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TMI Blog2009 (4) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... f exploration and production of petroleum and natural gas, mainly in Canada and India. In India, it holds participating interest in three oil blocks, namely Amguri development block, AA-ON/7 exploration block and AA-ONN-2003/2 exploration block, all of which are situated in the State of Assam. Of these three blocks, AA-ON/7 and AA-ONN-2003/2 are still in exploration stage. Only Amguri block has started producing oil and gas, commercial production in this block having started in April, 2006. 3. The applicant has entered into separate Production Sharing Contracts (PSC) with the Government of India and the concerned participating company in respect of each of the above three blocks. The applicant, the Government of India and the Assam Company Ltd. are parties to the PSC in respect of Amguri block in which the applicant holds 60% participating interest and is also the operator. 4. The applicant states that it proposes to restructure its business in India by transferring its participating interest in Amguri block to a partnership firm to be formed in Canada between it and its wholly owned subsidiary company, namely Legasi Petroleum International Inc. which is incorporated in Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or transfer (of participating interest in Amguri block to the partnership firm as its capital contribution, the provisions of Article 24 (non discrimination clause) of DTAA between India and Canada would be attracted. 6. The case of the applicant is that the proposed partnership firm should be assessed to tax as a separate taxable entity, as it would satisfy the requirements of section 184 read with section 2(31) of the Act. It is also stated that as the control and management of the affairs of the partnership firm will be located wholly outside India, the said firm shall be a non-resident firm. But that will not make any difference so far as the rate of tax is concerned, as the Act does not differentiate between resident and non-resident partnership firms. The applicant also claims that its share in the income of the proposed partnership firm shall be exempt from taxation. The applicant further states that, no doubt, the capital contribution to be made by it in the proposed partnership firm shall be subject to capital gains tax, but the value of consideration shall be the book value of the capital asset as recorded in the books of accounts of the proposed firm, as stipulated i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objected to the raising of this issue at the stage of hearing. But as the matter pertains to the maintainability of the present application, we allowed the Departmental representative to put forth his argument. On the merits of the case, the Revenue states that the proposed partnership firm would have characteristics more of a company or a corporation than a firm. Thus the provisions of sections 10(2), 45(3) and 184 would not be attracted. The proposed firm will be taxed in India as a foreign company. Without prejudice to this stand, the Revenue further states that the so called firm will be a resident of India because of the reason that, being operator of Amguri block, all its business activities will be carried on in India. The Revenue also states that the transfer by the applicant of its assets in Amguri block to the proposed firm would be an international transaction and the proposed firm would be regarded as an 'associated enterprise' of the applicant. With regard to article 24 of the DTAA, Revenue states that what is prohibited is discrimination between nationals of the two contracting parties and not between resident and non-residents. 8. 8.1 As the question of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l representative goes a step further and states during argument that the proposed restructuring of the business of the applicant is a mere tax avoidance measure. He seeks support from the interim report of the applicant for the period ended September 30, 2008, which refers to the availability of a working capital of US $ 24.8 million and absence of any debt liability. He further states that all the three oil blocks are already separate entities, inasmuch as different oil companies are partners of the applicant in them under different PSCs. Thus there is no question of further separation of Amguri block from other blocks. In reply, the applicant asserts that it heavily depends on finances to develop its operations in India and refers to another part of the same annual report for 2006 as cited by DIT, which says that "Canoro completed a $30 million private placement financing for the upcoming capital program." The applicant also filed copies of approved budget for 2008-09 and development plan for Amguri block to show that substantial expenditure is required for further development and exploitation of this block. The applicant further states that, since the other two oil blocks are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erceived by the respondents". The decision of the Constitution Bench in McDowell and Co. Ltd. v. Commercial Tax Officer (154 ITR 148) case was also referred to and the following observation therefrom was quoted with approval - "Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.". 