2010 (7) TMI 51 - AAR - Income Tax

Court classifies shares as 'capital asset,' ruling in favor of applicant in tax treaty case

The court ruled in favor of the applicant, holding that the shares in Jindal Praxair Oxygen Company Private Limited are classified as a 'capital asset' ... Transfer of shares - Taxability - applicability of section 115JB - withholding tax u/s 195 - Application of provisions of Transfer pricing (TP) u/s 92 to 92F - The applicant also holds 74% of the equity shares capital in Jindal Praxair Oxygen Company Private Limited (Jindal Praxair) and the balance 26% is held by JSW Steel Limited. The applicant is proposing to transfer 74% of the equity share capital in Jindal Praxair to its wholly owned subsidiary company, Praxair India - It is the contention of the applicant that the shares of Jindal Praxair held by it are capital assets and the proposed transfer of these to Praxair India would not be 'transfer' for the purpose of computing capital gains under section 45 read with section 47 (iv) of the Act - Held that: - as the applicant is tax resident of Mauritius and has been issued Tax Residency Certificate by the Mauritius Revenue Authority, it would not be subjected to tax in India on the capital gains arising from the proposed transaction in India - under section 115JB, there is no provision to include or exclude or to increase or decrease such income in the Act while determining the book profit. - the view that the provision of section 115JB of the Act is not attracted in the case of the applicant in view of decision in 'The Timken Company - 2010 TMI - 77013 - AUTHORITY FOR ADVANCE RULINGS' - the proposed transfer of equity shares by the applicant to Praxair India would not attract the transfer pricing provisions of section 92 to 92F of the Act Issues involved:1. Classification of investment as 'capital asset' under section 2(14) of the Income-tax Act, 1961.2. Taxability of transfer of equity shares under section 47(iv) of the Income-tax Act.3. Entitlement to benefits under the India-Mauritius tax treaty.4. Taxability of gains under Article 13 of the India-Mauritius tax treaty.5. Taxability of gains in the absence of a Permanent Establishment (PE) in India under Article 7 read with Article 5 of the Treaty.6. Applicability of section 115JB (Minimum Alternate Tax) of the Income-tax Act.7. Requirement to withhold tax under section 195 of the Income-tax Act.8. Requirement to file a return of income under section 139 of the Income-tax Act.9. Applicability of transfer pricing provisions under sections 92 to 92F of the Income-tax Act.Issue-wise Detailed Analysis:1. Classification of investment as 'capital asset' under section 2(14) of the Income-tax Act, 1961:The applicant contended that the shares in Jindal Praxair Oxygen Company Private Limited (JPOCPL) are held as investments and should be classified as a 'capital asset' under section 2(14) of the Income-tax Act. The shares are classified in the books under 'Non-current assets - investment in subsidiaries' and were held since 1995 without any trading activity. Based on judicial precedents and CBDT circulars, the shares are considered a 'capital asset' and not stock-in-trade.2. Taxability of transfer of equity shares under section 47(iv) of the Income-tax Act:The applicant proposed to transfer its equity shares in JPOCPL to its wholly owned subsidiary, Praxair India. Under section 47(iv), such a transfer is not regarded as a 'transfer' for the purpose of section 45, provided the parent company holds the entire share capital of the subsidiary, and the subsidiary is an Indian company. Since these conditions are met, the transfer is not taxable in India.3. Entitlement to benefits under the India-Mauritius tax treaty:The applicant, being a tax resident of Mauritius, is entitled to benefits under the India-Mauritius tax treaty. The applicant holds a Tax Residency Certificate from Mauritius, and as per Article 13(4) of the Treaty, capital gains from the alienation of shares are taxable only in Mauritius.4. Taxability of gains under Article 13 of the India-Mauritius tax treaty:Article 13(4) of the Treaty states that gains derived by a resident of a contracting state from the alienation of property are taxable only in the state of residence. Therefore, any gains from the transfer of shares by the applicant, a resident of Mauritius, are not taxable in India.5. Taxability of gains in the absence of a Permanent Establishment (PE) in India under Article 7 read with Article 5 of the Treaty:If the gains are considered business income, Article 7 of the Treaty applies, which states that business income is taxable in India only if the applicant has a PE in India. The applicant does not have a PE in India, and therefore, the gains are not taxable in India.6. Applicability of section 115JB (Minimum Alternate Tax) of the Income-tax Act:The provisions of section 115JB, dealing with Minimum Alternate Tax (MAT), are applicable only to domestic companies and not to foreign companies without a place of business or PE in India. Therefore, section 115JB does not apply to the applicant.7. Requirement to withhold tax under section 195 of the Income-tax Act:Since the gains from the proposed transfer are not taxable in India under the Act or the Treaty, Praxair India, the transferee company, is not required to withhold tax under section 195.8. Requirement to file a return of income under section 139 of the Income-tax Act:Given that the gains are not taxable in India, the applicant is not required to file any return of income under section 139.9. Applicability of transfer pricing provisions under sections 92 to 92F of the Income-tax Act:The transfer pricing provisions of sections 92 to 92F do not apply to the proposed transfer of equity shares by the applicant to Praxair India, as there is no liability to pay tax on the capital gain.Conclusion:The applicant is not liable to pay capital gains tax under section 45 or Minimum Alternate Tax under section 115JB of the Income-tax Act. The proposed transfer of equity shares does not attract the transfer pricing provisions of sections 92 to 92F. Therefore, the ruling is given in favor of the applicant, and the questions raised are answered accordingly.