Transfer pricing not attracted in the absence of liability to pay tax: AAR

Applicant: Goodyear Orient Company (Private) Ltd.and anr. on 02^nd May, 2011

A.A.R. Nos. 1006 & 1031 of 2010

Assessment Year:

Relevant Facts:

1. The Applicants are

(i) GTRC, a company incorporated in the US

(ii) GOCPL, a company incorporated in Singapore

(iii) GIL, a company incorporated in India.

The companies manages natural rubber purchasing and other business.

2. Entity (i) owns 75% of the shares in entity (iii) and seeks to transfer it to entity (ii) through a Share Contribution Deed (SCD).

Applicants questions:

1. Whether applicant (i) would be charged capital gains or any other tax?

2. Whether transfer pricing provisions are applicable on applicant (i)?

3. Whether any TDS is required to be deducted by applicant (i)?

4. Whether any tax would arise on GOCPL u/s 56?

Allowing the application of the assessee, the Hon’ble Authority held that:

(i) In the absence of any consideration for transfer, no income may be attributed to the transferee and thus, capital gains tax would not be applicable.

(ii) In the absence of liability to pay tax, Transfer Pricing provisions would not apply.

The decision is available here.

If a foreign company is liable to tax in India, even if not actually paying tax, has to necessarily file a return u/s 139(1): AAR

Also held:

The transfer pricing provisions from section 92 to 92F of the Act not attracted when sale and purchase of shares between non- resident companies.

VNU International v. Director of Income Tax, 28^th March, 2011

AAR No. 871 of 2010

Relevant Facts:

1. The applicant states that it is a tax resident of the Netherlands and does not have any permanent establishment in India.

2. The applicant first transferred 50% of shares it held in ORG-IMS, a company incorporated in India to IMS-AG, a company incorporated in Switzerland. After the transfer, the applicant was left with 50,765 shares of ORG-IMS, amounting to 50% of the total shares.

3. In a subsequent SPA, the applicant transferred 50% of the shares (50,765 shares) to IMS-AG & Interstatistik AG for a total consideration of ` 74,08,643. The shares were acquired for a consideration of ` 4,61,500.

Questions for consideration:

1. On the facts and circumstances of the case, whether any capital gain earned by VNU International on transfer of 50,765 shares of ORG-IMS to the purchasers would be liable to tax in India as per the provisions of the Act and the Tax Treaty between India and the Netherlands?

2. On the facts and circumstances of the case, if the capital gain is not taxable in India, whether the applicant is required to file any return of income under section 139 of the Act?

3. On the facts and circumstances of the case, whether the transfer of shares by the applicant to IMS AG attracts the transfer pricing provisions of section 92 to 92F of the Act?

4. On the facts and circumstances of the case, whether IMS AG were liable to withhold taxes under section 195 of the Act and if so, on what amount would the tax have to be deducted?

Partly upholding the application of the applicant, the Hon’ble Court held that:

Para 7: “ Transfer pricing provisions from section 92 to 92F of the Act would not be attracted as the sale and purchase of shares is between non- resident companies of the Netherland and Switzerland. Since there is no income chargeable to tax, there would be no liability to deduct tax u/s.195 of the Act.”

Para 8: “We are in agreement with the Learned Advocate that the capital gains earned by the applicant on transfer of shares would be covered by Article 13(5) of the Tax Treaty and shall be taxable only in the Netherlands, the state in which the transferor is a resident.”

Para 13: “...Then, as per the third proviso, every company is required to file its return of income, whether it has an income or a loss. The applicant being a foreign company, is covered within the definition of a company under section 2(17) of the Act. The applicant does not dispute that the income arising from the sale of shares is liable to be taxed in India by virtue of section 5(2) of the Act, though no tax is actually paid in India. It is a different matter that by virtue of DTAA the applicant is actually paying tax in the Netherlands. If the power to tax be granted it is difficult to appreciate the argument that when the resulting income is nil, there is no obligation to file return of income. It may be mentioned that where it is not necessary for a non- resident to furnish return under section 139(1) of the Act, the statue has specifically provided, as is the case under section 115AC(4) of the Act. Apart, it is necessary to have all the facts connected with the question on which the ruling is sought or is proposed to be sought in a vide amplitude by way of a return of income than alone by way of an application seeking advance ruling in Form 34C under IT Rules 1962. Instead of causing inconvenience to the applicant, the process of filing of return would facilitate the applicant in all future interactions with the Income tax department.”

The decision is available here.

Convention on Mutual Administrative Assistance in Tax Matters

Spain has recently signed an updated Convention on Mutual Administrative Assistance in Tax Matters (available here).

This treaty is a step ahead of Tax Information Exchange Agreements (TIEAs) and provides for Mutual Administrative Assistance between two or more nations in tax matters.

The Unofficial Consolidated Text Of The Convention On Mutual Administrative Assistance in Tax Matters As Amended By The 2010 Protocol is available here.

India had recently concluded a DTAA + Mutual Administrative Assistance in Tax Matters available here.

Supreme Court: Parliament may exercise legislative powers extra-territorially only in cases of existence of sufficient nexus

Gvk Industries Ltd. v. Income Tax Officer, on 1^st March, 2011

CIVIL APPEAL NO. 7796 OF 1997

Relevant facts:

The Appellant by way of a writ petition filed in Andhra Pradesh High Court had challenged an order of the Respondents which decided that the Appellant was liable to withhold a certain portion of monies being paid to a foreign company, under either one of Sections 9(1)(i) or 9(1)(vii)(b) of the Income Tax Act (1961). The Appellant had also challenged the vires of Section 9(1)(vii)(b) of the Income Tax Act (1961) for want of legislative competence and violation of Article 14 of the Constitution. The High Court having upheld that Section 9(1)(i) did not apply in the circumstances of the facts of the case, nevertheless upheld the applicability of Section 9(1)(vii)(b) on the facts and also upheld the constitutional validity of the said provision. The High Court mainly relied on the ratio of the judgment by a three judge bench of this court in ECIL. Hence, the appeal.

