2005 (7) TMI 32 - AAR - Income Tax

Tax resident of U.K. - registered with SEBI as a Foreign Institutional Investor (FII) & made investments in Indian securities held that when no tax liability arises under the Act the treaty per se does not create any tax liability there has been no transfer of shares in Indian companies held by the applicant as a consequence of the reorganisation of the applicant in U.K. - in respect of the transaction the applicant is not chargeable to tax in India or under DTAA

Issues Involved:
1. Chargeability of tax under the Income Tax Act, 1961 for the reorganization of the applicant in the UK.
2. Determination of whether the reorganization constitutes a transfer of Indian securities under Section 2(47) of the Income Tax Act, 1961.
3. Compliance with conditions outlined in the comments by the Director of Income-tax (International Taxation), Mumbai.
4. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and the UK.

Detailed Analysis:

1. Chargeability of Tax under the Income Tax Act, 1961:
The primary question was whether the reorganization of the applicant, a UK-based company, is chargeable to tax in India under the Income Tax Act, 1961, or the DTAA between India and the UK. The applicant, a limited company incorporated in Great Britain, reorganized its unit trusts into sub-funds of open-ended investment companies (OEICs) without any sale, exchange, or extinguishment of underlying assets, including Indian securities. The reorganization was approved by the Financial Services Authority (FSA) in the UK and SEBI in India.

2. Determination of Transfer under Section 2(47):
The determination of whether the reorganization constitutes a transfer of Indian securities under Section 2(47) of the Income Tax Act, 1961, was crucial. Section 2(47) defines "transfer" to include sale, exchange, or relinquishment of the asset or extinguishment of any rights therein. The applicant argued that there was no transfer as it continued to be the owner of the Indian securities post-reorganization. The Authority examined the ownership status pre- and post-reorganization and found no change in the beneficial ownership of the securities, thus concluding that no transfer occurred under Section 2(47).

3. Compliance with Conditions Outlined by the Director of Income-tax:
The Director of Income-tax (International Taxation), Mumbai, outlined four conditions that needed to be satisfied to avoid tax implications:
- The applicant was the 'owner' of the Indian securities as a trustee.
- The applicant remained the 'owner' of the Indian securities as a depository.
- The reorganization scheme was tax-exempt in the UK.
- The applicant was permitted under UK regulations to act as both a depository and trustee.

The Authority found that:
- The applicant continued to be the owner of the Indian securities post-reorganization.
- The reorganization scheme was tax-exempt in the UK, as evidenced by the clearance from the Inland Revenue.
- The applicant was permitted to act as both a depository and trustee under UK regulations, as confirmed by the Financial Services Authority Register.

4. Applicability of the Double Taxation Avoidance Agreement (DTAA):
The Authority noted that the DTAA between India and the UK would not create any tax liability if no tax liability arises under the Indian Income Tax Act. Since the reorganization did not result in a transfer of Indian securities and was not chargeable to tax under the Act, the DTAA was not applicable in this case.

Conclusion:
The Authority ruled that the reorganization described in Annexure-II of the application does not make the applicant chargeable to tax in India under the provisions of the Income-tax Act, 1961, or the DTAA between India and the UK. The ruling was pronounced on July 29, 2005.

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