla , Senior Advocate For the Department : Ms. S. Padmaja , ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Holding AG 4,430,609 99.99 2 Microwa AG 1 0.01 4. The shares of MTIN are held by MTH-Swiss as capital assets. As part of an internal restructuring, MTH-Swiss proposes to contribute 4,430,609 equity shares of ₹ 10 each in MTIN to the applicant. Further, the applicant would not be liable to compensate MTH-Swiss for the contribution of shares at any time by payment of any sum and as a consequence of the contribution, no obligation or liability of MTH-Swiss would be assumed at anytime in future by the applicant. MTH-Swiss would execute a share contribution agreement outside India for the contribution of shares of MTN to the applicant. As a result of the above transaction, the shares in MTIN would be held by the applicant. 5. The application filed by MT-AG(M/s. Mettler Toledo AG) was admitted by the Principal Bench of Authority for Advance Rulings vide an order dated May 29, 2013 under section 245R(2) of the Act. The issue of tax avoidance, determination of fair market value of the asset and applicability of transfer pricing provisions, claimed as a ground by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty by any person without consideration or for inadequate consideration in excess of INR 50,000 shall be chargeable to tax in the hands of the recipient under the head Income from other sources . The term property is defined to include inter alia shares in a company. It is submitted that income arising in terms of section 56(2)(x) of the Act from the proposed receipt of equity shares of MTIN would be taxable as income from other sources. As per section 90, the taxpayer is permitted to choose between the provisions of the Act or applicable tax treaty whichever is more beneficial. The applicant is a company incorporated in Switzerland and hold valid TRC and as the income stated above does not covered by any specific article of the India-Swiss tax treaty and it shall be covered by article 22 relating to other income. As per article 22(1) the income of resident wherever arising and not dealt with in other articles of tax treaty are taxable only in Switzerland. So the income arising in terms of section 56(2)(x) of the Act would not be taxable in India in the hands of the applicant in terms of article 22(1) of the India-Swiss Tax Treaty. Issue No. 2. 6.4. It is stated that as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of shares contemplated as a part of internal restructuring other than the shares of MTIN. MTH-Swiss is the lone entity which is contributing its equity shares to the applicant, whereas there are more than 20 entities in the group. Therefore, the Revenue's reiterated stand is that the contribution by a single player out of more than 20 players cannot constitute restructuring. The applicant has not given the details of the restructuring scheme. In the note on restructuring and contribution of shares attached to the submission it is merely stated that MT Group has subsidiaries in excess of 20 globally and these entities are in expansion mode and require a capital contribution. The contribution of shares of MTIN to MT-AG would allow effective movement of profit/funds. But such a claim is devoid of any corroboration. It is not clear how the contribution of the shares is going to help the group. Contemplation of only one transaction cannot lead to any restructuring of a group as large as the applicant. This shows that the so-called internal restructuring is devoid of any economic substance and is designed only for avoidance of tax. The scheme of restructuring is, in reality, noth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be given at the instance of an applicant, on a transaction. Here it is a concluded transaction, according to the applicant. While therefore, considering the question of giving the ruling, this Authority has also the right, nay, the duty, to consider the reality of the transaction and the genuineness of the transaction, in addition to its validity. When such transactions are entered into involving assets, substantially worth, it behoves the applicant before this Authority, to establish to the hilt the factum, the genuineness and the validity of the transaction, of the right to enter into the transaction and the bona fides of the transaction especially when the Revenue has challenged the genuineness of the transaction itself. In the light of the pleas raised by the Revenue and the circumstances obtaining, I feel that a proper enquiry into the question of the genuineness and validity of the transaction is necessary, I find that the Assessing Authority under the Act would be in a better position to go into and decide these questions. On the materials now before me, I do not think that I should venture into entering a finding one way or the other on the genuineness and validity of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue states that the above amendment was brought through Finance Act, 2012 and is applicable, with effect from April 1, 2013. Because of insertion of this section, the ruling pronounced by the hon'ble Authority for Advance Rulings in the case of Amiantit International Holding Ltd., In re [2010] 322 ITR 678 (AAR) ; 230 CTR (AAR) 19 and Goodyear Tire and Rubber Company, In re [2011] 334 ITR 69 (AAR) (AAR Nos. 1006 and 1031 of 2010) will no longer be relevant to decide the present case. Thus, to examine the above in the applicant's case, further details on the transfer of the shares are required to determine the full value of consideration for its comparison with the fair market value of the asset (shares). It is stipulated that the issue involves determination of fair market value of the shares of Indian company (MT-IN) and accordingly, the application is also barred by section 245R(2) of the Income-tax Act, 1961. 