TaxTMI 
TaxTMI 
2009 (11) TMI 32
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.... Pvt. Ltd. The percentage of shares held by DC in these three Indian Companies were - 54.65%,74.9% and 100% respectively. It may be stated that the third company was the wholly owned subsidiary of DC. 3. DC had undergone bankruptcy proceedings initiated under the Bankruptcy Code of US (Title 11 Chapter 11). In the course of such proceedings DC submitted a plan for reorganization in October, 2007 before the Court. The same was confirmed by the Bankruptcy Court in the Southern district of New York by an order dated 26th December, 2007. The 'Plan for Reorganization', according to the applicant, envisaged the following: "i. In respect of certain liabilities of DC, DHC (newly formed company) would issue its shares/make cash payment equivalent to the actual/impaired (i.e. discounted) amount of the liability. ii. All properties of DC including shares held in Indian Companies and any property acquired by DC would vest subject to Restructuring Transactions, in DHC. iii. The Plan endows an authority to DC and DHC to enter in to such Restructuring Transactions and take such actions/steps as they may determine as necessary to effect a corporate restructuring of....
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....bal) is taxable in India.The following questions are framed by the applicant for the purpose of seeking advance ruling from this Authority: "1. In the facts and circumstances of the case whether the transfer of shares of Dana India Technical Centre Private Limited, Dana India Private Limited and Spicer India Limited, by Dana Corporation, is not taxable under the Income-tax Act, 1961? 2. If the answer to the question 1 is in the affirmative, whether advance tax paid as an abundant caution, be refunded as per provisions of the Income-tax Act, 1961?" 10. On 3rd March, 2006 Dana Corporation (DC) and 40 of its US subsidiaries filed petitions for Reorganization under Chapter 11 of the US Bankruptcy Code.The bankruptcy contemplated by Chapter 11 is known as Reorganization Bankruptcy as opposed to liquidation bankruptcy. In the case of former, while the business continues, the Bankruptcy Court supervises the re-organization of the Company's contractual and debt obligations. The debtor can propose a plan of reorganization. The Petitioning debtor continues to have control of its business as a debtor in possession subject to the supervision of the Court. The debtor in possessi....
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....to Article V of the Plan and Exhibit V.B.1 to the Plan, the transfer of assets to the Operating Subsidiaries and the assumption of certain Liabilities of Debtor Dana Corporation by the Operating Subsidiaries in exchange for the shares of New Dana Holdco Common Stock to be distributed to the creditors of Dana Corporation is a transfer for fair value and fair consideration inasmuch as Dana Corporation will be transferring more liabilities than assets to New Dana Holdco. [see 12/10 Transcript, at 163:15 - 165:10; Debtors' Exhibit 2 (at 3)]. After such transfers, New Dana Holdco, the Operating Subsidiaries, Reorganized Dana Corporation and each of the other Reorganized Debtors will be solvent and left with sufficient assets, liquidity and capital to satisfy their obligations as they come due for the foreseeable future. It was stated in the order that the primary purpose in effecting the Restructuring transactions is the rationalization of the reorganized debtors' corporate structure. 14. By the Plan and Agreement of Merger executed on 30th January, 2008, DC merged with Dana Companies, LLC, a Virginia Limited Liability Co. The merger was a sequel to the Court's....
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....tion 92 etc. of the Act as it is admittedly an international transaction between two or more related entities.Therefore, the computational provisions do not fail. It is finally submitted that the transaction of transfer of shares in Indian companies of DC is taxable in India and the exact amount of tax payable may be left open to be computed based on the determination of the arm's length price under the transfer pricing provisions. It is further pointed out that the applicant has voluntarily paid advance tax by way of 'abundant caution' and claimed the refund in the event of favourable ruling of AAR. 17. First, I shall address the contentious issue whether the charge to capital gains tax is attracted in relation to the transfer of shares of the Indian companies by the applicant, having regard to the provisions of Section 45 and 48 of the Income Tax Act, 1961. Section 45 charges the profits or gains arising from the transfer of a capital asset to income tax and it shall be deemed to be the income of the previous year in which the transfer took place. Section 48 provides for "Mode of computation" of capital gains. It lays down that the income chargeable under the head "c....
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.... provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is placed on the charging provision.That pertains to the fundamental integrality of the statutory scheme provided for each head." 18. In tune with the above exposition of law, a question was posed by the court "whether if the expression 'asset' in section 45 is construed as including the goodwill of a new business, is it possible to apply the computation sections for quantifying the profits and gains on its transfer"? The said question was answered against the Revenue by holding inter alia that in the case of goodwill generated in a new business, it would be impossible to determine the cost of acquisition under Section 48 and therefore goodwill cannot be described as an asset within the terms of Section 45 and the transfer was not liable to be taxed under the head 'capital gains'. 19. In Sunil's case, the Supreme Court held that the assessee, a partner of a firm who transferred his shares to the firm received no 'consideration' within the meaning of Section 48 of the Income Ta....
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....ional 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 (as pointed out by Gujarat High Court in CIT, Gujarat-II vs. Vania Silk Mills Ltd.1 24. As observed by the Supreme Court in CIT, Calcutta Vs. Gillanders Arbuthnot & Co.2, the test is "what is the consideration bargained for" or the consideration agreed to be paid. In CIT vs. George Henderson & Co.3, it was held that the expression "full value of consideration" does not take within its ambit the fair market value of the asset transferred . As succinctly stated by Bombay High Court in Baijnath Chaturbhuj vs. CIT4 says: "full value must be the true value, not any artificial value which parties for any purpose may assign to a particu....
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....e 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. 26. The learned counsel for the Revenue further submitted that the entire assets of the applicant company as well as DHC would have been valued and the shares also would have been valued and the applicant and the transferee Companies must be well aware of the fair value of shares. The full value of consideration for the transfer of shares is therefore ....
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....organization 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. 28. 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. 29. The counsel for the Revenue has drawn our attention to the observation of the Bankruptcy Court that there was fair consideration for the transfer. These observations of the Bankruptcy Court in paragraph W extracted earlier do not in any way support the Revenue's stand. The fair value and fair consideration referred to in the said paragraph is in relation to the creditors of DC and not referable to the DC or its shareholders. As part of the reorganization, the claims of the creditors were compromised and as a sequel to su....
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....nsideration or atleast there is some consideration. If no consideration had passed from or on behalf of the transferee Companies to the transferor company and the charge under Section 45 fails to operate for want of consideration or determinable consideration, obviously, the provisions in Section 92 etc. do not come to the aid of the Revenue. It must be noted that Section 92 is not an independent charging provision. As the Section heading itself shows, it is a provision dealing with "Computation of income from international transactions". The opening part of Section 92 says that "any income arising from an international transaction shall be computed having regard to the arm's length price". The expression 'income arising' postulates that the income has arisen under the substantive charging provisions of the Act. In other words, the income referred to in Section 92 is nothing but the income captured by one or the other charging provisions of the Act. In such a case, the computation aspect is taken care of by Section 92 and other related provisions in Chapter X. It must be noted that the income chargeable under the Act is divided into various heads under Section 14.....