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TMI Blog2019 (11) TMI 1585X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Tax Avoidance Agreement entered into between India and Switzerland ? 2. Based on the facts and circumstances of the case, whether MTH-Swiss is required to deduct any tax under section 195 of the Act in relation to the proposed contribution of shares of MTIN to the applicant ? 3. Based on the facts and circumstances of the case, whether the applicant, the recipient of shares, is required to withhold tax in accordance with the provisions of section 195 of the Act ?" 3. The facts of the case in brief are that the applicant is an operating company engaged in the business of developing, manufacturing and globally marketing scales, instruments, measurement devices and systems. Further the applicant provides support to affiliated companies, especially financial support and is having investments in various countries like Bermuda, Hong Kong, Brazil, etc. The applicant claims not to have a permanent establishment in India within the meaning of article 5 of India-Swiss Tax Treaty. 4. Mettler Toledo Holding AG (MTH-Swiss), an MT Group company, is a company incorporated in Switzerland and is having investments in Germany, Russia, Ukraine, Malaysia, Japan, etc. Mettler-Toledo India Pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of MTIN would be taxable as income from other sources but as per section 90, the taxpayer is permitted to choose between the provisions of the Act or applicable tax treaty whichever is more beneficial and as the income stated above is not covered by any specific article of the India-Swiss tax treaty and it shall be covered by article 22 relating to other income. As per article 22(1) the income of the resident wherever arising and not dealt with in other articles of tax treaty are taxable only in Switzerland. So the income arising in terms of section 56(2)(vii)(a) of the Act would not be taxable in India in the hands of the applicant in terms of article 22(1) of the India-Swiss Tax Treaty. 6.2. Vide letter dated September 11, 2017, learned authorised representative had mentioned that since the filing of the application there were changes in the Income-tax Act, i. e., section 50CA was inserted by the Finance Act, 2017 which provides for levy of capital gains on transfer of unquoted shares by substituting the agreed consideration by fair market value (FMV) in cases where the consideration is lower than the fair market value. It is submitted that the applicant is the recipient of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... International Holding Ltd., In re [2010] 322 ITR 678 (AAR) ; 230 CTR (AAR) 19; -Goodyear Tire and Rubber Company, In re [2011] 334 ITR 69 (AAR) (AAR No. 1006 and 1031 of 2010) ; -Dana Corporation, In re [2010] 321 ITR 178 (AAR) (AAR No. 788 of 2008). 6.6. It is also contended that the transfer of shares from MTH-Swiss to the applicant is without any consideration and in the nature of gift and is thus covered under section 47(iii) of the Income-tax Act and therefore there is no liability of tax in the hands of the MTH-Swiss. 6.7. Another plea taken by the learned authorised representative is that sections 92 to 92F dealing with transfer pricing (TP) provisions are not applicable to the impugned transaction as these sections are machinery sections and moreover the computation of arm's length price (ALP) is dependent on the income arising from an international transaction and as shares are transferred by way of gift no income arises to the applicant and the transferor and therefore the transaction is not subjected to transfer pricing provisions. Support is drawn from the ruling of the Income-tax Appellate Tribunal, Chennai in the case of Redington India Limited [2014] 49 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the transaction is not proved from the document submitted by the applicants. In any case gift by a corporation to another corporation is not a genuine transaction as human element is not involved in such transactions. 9. The Revenue has relied upon a similar case of AAR, i. e., Orient Green Power Pte. Ltd., In re [2012] 346 ITR 557 (AAR) AAR No. 973 of 2010, in which the authority has declined to give ruling with the following observations (page 565 of 346 ITR) : "Before parting with the case, it appears to be proper to observe that in the context of section 47(i) and (iii) this gift referred to therein, is a gift by an individual or a Joint Hindu Family or a Human Agency. Section 47(iii) speaks of 'any transfer of a capital asset under a gift, or will or an irrecoverable trust'. Execution of a will involves a human agency. Cannot the expression gift take its colour from a will with which it is juxtaposed, especially in the background of clause (i) of section 47 and clause (ii) which earlier existed. A gift by a corporation to another corporation (though a subsidiary or an associate enterprise, which is always claimed to be independent for tax purpose) is a strange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department has further submitted that the shares in MTIN are held by MTH-Swiss as a capital asset and any profits or gains arising from their transfer are chargeable to Income-tax under head "Capital gains". Section 45 of the Act provides that the gains arising from the transfer of a capital asset are chargeable to tax as capital gains. Section 48 of the Act deals with the mechanism for computing income chargeable under the head "Capital gains". Recently a new section 50D was inserted in the Income-tax Act, 1961 so as to provide that where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer. The provision reads as under : 50D. Fair market value deemed to be full value of consideration in certain cases.-Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then for the purpose of computing income chargeable to tax as capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n is taxable in this country and if yes, to what extent. The question of chargeability to tax would arise only at a later stage. The application of section 92 cannot be kept at bay by jumping to the second stage straight away. I am therefore, of the view that whether ultimately the gain or income is taxable in the country or not, sections 92 to 92F would apply if the transaction is one coming within those provisions, where there is no liability what would be the purpose of undertaking a transfer pricing exercise is not a question that would affect the operation or rigour of a statutory provision on its plain words." 