2012 (8) TMI 433 - AAR - Income Tax

Tax Authority Rules Capital Gains Not Taxable Due to Tax Treaty

The Authority concluded that the shares held by the applicant were considered 'capital assets' under the Income-tax Act. The capital gains arising from ... India-Mauritius DTAA – chargeability to tax of the proposed transaction of sale of shares of GSKPL, the Indian company, to GSK Pte. Singapore by applicant company being Mauritius resident and part of GSK group – Held that:- It is observed that shares were held by the applicant from the year 1993 in one and from the year 1996 in the other and had no intention to trade in those shares and they were held as investments. Hence, it is ruled that the shares held would be considered as ‘capital asset’ Taxability of capital gains arising from transfer of shares in India – Held that:- Once the asset is held to be a capital asset, its proposed sale will generate a gain that would qualify to be capital gains under the Act and under the India-Mauritius DTAC. However, capital gains that would arise would not be chargeable to tax in India in view of paragraph 4 of Article 13 of the DTAC between India and Mauritius. Applicability of transfer pricing provisions from Section 92 to Section 92F – Held that:- Even if section 92 to section 92F are machinery provisions, without resort to them, the capital gains from an international transaction cannot be determined. Only on determining whether capital gains have arisen, would the question arise whether the gain is chargeable to tax or not under the Act. The application of Section 92 cannot be kept at bay by jumping to the second stage straight away. Therefore, 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. Liability to withhold taxes u/s 195 – Held that:- In cases where there is no chargeability to tax, there will be no obligation to withhold. Requirement to file return of income u/s 139 – Held that:- Since the income is not taxable in this country, under the Act, there is no obligation on the applicant to file a return of income u/s 139 Applicability of Section 112 when the proposed transfer or sale of shares is not through a recognized stock exchange – Held that:- Section 112(1) would be attracted when the income of an assessee includes income chargeable under the head capital gains under the Act. In the present case, the income of the applicant would be capital gains. Once it is, Section 112 of the Act is attracted. Applicability of provisions of Section115JB – Held that:- Section 115JB overrides section 34 to 48 of the Act. So by reading section 115JB as confined in its operation to domestic companies alone, one may be doing violence to the special scheme of taxation adopted for taxing certain companies. There is no compelling reason to jettison the scheme of taxation adopted by the Act by reading down section 115JB as confined in its application to domestic companies alone. Therefore, Section 115JB(1) would equally apply to a foreign company Theory of precedents may not have strict application in proceedings before this Authority. This Authority is bound only by the decisions of the Supreme Court. The decisions of High Courts have only persuasive value. This Authority is not subordinate to any High Court for even Article 227 of the Constitution to apply. While the AAR should be slow in disagreeing with propositions of law laid down in earlier rulings, it should not be deterred from taking a contrary view if it is convinced that the earlier view is not correct. Issues Involved:1. Classification of shares as 'capital asset'2. Taxability of capital gains in India3. Taxability in the absence of a Permanent Establishment in India4. Applicability of transfer pricing provisions5. Withholding tax obligations under Section 1956. Requirement to file a return of income under Section 1397. Applicability of Section 112(1) concerning long-term capital gains8. Applicability of Section 115JB to a foreign companyDetailed Analysis:1. Classification of Shares as 'Capital Asset':The primary issue was whether the investment held by the applicant in equity shares of GlaxoSmithKline Pharmaceuticals Limited (GSKPL) would be considered a 'capital asset' under Section 2(14) of the Income-tax Act, 1961. The Authority concluded that the shares held by the applicant since 1993 and 1996 were indeed capital assets. The applicant had no intention to trade in these shares, and they were held as investments, thus qualifying as capital assets.2. Taxability of Capital Gains in India:Upon determining that the shares were capital assets, the next issue was whether the capital gains arising from the transfer of these shares to GlaxoSmithKline (Pte) Limited, Singapore (GSK Pte) would be subject to tax in India. The Authority ruled that the capital gains would not be chargeable to tax in India due to the provisions of paragraph 4 of Article 13 of the India-Mauritius Double Taxation Avoidance Convention (DTAC), which states that such gains are taxable only in Mauritius.3. Taxability in the Absence of a Permanent Establishment in India:Given the ruling on the second issue, the question of taxability in the absence of a Permanent Establishment in India did not arise, and no ruling was provided on this question.4. Applicability of Transfer Pricing Provisions:The Authority examined whether the provisions of Sections 92 to 92F relating to transfer pricing would apply. The applicant argued that these provisions should not apply as the transaction was not chargeable to tax in India. However, the Authority ruled that the provisions of Sections 92 to 92F would apply since the transaction involved an international transaction within the meaning of Section 92, irrespective of whether the income was ultimately taxable in India or not.5. Withholding Tax Obligations under Section 195:The issue was whether the sale consideration receivable by the applicant should suffer any withholding tax as per Section 195 of the Act. The Authority ruled that there was no obligation to withhold tax since the capital gains were not chargeable to tax in India, following the Supreme Court's decision in GE Technology Centre P. Ltd. v. CIT.6. Requirement to File a Return of Income under Section 139:The applicant argued that there was no obligation to file a return of income if the capital gains were not taxable in India. However, the Authority ruled that the applicant must file a return of income under Section 139, as the obligation to file a return does not disappear merely because the applicant is entitled to claim the benefit of a DTAC.7. Applicability of Section 112(1) Concerning Long-Term Capital Gains:The question was whether Section 112(1) of the Act would be attracted when the proposed transfer of shares was not through a recognized stock exchange. The Authority ruled that Section 112 would be attracted as the income of the applicant would be capital gains. The fact that the income might not get taxed under the Act due to the DTAC was a separate issue.8. Applicability of Section 115JB to a Foreign Company:The final issue was whether Section 115JB of the Act, which pertains to the Minimum Alternate Tax (MAT), would apply to the applicant, a foreign company. The Authority ruled that Section 115JB would apply to the applicant. The Authority emphasized that Section 115JB applies to all companies, including foreign companies, and there was no compelling reason to restrict its application to domestic companies alone.Conclusion:The Authority provided comprehensive rulings on each issue, emphasizing the applicability of the DTAC between India and Mauritius, the relevance of transfer pricing provisions, the obligation to file returns, and the applicability of MAT provisions to foreign companies. The rulings were based on a thorough interpretation of the Income-tax Act and relevant legal precedents.