Question/s before the Hon’ble Court:

1. Is the Parliament constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on or effect(s) in or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians?

2. Does the Parliament have the powers to legislate "for" any territory, other than the territory of India or any part of it?

The Hon’ble Court held that:

Para 42: “A question still remains, in light of the extreme conclusions that may arise on account of the propositions made by the learned Attorney General. Is the Parliament empowered to enact laws in respect of extra-territorial aspects or causes that have no nexus with India, and furthermore could such laws be bereft of any benefit to India? The answer would have to be no.”

Para 52: “The learned Attorney General is not only seeking an interpretation of Article 245 wherein the Parliament is empowered to make laws "for" a foreign territory, which we have seen above is impermissible, but also an interpretation that places those vaguely defined laws, which by definition and implication can range over an indefinite, and possibly even an infinite number, of fields beyond judicial scrutiny, even in terms of the examination of their vires. That would be contrary to the basic structure of the Constitution.”

Also, while answering the questions posed before the Hon’ble Court, it was held that -

Para 76: “The answer to the above (Question 1) would be yes. However, the Parliament may exercise its legislative powers with respect to extra-territorial aspects or causes, - events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like - that occur, arise or exist or may be expected to do so, naturally or on account of some human agency, in the social, political, economic, cultural, biological, environmental or physical spheres outside the territory of India, and seek to control, modulate, mitigate or transform the effects of such extra-territorial aspects or causes, or in appropriate cases, eliminate or engender such extra-territorial aspects or causes, only when such extra-territorial aspects or causes have, or are expected to have, some impact on, or effect in, or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of, or security of inhabitants of India, and Indians.”

“The answer to the above (Question 2) would be no. It is obvious that Parliament is empowered to make laws with respect to aspects or causes that occur, arise or exist, or may be expected to do so, within the territory of India, and also with respect to extra-territorial aspects or causes that have an impact on or nexus with India as explained above in the answer to Question 1 above. Such laws would fall within the meaning, purport and ambit of the grant of powers to Parliament to make laws "for the whole or any part of the territory of India", and they may not be invalidated on the ground that they may require extra-territorial operation. Any laws enacted by Parliament with respect to extra- territorial aspects or causes that have no impact on or nexus with India would be ultra-vires, as answered in response to Question 1 above, and would be laws made "for" a foreign territory.”

The decision is available here.

AAR: Denial of benefit of Indexed cost of acquisition of asset to a non-resident in a LTCG not discriminatory under Art. 24 of the India-Canada DTAA

Applicant: Transworld Garnet Company Limited on 22^nd February, 2011

AAR No. 843 of 2009

Assessment Year: 2009-10

Question/s before the Hon’ble Authority:

(1) The Second proviso to section 48 provides that no indexation benefit is available to a non-resident in the computation of long term capital gain arising from transfer of shares in an Indian company. Will not the denial of indexation benefit tantamount to discriminatory tax treatment under Article 24 of the India-Canada tax Double Taxation Avoidance Agreement

(2) Whether in computing the capital gains, deduction is admissible under section 48 of the Act on account of the following expenses incurred in connection with transfer of shares? Fees for valuation of business, professional fees for advice in connection with transfer, legal expenses, fees for escrow account, travel and hotel charges incurred in connection with transfer.

http://law.incometaxindia.gov.in/DIT/File_opener.aspx?page=ITAC&schT=&csId=b2ad777a-30b9-4442-9a64-5a501395669c&rdb=sec&yr=707cfd24-61fa-4e54-afbd-a98ca85903da&sec=48&sch=&title=Taxmann%20-%20Direct%20Tax%20Laws

Relevant facts: The applicant entered into a share purchase agreement with VV Minerals, a partnership firm registered in India for transfer of its shareholding in TGI. The Applicant submits that it had incurred expenses wholly and exclusively in connection with transfer of the shares mentioned supra. These expenses are: Fees for valuation of business, professional fees for advice in connection with transfer, legal expenses, fees for escrow account, travel and hotel charges. It is contended that section 48 of the Act provides that expenditure incurred wholly and exclusively in connection with transfer will be deducted from the full value of consideration from computation of capital gains. As these expenses are allowable deductions in computing capital gains under section 48, the same should be reduced in calculating the taxable capital gains.

Dismissing the plea of the assessee, the Hon’ble Authority held that:

Para 6: “The Art.24 therefore seeks to prevent differentiation solely on the ground of nationality and against nationals as such. A comparison cannot be made between a resident and a national of a state and a national of another state to contend that they must be taxed in the same way. The state is not obliged to extend the same privileges which it accords to its own residents to one who is not. For example the residents are taxable on their worldwide income and the non-residents are not. Therefore, discrimination on account of nationality other than residence may be prohibited. A foreign national may be resident and an Indian national may be non-resident. Both the nationals may be non-residents. But being of different nationalities and being non- residents, the nationals cannot be said to be discriminated in terms of Art 24 of the DTAA.”

Para 11: “The denial of the benefit of the second proviso to section 48 of the Act to the applicant, a non-resident assessee while computing capital gains arising from the sale of shares of TGI would not amount to discriminatory treatment in terms of article 24 of the DTAA with Canada.”

The decision is available here.