2021 (9) TMI 735 - AAR - Income Tax

Advance ruling u/s 245R - ruling sought in respect of taxability of transactions from the respective tax treaty perspective (India-Netherlands Tax Treaty and India-Switzerland Tax Treaty) - as per AR there was no question of valuation involved while determining taxability from tax treaty perspective and that ruling was sought only on legal principle as to the eligibility of benefit under the tax treaty AND the applicant had not raised any question regarding taxability or otherwise of the transactions under the provisions of Income-tax Act - HELD THAT - The issue of valuation of any share or the issue of computation of capital gain on transfer of the shares is not found involved in the questions raised by the applicant. The exercise of valuation of shares (if at all necessary) and the computation of capital gains has to be undertaken by the Assessing Officer only when the issue of taxability of capital gain on transfer of shares is decided in favour of the Revenue. We do not find any involvement of determination of fair market value of any property (shares) in the questions raised in the application. In the case of Worldwide Wickets, In re. 2018 (2) TMI 1428 - AUTHORITY FOR ADVANCE RULINGS, MUMBAI as held that the computation of capital gains is embedded in the concept of valuation of shares and merely for this reason the question of capital gains arising in the application cannot be held to be barred by clause (ii) of the proviso to section 245R(2) of the Act. Considering the precise questions raised by the applicant on the taxability of capital gains and the obligation to deduct tax under section 195 as well as the decision of the Authority on this issue, the objection of the Revenue on the issue of involvement of determination of fair market value of the property is rejected. As regarding clause (iii) of the proviso to section 245R(2) of the Act, the Revenue has submitted that it is not in a position to make a comment at present as all the details are not available. Though the applicant has disputed the contention of the Department, in the interests of justice, it will be fair to leave this matter open. Accordingly, the Department is free to bring on record any adverse evidence in respect of transaction being designed prima facie for avoidance of tax in the course of merit hearing. The application is admitted under section 245R(2) of the Act.

Summary

Issues Involved:
1. Whether the applicant is required to deduct tax under section 195 of the Act on payments made for share acquisitions under tax treaties?
2. Taxability of gains arising from share transfers under different tax treaties.
3. Determination of fair market value of shares and potential tax avoidance.

Issue 1: Tax Deduction under Section 195:
The applicant sought clarification on the tax deduction requirement under section 195 of the Act for payments made to acquire shares under tax treaties. The questions raised pertained to the applicability of tax treaties with Netherlands and Switzerland in relation to share acquisitions. The Commissioner of Income-tax contended that the application was inadmissible due to the involvement of share valuation in the transactions. However, the applicant argued that the questions were solely related to the tax treaty perspective and not valuation issues. The Authority noted that the questions did not involve valuation of shares but focused on the taxability of gains under the tax treaties. The objection raised by the Revenue regarding fair market value determination was rejected, citing a previous judgment by the Mumbai Bench of the Authority.

Issue 2: Taxability of Gains from Share Transfers:
The second issue revolved around the taxability of gains arising from the transfer of shares under the India-Switzerland tax treaty. The applicant raised questions regarding the tax treatment of gains from transferring shares of various companies to a non-resident buyer. The Authority clarified that the determination of fair market value or computation of capital gains would only be relevant if the issue of taxability of capital gains was decided in favor of the Revenue. The Authority emphasized that the questions raised by the applicant did not involve valuation of shares, and the objection by the Revenue on fair market value determination was dismissed.

Issue 3: Determination of Fair Market Value and Tax Avoidance:
The final issue pertained to the determination of fair market value of shares and the potential tax avoidance in the transactions. The Revenue raised concerns about incomplete details provided by the applicant and the possibility of the transactions being designed for tax avoidance. The applicant refuted these claims, stating that all relevant details were furnished, and the transactions were not aimed at tax avoidance. The Authority decided to leave this matter open for the Revenue to present any adverse evidence during the merit hearing. The application was admitted under section 245R(2) of the Act, and the date of the next hearing was to be communicated later.

This judgment addressed the applicant's queries regarding tax deduction requirements, taxability of gains from share transfers under tax treaties, and concerns about fair market value determination and potential tax avoidance. The Authority clarified that the questions raised focused on tax treaty perspectives rather than share valuation issues, rejecting objections raised by the Revenue. The decision to admit the application for further proceedings highlighted the complex interplay between tax treaties, capital gains tax, and the obligation to deduct tax at source in cross-border transactions.