2009 (11) TMI 32 - AAR - Income Tax

Share transfer reorganization not taxable as capital gains; no consideration under Sections 45, 48, 92, refund allowed

AAR held that the transfer of shares in three Indian companies by the applicant to its associated foreign entities pursuant to a group reorganization was ... Merger of two companies - transfer of shares - levy of income in India - profit or gain within the meaning of Section 45 arise to the transferor (the applicant) on account of transferring the shares in the Indian companies - amount received by or accrued to the applicant by way of consideration - transfer of capital asset (shares) - Whether the transfer of shares of Indian companies by DC to Dana World Trade Corporation (Dana WTC) and Dana Global Products, Inc. (Dana Global) is taxable in India. - HELD THAT:- The profit or gain envisaged by Section 45 is not something which remains ambivalent or indefinite or indeterminable. The profit or gain or the full value of the consideration, cannot be arrived at on notional or hypothetical basis. The profit or gain to the transferor must be a distinctly and clearly identifiable component of the transaction. The consideration for the transfer of shares in terms of money or money's worth is not something which can be implied or assumed. No profit or gain in the form of consideration for transfer can be inferred by a process of deeming or on presumptive basis. There must be a causal nexus between the transfer of capital asset and the profit or gain accruing to or received by the assessee. The fact that the applicant put forward the reorganization plan in the overall interests of its business and that there is certain business advantage to the applicant has no bearing on the point whether any consideration has in fact been received or accrued on the transfer of shares. In fact, such benefit or advantage in the larger sense is incapable of being computed in monetary terms as representing the valuable consideration for transfer. The recital in the Shares Transfer Agreement that the transfer was effected without consideration therefore reflects the correct position. It is clarified by the applicant (vide written submissions dated 10.8.2009) that the sum of $ 3563 (millions) represents the value of reorganized entity, namely, DHC and has nothing to do with the value of assets and liabilities of the entity under reorganization i.e. DC and that the reorganization value has been determined in view of the statutory requirement so that the creditors and other stakeholders can take an informed business decision. As stated by the applicant, the objective behind the determination of such value is not to determine the consideration for the transfers effected on the sidelines of reorganization. I am, therefore, of the view that the facts on record judged in the light of reorganization plan lead to a reasonable inference that there was no consideration for the transfer or at any rate the consideration is indeterminable and therefore the charging provision - Sec. 45 becomes inapplicable. The income in the present case, if at all, is traceable to 'Capital gains' which is one of the heads of income. If by application of the provisions of Section 45 read with Section 48 which are integrally connected with each other, the income cannot be said to arise, Section 92 of the Act does not come to the aid of Revenue, eventhough it is an international transaction. The expression 'income' in Section 92 is not used in a sense wider than or different from its scope and connotation elsewhere in the Act. Section 92 obviously is not intended to bring in a new head of income or to charge the tax on income which is not otherwise chargeable under the Act. The interpretation sought to be placed by Revenue would amount to reading words into S.92. I have, therefore no hesitation in rejecting the Revenue's contention. Authority is of the view that the transfer of shares of the three Indian companies by Dana Corporation to US Dana WC and Dana Global is not chargeable to tax as capital gains under the Income-tax Act, 1961. The first question is accordingly answered in the affirmative. The second question is answered by observing that the applicant can seek appropriate remedies under the Act for the refund of advance tax paid. Issues: (i) Whether the transfer of shares of Indian companies by the transferor to its foreign subsidiaries in the course of a US Chapter 11 reorganisation is chargeable to tax as capital gains under Section 45 read with Section 48 of the Income-tax Act, 1961; (ii) Whether advance tax paid may be refunded if the transfer is held not taxable.Analysis: The Authority examined whether any profit or gain arose to the transferor and whether any full value of consideration was received or accrued such that Section 48 could be applied to compute capital gains under Section 45. The Authority applied the principle that the charging provision (Section 45) and the computation provisions (Section 48) constitute an integrated code and that where computation is impossible or consideration is indeterminable, the charge fails. The Authority considered the nature of the reorganisation under Chapter 11, the Share Transfer Agreements stating transfers were without consideration, the taking over of liabilities by the new holding company, and the submissions and financial valuations relied upon by Revenue. It concluded that liabilities assumed in the overall reorganisation could not be equated to a bargained consideration for the specific transfers of Indian company shares, nor could hypothetical or notional valuations substitute for identifiable consideration. The Authority rejected the Revenue's contention that Chapter X (Sections 92 et seq.) supplies an independent charging mechanism, holding that transfer pricing provisions are machinery for computation where income under a charging provision exists and cannot create a charge where none otherwise arises.Conclusion: (i) The transfer of the shares is not chargeable to tax as capital gains under Section 45 read with Section 48 of the Income-tax Act, 1961, and (ii) the applicant may seek refund remedies under the Act in respect of advance tax paid.