9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2019 (7) TMI 1861 - AAR - Income TaxIncome taxable in India - transfer of shares of the Indian subsidiary - capital gains on transfer of equity shares of wholly owned subsidiary IEE Pvt.Ltd. will be taxable in the hands of the applicant at the rate of 10 per cent. in accordance with section 112(1)(c)(iii) of the Income-tax Act, 1961 - applicant is an Australian company and has sold the entire shareholding in its wholly owned Indian subsidiary to an entity of APXL group - applicant was controlling the affairs of the Indian subsidiary through its key managerial personnel (KMP) - applicant contends that it is a tax resident of Australia and as per article 13(5) of the India-Australia Tax Treaty on Alienation of property , the sale of equity shares of IEE Pvt. Ltd. may be taxed in India HELD THAT - Applicant is operating in India through wholly owned subsidiary (IEE Pvt. Ltd.) and on account of the world wide operations of applicant group, it has established supply agreements and the developed warehouse management, inventory control software and accounting system and the same practices were employed in running operations in India. It is also noticed that as part of business strategy the applicant group entered into strategic alliance with APXL group in 2006 (much before the impugned sale in 2012), sharing part of its supply chain and other practices. Along with the application what was submitted was share purchase agreement and clause 5.4 of the said agreement mentions that all strategic arrangements would cease with effect from the closing date of share purchase agreement. The Department's contention that the transaction is more than share transfer is thus not correct Slump sale - Argument of the Revenue that it is a case of slump sale is not borne out by facts. All the assets and liabilities IEE Pvt. Ltd. remain with IEE Pvt. Ltd. after the transfer and what has changed is the shareholding pattern. Further a perusal of the share purchase agreement, clause 5.4 reveals that all strategic agreement will automatically stand terminated with effect from closing of the share purchase agreement. Value of share of IEE Pvt. Ltd. is not ascertainable thus the fair market value of the capital assets on the date of transfer shall be deemed to be full value of the consideration received as per section 50D and also to ascertain the fair market value reference to valuation officer under section 55A is called for - The plea of the Department is not tenable as during the course of hearing the applicant has provided the valuation report prepared by BSR Co. and the same was shared with the Department and their letter dated May 16, 2019 comments were also offered on the said valuation. The valuation report lists out various projections and assumptions and after employing the discounted cash flow method, the value of share was arrived at 5.34 AUD per share (₹ 372 per share). The actual share transfer has happened at ₹ 182 per share owing to hard bargaining by the buyer. Thus, the value of share was ascertained and pleas of the Department are rejected. Difference between ascertained price and the actual sale price is income of buyer as per section 56(2)(viia) - The said argument is really not pertinent to the case of the applicant as it is the seller of the shares. The referred section affects the buyer and the Department is at liberty to proceed against the buyer on the differential between fair market value and actual sale price. Substantial question raised in the application is answered in the affirmative, i. e., the capital gains on transfer of equity shares of IEE Pvt. Ltd. will be taxable in the hands of the applicant at the rate of 10 per cent. in accordance with section 112(1)(c)(iii) of the Income-tax Act, 1961.
Issues Involved:
1. Taxability of capital gains under section 112(1)(c)(iii) of the Income-tax Act. 2. Applicability of slump sale provisions under section 2(42C) of the Income-tax Act. 3. Applicability of section 50D of the Income-tax Act. 4. Applicability of section 55A of the Income-tax Act. 5. Constitution of a permanent establishment. 6. Applicability of section 56(2)(viia) of the Income-tax Act. Issue-wise Detailed Analysis: 1. Taxability of Capital Gains under Section 112(1)(c)(iii): The applicant, an Australian company, sold its entire shareholding in its Indian subsidiary, IEE Pvt. Ltd., to an entity of the APXL group. The applicant argued that the capital gains from this share transfer should be taxed at 10% under section 112(1)(c)(iii) of the Income-tax Act, 1961, as the gains qualify as long-term capital gains. The Department contended that the transaction involved more than just share transfer, including the transfer of business operations and strategic agreements. However, the ruling found that the transaction was indeed a share transfer, as all strategic agreements ceased upon the closing of the share purchase agreement. 2. Applicability of Slump Sale Provisions: The Department argued that the transaction constituted a slump sale, defined under section 2(42C) of the Income-tax Act, as it involved the transfer of an undertaking for a lump sum consideration without assigning values to individual assets and liabilities. The ruling, however, found that the assets and liabilities of IEE Pvt. Ltd. remained with the company after the transfer, and only the shareholding pattern changed. The ruling cited the Bombay High Court's decision in UTV Software Communication Ltd., which held that the transfer of shares does not constitute a slump sale. 3. Applicability of Section 50D: The Department argued that since the sale consideration was not ascertainable, section 50D should apply, which deems the fair market value of the capital asset as the full value of the consideration received. The ruling rejected this argument, noting that the applicant provided a valuation report prepared by BSR & Co., which determined the share value using the discounted cash flow method. The actual share transfer occurred at a lower price due to hard bargaining by the buyer, thus the consideration was ascertainable. 4. Applicability of Section 55A: The Department contended that the fair market value of the capital assets needed to be ascertained, invoking section 55A. The ruling found this plea untenable, as the valuation report provided by the applicant was shared with the Department, and their comments were considered. The valuation report justified the share price, thus section 55A was not applicable. 5. Constitution of a Permanent Establishment: The Department argued that the Indian subsidiary constituted a permanent establishment of the applicant in India. The ruling found this plea redundant, as it was already established that the transaction was a share transfer, attracting capital gains tax in the hands of the applicant. 6. Applicability of Section 56(2)(viia): The Department argued that the difference between the fair market value of the shares and the actual sale price should be considered income of the buyer under section 56(2)(viia). The ruling found this argument irrelevant to the applicant's case, as it pertained to the buyer, and the Department could proceed against the buyer separately. Conclusion: The ruling concluded that the capital gains on the transfer of equity shares of IEE Pvt. Ltd. would be taxable in the hands of the applicant at the rate of 10% in accordance with section 112(1)(c)(iii) of the Income-tax Act, 1961.
|
