2011 (3) TMI 22 - AAR - Income Tax

DTAA Whether the sale of share by on non resident to another non resident will be taxable as capital gain in India - The applicant submits that as ORG-IMS is an Indian company, the situs of its shares would be in India - The applicant submits that under section 90(2) of the Act, an assessee has an option to be governed by the provision of the Tax Treaty, if they are more beneficial than the provision of the Act - The applicant submits that transfer of shares of ORG-IMS by the applicant would be governed by Article 13(5) of the Tax Treaty. - Any capital gain earned by it would be taxable only in Netherlands Regarding filing of return - The learned Advocate argued that section 139(1) of the Act is merely a machinery section and would apply only where the transaction entered into by the foreign assessee is liable to be taxed in India - As per the third proviso, every company is required to file its return of income, whether it has an income or a loss - If the power to tax be granted it is difficult to appreciate the argument that when the resulting income is nil, there is no obligation to file return of income. It may be mentioned that where it is not necessary for a non- resident to furnish return under section 139(1) of the Act, the statue has specifically provided, as is the case under section 115AC(4) of the Act. Apart, it is necessary to have all the facts connected with the question on which the ruling is sought or is proposed to be sought in a vide amplitude by way of a return of income than alone by way of an application seeking advance ruling in Form 34C under IT Rules 1962. Instead of causing inconvenience to the applicant, the process of filing of return would facilitate the applicant in all future interactions with the Income-tax department.

Issues Involved:
1. Taxability of capital gains in India under the Income-tax Act and the Tax Treaty between India and the Netherlands.
2. Obligation to file a return of income under section 139 of the Income-tax Act if capital gains are not taxable in India.
3. Applicability of transfer pricing provisions under sections 92 to 92F of the Income-tax Act.
4. Liability of the purchasers to withhold taxes under section 195 of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Capital Gains:
The primary issue is whether the capital gain earned by the applicant on the transfer of shares of ORG-IMS is liable to tax in India under the Income-tax Act and the Tax Treaty between India and the Netherlands. The applicant, a tax resident of the Netherlands, transferred shares of ORG-IMS, an Indian company, to purchasers who are residents of Switzerland. Under section 9(1) of the Income-tax Act, income arising from the transfer of a capital asset situated in India is deemed to accrue or arise in India and thus taxable. However, under Article 13(5) of the Tax Treaty, gains from the alienation of shares are taxable only in the state of the alienator's residence unless the shares are transferred to a resident of the other state. Since the purchasers are not residents of India, the capital gains are taxable only in the Netherlands. Both the applicant and the revenue agreed that the transaction falls under Article 13(5) and is not taxable in India.

2. Obligation to File a Return of Income:
The applicant contended that since the capital gains are not taxable in India, there is no obligation to file a return of income under section 139(1) of the Income-tax Act. The applicant cited various AAR rulings supporting the view that section 139(1) is a machinery provision that applies only when the transaction is liable to tax in India. The revenue argued that compliance with section 139(1) is necessary, even if the income is not taxable in India due to the Tax Treaty. The Authority agreed with the revenue, stating that the obligation to file a return exists irrespective of the tax liability due to the DTAA, especially for companies. The ruling emphasized that the filing of returns facilitates future interactions with the Income-tax department.

3. Applicability of Transfer Pricing Provisions:
The applicant argued that sections 92 to 92F of the Income-tax Act, which deal with transfer pricing, are machinery provisions that apply only when the transaction is taxable in India. Since the capital gains from the transfer of shares are not taxable in India, the transfer pricing provisions do not apply. The revenue conceded this point, agreeing that the transfer pricing provisions would not be attracted as the transaction is between non-resident companies of the Netherlands and Switzerland.

4. Liability to Withhold Taxes:
The applicant contended that section 195 of the Income-tax Act, which deals with the withholding of taxes, would not apply as the capital gains are not taxable in India. The revenue agreed, stating that since there is no income chargeable to tax in India, there would be no liability to deduct tax under section 195. The Authority concurred, ruling that the purchasers were not liable to withhold tax at source under section 195.

Conclusion:
The Authority ruled in favor of the applicant on issues 1, 3, and 4, confirming that the capital gains are taxable only in the Netherlands, the transfer pricing provisions do not apply, and there is no liability to withhold taxes under section 195. However, on issue 2, the Authority ruled against the applicant, stating that the obligation to file a return of income under section 139(1) exists irrespective of the tax liability due to the DTAA.

Pronouncement:
The ruling was given and pronounced on the 28th Day of March, 2011.

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