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2010 (2) TMI 123 - AAR - Income TaxDividend income - AIH proposes to restructure the group and split AIH into two companies, one owning the business carried on in Europe and the other owning business carried on in Asia, North Africa & Latin America - AIH proposes to contribute shares of AFIIL (the Indian Company) along with non-European investments to ACHL. AIH - the applicant will not receive any consideration for the contribution so made. Such a contribution akin to a gift is permissible under the Bahrain legislation. Held that By transferring the Indian Company shares to its 100% subsidiary, the applicant, in our view, will derive no profit and make no gain. Nothing in the form of money or money s worth or nothing capable of being turned into money will accrue or arise to the applicant on the date of transfer. Therefore, the contention of the Revenue has to be rejected. Regarding applicability of transfer pricing Section 92 obviously is not intended to bring in a new head of income or to charge the tax on income which is not otherwise chargeable under the Act. The interpretation sought to be placed by Revenue would amount to reading words into S.92 - the transfer pricing provisions in Chapter X are not attracted. ACHL is not obliged to withhold tax under S.195 of I.T.Act
Issues Involved:
1. Tax liability in India for the proposed contribution of shares of AFIIL. 2. Applicability of transfer pricing provisions under sections 92 to 92F of the IT Act. 3. Obligation of ACHL to withhold tax under section 195 of the IT Act. Detailed Analysis: Issue 1: Tax Liability in India for the Proposed Contribution of Shares of AFIIL Contentions of the Applicant: The applicant argued that no profit or gain has accrued or arisen from the transfer of shares as no consideration in monetary terms will be received. Therefore, the liability to pay capital gains tax does not arise under section 45 read with section 48 of the IT Act. Additionally, the transfer is in the nature of a gift, falling under clause (iii) of section 47, thus excluding it from the charging provision under Section 45. Contentions of the Revenue: The Revenue contended that the charge under section 45 is applicable because the transfer is based on business considerations aimed at deriving financial advantages, not a gratuitous gift. The Revenue argued that the benefits and advantages represent valuable consideration for the transfer. Judgment: The court examined the relevant provisions of the IT Act, including sections 45, 47, and 48, and concluded that no profit or gain has accrued to the applicant from the transfer of shares. The court emphasized that income must be real and not hypothetical, and the alleged consideration must be capable of being evaluated on commercial principles. Since the applicant did not acquire any right to receive a definite or ascertainable amount or benefit, no capital gains tax liability arises. Therefore, the first question was answered in the negative. Issue 2: Applicability of Transfer Pricing Provisions Contentions of the Revenue: The Revenue argued that since the transfer of capital assets by the applicant is an international transaction, transfer pricing provisions under sections 92 to 92F should apply to determine the value of consideration. Judgment: The court referred to the ruling in Dana Corporation, which stated that section 92 is not an independent charging provision but a computation provision that applies only if income is chargeable under the Act. Since no income arises under sections 45 and 48, the transfer pricing provisions do not apply. The court also noted that the ruling in Canoro Resources did not contradict this view. Thus, the second question was answered in the negative. Issue 3: Obligation of ACHL to Withhold Tax Judgment: Given the answers to the first two questions, the court concluded that ACHL is not obliged to withhold tax under section 195 of the IT Act. Since the income is not chargeable to tax, the obligation to withhold tax does not arise. The third question was answered in the negative. Conclusion: All three questions raised by the applicant were answered in the negative, indicating that no tax liability arises from the proposed contribution of shares, transfer pricing provisions do not apply, and there is no obligation to withhold tax. The ruling was pronounced on the 23rd day of February 2010.
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