12. It is also argued by the Revenue that the contentions of the applicant that as there is no income liable to tax in the hands of MTH-Swiss, the provisions of sections 92 to 92F of the Act will not be applicable and the transfer pricing provisions are n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rong World ruling and the recent retrospective amendment to the definition of international transaction , it can be said that the contribution of shares in the present case is an international transaction subject to TP, even if there is no consideration. The Transfer Pricing Officer can substitute arm's length price so determined for nil consideration agreed between two parties. Thus, transfer pricing provisions will be attracted in the proposed transaction and because of this reason also the application is barred by section 245R(2) of the Income-tax Act, 1961. 15. As per the contentions of the Revenue, the impugned contribution of shares of MTIN by MTH-Swiss to the applicant, i. e., Mettler-Toledo AG (MT-AG) will fall under the definition of transfer as per section 2(47) read with section 45 of the Income-tax Act, 1961. 16. The Revenue further, submits that in terms of the provisions of section 56(2)(viia) of the Income-tax Act, 1961 ( the Act ), as the shares of MTIN would be transferred without any consideration, the aggregate fair market value of shares of MTIN shall be chargeable to tax under the head Income from other sources in the hands of the applicant. 17. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and Deere and Company, In re [2011] 337 ITR 277 (AAR) ; the Authority for Advance Rulings held that transfer of shares of Indian subsidiary without consideration is gift. This claim of the applicant is factually incorrect. The Authority for Advance Rulings in these cases has decided the matter in favour of the applicant holding that the consideration is not ascertainable or determinable. The Authority for Advance Rulings has not gone into the question of applicability of section 47(iii) in the above mentioned cases. Moreover, after the insertion of section 50D the ratio of these judgments does not help the applicant. 19. The Revenue concludes the arguments by saying that the transaction results into capital gains under section 45 in the hands of MTH Swiss and hence MT-AG needs to deduct tax accordingly under section 195. This issue also involves valuation of shares of MTIN which are proposed to be transferred to MTG Swiss. Thus this application itself is not admissible as per the first proviso to section 245R(2) of the Income-tax Act. Hence, the Revenue submits that the application may be rejected and issue may be decided in favour of the Revenue on the ground of admission as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates existence of consideration which is not ascertainable and reading the provisions in the matter suggested by the Revenue would render the provisions on section 47(iii) of the Act ineffective. It is also stated that in section 245R(4) proceedings it is not permissible to raise the issue of fair market value and in any case the authority is not being asked to determine the fair market value of the shares sought to the transferred. Decision 25. We have carefully considered the arguments from both sides, and also perused the documents submitted and also the decisions cited in the context. This is a case of proposed transaction of share sale. The application in this case was filed before the Authority for Advance Rulings on December 2, 2011 and the transaction has still not materialized. Mettler Toledo AG (the applicant, MT-AG for short), an MT Group company, is a company incorporated and tax resident of Switzerland. Mettler Toledo Holding AG (MTH Swiss), an MT Group company, is a company incorporated in Switzerland and Mettler-Toledo India Private Limited (MTIN), an MT Group company, is a company incorporated in India. It is claimed that as part of internal restructuring MTH- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve rise to income from other sources as per section 56(2)(x) (erstwhile section 56(2)(vii)(a)) in the hands of the applicant. It is also averred by the applicant that the income will not be in the nature of capital gains in the hands of the transferor as the transaction is without any consideration so charging section 45 fails and also the transaction is in the nature of gift and so it is not a transfer under section 47(iii) of the Income-tax Act. The learned authorised representative then proceeds to state that the applicant is entitled to choose more beneficial provisions between treaty and those contained in the Income-tax Act. Thereafter it is suggested that the applicant being Swiss resident, in terms of article 22(1) of the treaty, the income from other sources is taxable only in Switzerland and is not liable to tax in India. 30. The Department on the other hand maintains that the transaction is without any economic rationale and is not a genuine transaction and the transaction is entered into only with the intent to avoid tax in India. The Revenue also emphasizes that the transaction is governed by transfer pricing provisions and the Assessing Officer has to determine the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted having regard to the arm's length price .' There is nothing to show in the context that the expression 'income' has to be given a restricted meaning. 