Transfer pricing in share restructurings can apply even with nil consideration, triggering capital gains and withholding obligations.

In an international share transfer between non-resident group entities, the absence of stated consideration does not prevent transfer pricing provisions from applying, because Chapter X still requires arm's length pricing to be determined. If arm's length consideration is substituted, the transaction may generate taxable capital gains in India in the transferor's hands. Where the resulting sum is chargeable to tax, the payer may also have withholding obligations under section 195. A restructuring lacking wider commercial substance, business synergy, or movement of assets or functions may be treated as a tax avoidance arrangement within the proviso to section 245R(2).

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Issues: (i) Whether the proposed transfer of shares between the non-resident group entities gave rise to taxable income in India and attracted transfer pricing provisions, (ii) whether the applicant was obliged to deduct tax at source under section 195 on the resulting capital gains, and (iii) whether the proposed arrangement was a tax avoidance device falling within the proviso to section 245R(2).

Issue (i): Whether the proposed transfer of shares between the non-resident group entities gave rise to taxable income in India and attracted transfer pricing provisions.

Analysis: The transaction was treated as an international transaction connected with business restructuring. The absence of consideration did not exclude the operation of transfer pricing provisions, because the computation mechanism under Chapter X applies to international transactions and the arm's length price has to be determined even where the stated consideration is nil. Once arm's length consideration is substituted, the transaction was held to generate taxable capital gains in the hands of the transferor, and the treaty position did not displace that result.

Conclusion: Yes. Transfer pricing provisions applied and capital gains tax was exigible in the hands of the transferor.

Issue (ii): Whether the applicant was obliged to deduct tax at source under section 195 on the resulting capital gains.

Analysis: The obligation under section 195 arises where sums chargeable to tax are payable to a non-resident. Since the transaction was held to result in taxable capital gains in India in the hands of the transferor, the corresponding payment obligation of the applicant was treated as one carrying tax deduction consequences.

Conclusion: Yes. The applicant was liable to deduct tax at source under section 195.

Issue (iii): Whether the proposed arrangement was a tax avoidance device falling within the proviso to section 245R(2).

Analysis: The restructuring note showed only a single transfer of Indian shares, without any demonstrated wider commercial reorganisation, business synergy, or accompanying movement of assets or functions. The transaction was therefore viewed as lacking commercial substance and as structured to avoid capital gains taxation in India.

Conclusion: Yes. The arrangement was held to be a tax avoidance device and the application fell within the proviso to section 245R(2).

Final Conclusion: The ruling ultimately answered all substantive questions against the applicant, held the transaction taxable in India through transfer pricing, recognised a corresponding withholding obligation, and treated the arrangement as tax-avoidance oriented.

Ratio Decidendi: In an international transaction, the absence of stated consideration does not prevent application of transfer pricing provisions, and the arm's length price may be substituted to compute taxable income even where the transaction is structured as a restructuring transfer.

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