2012 (8) TMI 434 - AAR - Income Tax

Gift by foreign company incorporated in Singapore of shares held in Indian company to its Indian subsidiary without consideration - transfer effected before the coming into force of section 56(2)(viia) applicant contending non-taxability u/s 45 r.w.s. 48 since the transfer was one without consideration whereas Revenue questioning genuineness of the transaction and contending the same to be with purpose of avoiding tax Held that - The shares dealt with are shares of a public limited company governed by the Companies Act, 1956. It is claimed that, what can be called an oral gift, was made by one corporation to another corporation. Such a form of transfer appears to be strange, unless it be one which has been set up for some purpose. It is necessary for the applicant to demonstrate before this authority that the transfer was authorized by the Articles of Association and was effected in the mode prescribed by the Articles of Association and meeting the requirements of section 82 of the Companies Act. Hence, proper enquiry by AO into the question of the genuineness and validity of the transaction is necessary. Hence forth, ruling declined Further, Section 47(i) and (iii), applies to gift by individual or a HUF or a Human Agency. A gift by a corporation to another corporation (though a subsidiary or an associate enterprise, which is always claimed to be independent for tax purposes) is a strange transaction. To postulate that a corporation can give away its assets free to another even orally can only be aiding dubious attempts at avoidance of tax payable under the Act.

Summary

Issues Involved:
1. Taxability of the transfer of shares without consideration.
2. Applicability of section 47(iii) of the Income-tax Act.
3. Applicability of transfer pricing provisions.
4. Determination of arm's length price.
5. Obligation to withhold tax under section 195.
6. Requirement to file a return of income under section 139.

Detailed Analysis:

1. Taxability of the Transfer of Shares Without Consideration:
The applicant, a Singapore-based company, transferred its 49.75% shares in Bharath Wind Farm Limited (BWFL India) to Orient Green Power Company Limited (OGPL India) without consideration. The applicant contended that this transaction, being a gift, was not taxable under section 45 of the Income-tax Act when read with section 48, as no consideration was passed. The Revenue questioned the genuineness and purpose of the transaction, suggesting it was structured to avoid tax and pre-dated to circumvent amendments to the Income-tax Act.

2. Applicability of Section 47(iii) of the Income-tax Act:
The applicant argued that the transaction was exempt from tax under section 47(iii), which excludes gifts from the purview of section 45. However, the Authority noted that the applicant failed to demonstrate that the transfer was authorized and effected according to the Articles of Association of the company. The Authority expressed skepticism about the transaction, suggesting it might not qualify as a gift under section 47(iii) due to the lack of clear authorization and prescribed mode of transfer.

3. Applicability of Transfer Pricing Provisions:
The applicant claimed that since the transaction did not generate taxable income, the transfer pricing provisions under sections 92 to 92F did not apply. The Authority did not make a definitive ruling on this issue, leaving it open for the Assessing Officer to determine after a detailed enquiry.

4. Determination of Arm's Length Price:
The applicant sought clarification on whether the maximum price prescribed under exchange control regulations and CCI guidelines could be considered the arm's length price if transfer pricing provisions applied. The Authority did not address this issue directly, as it deferred the matter to the Assessing Officer for a thorough examination.

5. Obligation to Withhold Tax Under Section 195:
The applicant contended that OGPL India was not required to withhold tax under section 195 since no payment was made for the shares. This issue was also left open for decision by the Assessing Officer, contingent on the findings regarding the taxability of the transaction.

6. Requirement to File a Return of Income Under Section 139:
The applicant argued that it was not required to file a return of income under section 139 if the transaction was not taxable. The Authority deferred this question to the Assessing Officer, pending a detailed enquiry into the transaction's genuineness and validity.

Conclusion:
The Authority declined to provide a ruling on the questions posed by the applicant due to insufficient evidence to establish the genuineness and validity of the transaction. It emphasized the need for a thorough enquiry by the Assessing Officer to determine the tax implications, the applicability of transfer pricing provisions, and the obligations under sections 195 and 139. The ruling highlighted the complexities and potential tax avoidance issues associated with corporate transactions involving significant assets.