2013 (3) TMI 413 - HC - Income Tax

Writ petition filed against the advance ruling order 2011 (5) TMI 561 - AUTHORITY FOR ADVANCE RULINGS - 74% shares of Goodyear India Limited were held by a USA company who has a 100% subsidiary in Singapore - whether the transfer of the 74% shares to the Singapore company, which was without any consideration, even if the same was for consideration would be exempted from income-tax in view of the specific provisions of section 10(38) read with Chapter VII of the Finance (No.2) Act, 2004 - Held that - Charge of securities transaction tax as given in section 98 of Chapter VII of Finance (No.2) Act, 2004 r.w.s. 10(38) states that income arising from the transfer of a long term capital asset, if it is an equity share in a company or a unit of an equity oriented fund, where the transaction of sale of such equity share is chargeable to securities transaction tax, then such income would be exempt. Thus if income arises out of the transfer of a long term capital asset being an equity share in a listed company, the said income would be exempt under section 10(38) of the said Act. There is no doubt that the shares of Goodyear India Limited are listed shares and therefore even if a consideration had been charged for the transfer of the 74% share, the income arising therefrom would be exempt by virtue of the provisions of section 10(38) of the said Act. The A.A.R. also observed that for the same reason this was a complete answer to the revenue s argument that the transactions were part of a design of treaty shopping as having regard to the DTAA between India and Singapore, the capital gain would only be taxed at Singapore and not in India. Thus, according to the revenue, the transaction was proposed to be entered into to avoid being taxed in India. No interference is called for with the ruling given by the A.A.R.

Summary

Issues:
Tax liability on transfer of shares from USA company to Singapore company.

Analysis:
The case involved a writ petition filed by the department challenging an advance ruling order related to the tax liability of transferring 74% shares of a company held by a USA company to its Singapore subsidiary. The Authority for Advance Rulings (A.A.R) ruled that there would be no tax liability on either the USA company or the Singapore company. The ruling was based on the provisions of the Income-tax Act, 1961, specifically section 10(38) read with Chapter VII of the Finance (No.2) Act, 2004. The A.A.R considered that the transfer of shares without consideration would be exempted from income tax under the relevant provisions.

The A.A.R's decision was supported by the interpretation of the securities transaction tax provisions in Chapter VII of the Finance (No.2) Act, 2004. It was noted that if income arises from the transfer of a long-term capital asset like listed equity shares, and the transaction is chargeable to securities transaction tax, then such income would be exempt under section 10(38) of the Income-tax Act, 1961. Since the shares in question were listed shares of Goodyear India Limited, any income arising from their transfer would be exempt under section 10(38).

The A.A.R also addressed the revenue's argument regarding 'treaty shopping' and potential double taxation issues between India and the USA. The revenue contended that the transaction was designed to avoid taxation in India. However, the A.A.R concluded that the provisions of section 10(38) of the Income-tax Act, 1961 provided a complete answer to the revenue's concerns. The A.A.R's ruling was upheld by the High Court, which dismissed the writ petition. The Court clarified that it was not acting in an appellate capacity and found no illegality in the A.A.R's decision, refraining from interference based on the extraordinary jurisdiction under Article 226 of the Constitution of India.

In conclusion, the judgment affirmed that no tax liability would arise on the proposed transfer of shares from the USA company to its Singapore subsidiary, based on the specific provisions of the Income-tax Act, 1961 and the Finance (No.2) Act, 2004. The ruling highlighted the exemption under section 10(38) for income arising from the transfer of listed equity shares, ultimately dismissing the department's challenge to the A.A.R's decision.