12.1. The above view was further confirmed by the hon'ble Authority in the case of Armstrong World Industries Mauritius Multiconsult Ltd., In re [2012] 349 ITR 303 (AAR) (AAR No. 1044 of 2011). 13. It is stated by the Commissioner of Income-tax (DR) that the Finance Act, 2012 has amended the definition of "international transaction" under section 92B with retrospective effect from April 1, 2002 by inserting Explanation (e) which specifically includes a transaction of business restructuring or reorganization entered with an AE irrespective of the fact that it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his document will also show what are the various considerations and benefits in group restructuring, how and in what way various group companies including the applicant will benefit from the group restructuring. In the absence of the above mentioned documents, the Revenue is of the opinion that the applicant has failed to prove with supporting documents that the transaction is not designed to avoid income-tax. 18. Case law relied upon by the applicant are distinguished by the Revenue in following manner : 18.1. In respect of the case of D. P. World Pvt. Ltd. v. Dy. CIT (I. T. A. Nos. 3627 and 3841/Mum/2012 dated October 12, 2012) the Income-tax Appellate Tribunal has rendered a decision of treating gift of shares as not transfer under section 47 of the Act, it is stated that in that case there was proper gift deed made by the transferor which was backed by the Board's resolution and memorandum of association which is not the case with the present applicant. Moreover, in the above mentioned case and in the case of Redington India relied upon by the applicant, the Assessing Officer got the opportunity to verify the facts and claims made by the taxpayer during assessment procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e [2012] 348 ITR 556 (AAR). 22. Regarding the final executed version of the contribution agreement as well as the Board resolution is concerned, the applicant has submitted that the transaction for which the answer is being sought for by the applicant has not been entered into. Once it is decided by the applicant to enter into the same, all requisite approvals including the Board approval will be obtained pursuant to which the Contribution agreement will be executed. 23. In response to the Revenue contention that gift from one Corporation to another is not a genuine transaction and as human element is not involved, the reliance is placed on the ruling on the Income-tax Appellate Tribunal, Chennai in the case of Redignton India Ltd wherein it is held that a company can transfer property by way of gift and there is no requirement that the same should be out of love and affection. It is also submitted that the ruling in the case of Orient Green Power Pte. Ltd., In re [2012] 346 ITR 557 (AAR) is not applicable as MTH-Swiss is authorized by its charter to transfer its holdings to other entities. 24. As regards, the allegation that the issue involves determination of fair market value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epartment on the other hand has argued that it is a case of tax avoidance and the transaction is taxable both in the hands of the transferor and the applicant. 28. The only issue to be adjudicated upon is whether the proposed share transfer transaction results in any taxable income. The transaction between non-resident entities is indisputably an international transaction. It is also noticed that the Finance Act, 2012, with retrospective effect from April 1, 2002, has inserted Explanation (ie) below section 92B to clarify that a transaction of business restructuring or reorganization entered into by an enterprise with an associate enterprise irrespective of the fact that it has a bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date is an international transaction. In the instant case, it has been admitted by the learned authorised representative that share transfer transaction is a sequel to business reorganization. 29. The transaction relates to shares of Indian Company MTIN or asset situated in India and in terms of section 9(1)(i) read with Explanation 5 the transaction would give rise to income deemed to accr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld demand tax deduction at source. 33. On the aforesaid issue, we have the benefit of decisions of the Authority for Advance Rulings in Castleton Investment Ltd., In re [2012] 348 ITR 537 (AAR) ; 24 taxmann.com 150 (AAR-New Delhi) and also decisions of Kolkatta Special Bench of the Income-tax Appellate Tribunal in Instrumentarium Corporation Ltd., Finland v. Asst. DIT (International Taxation) [2016] 49 ITR (Trib) 589 (Kolkata) [SB] ; 71 taxmann.com 193, Income-tax Appellate Tribunal, Delhi Special Bench in L. G. Electronics India P. Ltd. v. Asst. CIT [2013] 22 ITR (Trib) 1 (Delhi) [SB] ; 29 taxmann.com 300 and in Income-tax Appellate Tribunal Ahmedabad, Vodafone India Services (P.) Ltd. v. Dy. CIT [2018] 11 ITR (Trib)-OL 272 (Ahmedabad) ; 89 taxmann.com 299 (Ahmedabad-Trib.). 34. In the case of Castleton Investment Ltd., In re [2012] 348 ITR 537 (AAR) ; [2012] 24 taxmann.com 150 (AAR) Authority for Advance Rulings, New Delhi, it is held as under (page 546 of 348 ITR) : "Even if section 92 is taken as a machinery provision as posited by this Authority, the question is whether the provision would apply when an international transaction within the meaning of section 92 is involved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at preventing avoidance of tax by certain well known devises, determination of arm's length price, 'computation of income in certain cases, etc., in relation to international transactions. These are again machinery provisions which would not apply in the absence of liability to pay tax'. There was no reference to the Canoro ruling or an independent discussion on this question. There was no discussion of the aspect here arising. With respect, taxability of a capital gain is broadly determined based on the difference between the investment and the sale price. Even if section 92 to section 92F are machinery provisions, without resort to them, the capital gains from an international transaction cannot be determined. Only on determining whether capital gains have arisen, would the question arise whether the gain is chargeable to tax or not under the Act. Clearly, in cases governed by the Act alone, they would be chargeable to tax. In a case when an option is exercised to opt for benefits under a DTAC, then the question would arise whether the gain is taxable in this country and if yes, to what extent. The question of chargeability to tax would arise only at a later stage. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view, the assessee is not really correct in con tending that when the assessee has not reported any income from a particular international transaction, the arm's length price adjustment cannot compute the same. The computation of income on the basis of the arm's length price does not require that the assessee must report some income first, and only then it can be adjusted for the arm's length price. Section 92(1) is not an adjustment mechanism ; it is a computation mechanism. The arm's length price principle requires that an arm's length price is assigned to the transactions between the associated enterprise, and if the income is computed, if any, on the basis of the arm's length price so assigned. As regards reliance on the Vodafone India Services Pvt. Ltd. v. Union of India [2014] 368 ITR 1 (Bom), that deals with a situation in which the international trans action was inherently incapable of producing the income chargeable to tax as it was in the capital field. This is evident from the observation of the hon'ble Bombay High Court to the effect that, 'In this case, the Revenue seems to be confusing the measure to a charge and calling the measure a n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ple fact that the foreign AE did not pay any consideration to the Indian AE will not take the transaction out of the purview of the transfer pricing provisions, if it is otherwise an international transaction." 37. In Vodafone India Services (P.) Ltd. v. Dy. CIT [2018] 11 ITR (Trib)-OL 272 (Ahmedabad) ; 89 taxmann.com 299 (Ahmedabad -Trib.) it is held that (page 478 of 11 ITR (Trib)-OL) : "The next point made by the assessee is that there is no consideration for the transfer and, for this reason, the computation of capital gains in not possible. It is true that the consideration in this case is zero but then that precisely is a zero consideration for transfer of this valuable right in an arm's length situation, and, therefore, while computing the income of the assessee, arm's length consideration should be taken into. The plea of the Revenue authorities is indeed well taken. Once we come to the conclusion that an income, which essentially includes a capital gain, has arisen on account of an international transaction, such an income has to be computed on the basis of an arm's length price. Section 92(1) categorically states that 'any income arising from an inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13 of the treaty and the relevant clause is 13(5). "Article 13 Capital gains 1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in article 6 and situated in the other Contracting State may be taxed in that other State. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State, or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of independent personal services, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such fixed base, may also be taxed in that other State. 3. Gains derived by an enterprise of a Contracting State from the alienation of ships or aircraft operated in international traffic, or mov able property pertaining to the operation of such ships or aircraft shall be taxable only in that State. 4. Gains from the alienation of shares of a company, the property of which consists principally of immovable property s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax resident of Switzerland. Amongst others, MTH-Swiss currently holds investments in MTIN. 3. MTG-Swiss, an MT Group company, is a company incorporated and tax resident of Switzerland. MTG-Swiss is an operating company engaged in the business of developing, manufacturing and globally marketing scales, instruments, measurement devices and systems. Further, MTG-Swiss provides support to affiliated companies, especially financial support and is having investments in various countries like Bermuda, Hong Kong, Brazil, etc. 4. MTG-Swiss has in excess of 20 subsidiaries globally. These entities are in expansion mode and would require a capital contribution. As a part of internal restructuring, it is proposed to contribute shares of MT-IN to MTG-Swiss as it would allow efficient allocation and movement of profits/funds that would be received by MTG-Swiss from MT-IN from Switzerland/US tax perspective. 5. It may be noted as there would be no change in the jurisdiction (i. e., Switzerland) from which the investments were originally made by reason of contribution of shares of MT-IN by MTH-Swiss to MTG-Swiss. Thus, there would be no additional benefits to MTG-Swiss from an Indian tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exempt from securities transfer tax in Switzerland if the transfer of securities is for lack of consideration. Thus by proposed transfer at no consideration avoids payment of taxes in India as well as in Switzerland. It is also observed that despite having more than 20 subsidiaries globally, the Mettler-Toledo group has proposed only single share transfer transaction from MTH-Swiss to MT-AG and there is no other changes in the group structure, allocation or movement of assets and other intangibles and that too the shares of an Indian entity MTIN and that too for no consideration. The transfer is between a Swiss company to another Swiss company and for both of them it is investment and this transfer without any concomitant transfer of any assets, rights, brands, etc., from the recipient or from any other entity to the transferor defies logic and the scheme prima facie is without any commercial logic or substance and falls under scheme for tax avoidance. The application thus falls under clause (iii) to proviso to section 245R(2). 47. Further, it is also pertinent to see another dimension to the transaction as indicated above it is an international transaction where transfer pricing ..... 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