'Income', according to Concise Oxford English Dictionary, means 'money received, especially on a regular basis, for work or through investments'. The definition in the Act also does not restrict its meaning. In fact, it expands it by including within it, the various receipts described therein. Section 2(24) only says, 'income includes'. An inclusive definition is normally a definition of expansion and not of restriction. Therefore, going by its general meaning and by its defined meaning under the Act, there is no warrant for restricting the scope of the expression 'income' occurring in section 92 of the Act. Section 92(1) clearly speaks of computation of income from an international transaction. The Explanation to section 92(1) and sub-section (2) of section 92 do not restrict but only expand the concept of income under section 92(1). Section 92(3) only manifests the intention of not reducing the income as calculated under sub-sections (1) and (2). It cannot certainly be said to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w that whether ultimately the gain or income is taxable in the country or not, sections 92 to 92F would apply if the transaction is one coming within those provisions. In cases, where there is no liability what would be the purpose of undertaking a transfer pricing exercise is not a question that would affect the operation or rigour of a statutory provision on its plain words. In Dana Corporation, In re (AAR 788 of 2008)-since reported in [2010] 321 ITR 178 (AAR), it was stated that the expression income arising postulates that the income has arisen under the substantive charging provisions of the Act. In other words, the income referred to in section 92 is nothing but income captured by one or the other charging provisions of the Act. With respect, there is nothing in sections 92 to 92F enacted in a particular context, to suggest that the expression income arising, must not be understood in its plain and grammatical meaning, but the words should be understood as income arising under any of the charging provisions of the Act. Praxair Pacific Ltd., In re [2010] 326 ITR 276 (AAR) merely states that in the absence of liability to pay tax on the capital gains, the pro visions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... '. Undoubtedly, the learned counsel is right in interpreting this decision to the extent that what is not in the nature of income cannot be turned into income so as to make the arm's length price adjustment therein, and then bring the arm's length price adjustment to tax since the computation is of income and it is only the price at which transaction is entered into that is to be taken as an arm's length price in computation of that income. The arm's length price adjustments cannot be treated as income per se. However, the assessee does not derive any support from this decision since consideration for a loan, i. e., interest, is inherently in the nature of income. There is no, and there cannot be any, dispute or controversy about this character of income. The point of dispute is whether zero interest, or no interest, is good enough for computing the income or whether an arm's length interest must substitute this zero interest. The answer is obvious. As long as the transaction is an international transaction between the associated enterprises, the computation of income has to be on the basis of the arm's length interest. Therefore, in our considered view, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is a zero consideration in fact but application of arm's length principle results in a con sideration being assigned, the income, i. e., capital gain in this case, is to be computed on the basis of arm's length consideration. In view of the above discussions, in a situation in which the asses see has not assigned any consideration to transfer of a capital asset under an international transaction, though, in an arm's length situation, a consideration is required to be assigned, the computation of capital gains will not fail because, so far as computation of capital gains in such a situation is concerned, it has to be on the basis of arm's length price rather than stated consideration. This plea of the assessee also, therefore, fails. 38. A perusal of the above decisions clearly outline 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares other than those mentioned in Paragraph 4, of a company which is a resident of a Contracting State : (a) shall be taxable only in the Contracting State of which the alienator is a resident ; (b) notwithstanding the provision of sub-paragraph (a), India may tax gains from the alienation of shares in a company which is a resident of India. In this case the provisions of sub-paragraph (b) of paragraph 1, of article 23 shall apply. 6. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3, 4 and 5 shall be taxable only in the Contracting State of which the alienator is a resident. 41. 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). 42. The decisions cited by the applicant have also been perused. It is noticed that the later decisions cited above in the case of Castleton, Instrumentarium, LG Electronics and Vodafone India Servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax perspective on the contribution of the shares. 6. There is no other contribution of shares contemplated as a part of internal restructuring other than the shares of MT-IN. 44. A perusal of the aforesaid note (Point No.4) makes it apparent that 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 des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer pricing provisions are applicable. The transfer pricing provisions are comprised in Chapter X of the Income-tax Act with the following heading Chapter X Special Provisions relating to avoidance of tax In other words, the transfer pricing provisions are antitax abuse provisions 48. From above discussion, 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. Therefore, the case law cited by the learned authorised representative in the context are not commented upon. 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. 49. In view of foregoing, we hold as under : (1) and (2) Capital gains tax is exigible in the hands of ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