8.5 In the case of P-9 of 1995 (supra) also, the applicants were companies incorporated in Mauritius with the object of carrying on business as investment and holding companies. Each of the applicant companies invested in banks in India and was allotted shares. The applicants sought ruling of this Authority with regard to the rate of withholding tax on dividend payments to be made to them by Indian banks and taxability of capital gains to be derived from transfer of those shares, both under the Indo-Mauritius tax treaty. Under this treaty the rate of withholding tax was 5% and capital gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be left with the remaining two blocks, namely, AA-ON/7 and AA-ONN-2003/2. Since the proposed firm will not be having any participating interest in AA-ON/7 and AA-ONN-2003/2 blocks, the balance sheet of the said firm would not include the losses being incurred in those blocks, and so it would look financially attractive. The Revenue has not shown how the proposed transaction on the face of it is a tax avoidance device. We notice that the applicant has offered to pay tax on the proposed transaction. As a matter of fact, the case of the Revenue is not really that the proposed transaction itself is a tax avoidance device, but that the possible future transactions might lead to loss of revenue. We feel that this argument is far-fetched and cannot be supported on facts or in law. True, it is possible that the applicant may in future exit from the proposed partnership firm, but that possibility will not render the present transaction itself as a tax avoidance device. Whenever that firm transfers its participating interest in Amguri block, it would be liable to capital gains tax in India. Therefore, we reject the Revenue's plea that prima facie the transaction is designed only with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of net profits between the partners. 9.3 We may first peruse the relevant provisions of the Partnership Act of Alberta under which the proposed partnership will be registered. This Act recognizes three types of partnerships, namely, ordinary partnerships, limited partnerships and limited liability partnerships. Section 2 which is common to all the three, reads as under- "Meaning of 'firm' and 'firm name' 2. Persons who have entered into partnership with one another are for the purposes of this Act called collectively a "firm", and the name under which their business is carried on is called the "firm name". 'Partnership' has been defined in section 1(g) to mean the relationship between the persons carrying on a business in common with a view to making profit. We may now turn to the provisions applicable to ordinary partnerships, because it appears from the draft partnership agreement filed by the applicant that the proposed partnership will be an ordinary partnership. Section 3 reads as under- "Body corporate not partnership 3. The relationship between members of any company or association who constitute a corporation under any law in force in Alberta is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nership firm a company. Distribution of surplus fund is an aspect of joint sharing of profits by the partners. It is different from payment of dividend by a company. It is seen from the draft partnership agreement that the managing partner has been assigned a predominant role. Under the Indian Partnership Act also this is possible. The position of a managing partner of a firm is very different from that of a managing director of a company. 9.5 This takes us to section 184 of the Act, the relevant provisions of which are extracted below- "Assessment as a firm. 184.(1) A firm shall be assessed as a firm for the purposes of this Act, if— (i) the partnership is evidenced by an instrument ; and (ii) the individual shares of the partners are specified in that instrument. (2) A certified copy of the instrument of partnership referred to in sub-section (1) shall accompany the return of income of the firm of the previous year relevant to the assessment year commencing on or after the 1st day of April, 1993 in respect of which assessment as a firm is first sought" x x x x x x x x x x x x x x x x x x xx xx xx" The proposed partnership of the applicant wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovision is defective and does not precisely spell out such shares, but if from the construction of the deed as a whole, such shares can be ascertained, then the requirement of para(ii) of section 184(1) will be taken to have been satisfied. We find that in the present case the individual shares of the partners can be clearly ascertained with reference to article 4 and 5.1 read with Schedule-A. 9.6 Coming to the residential status of the proposed firm, the same would have to be determined with reference to the sub-section(2) of section 6 of the Act which is given below: "6. Residence in India For the purposes of this Act,- (1) x x x x x x x x x x (2) A Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India. xx xx xx xx xx xx xx xx xx xx" As may be seen from the above, the normal presumption is that a firm will have to be considered a resident unless its control and management are wholly situated outside India. This provision has been considered in a number of cases. In B.R. Naik v/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be computed with reference to arm's length price. The response of the applicant to this is that sub-section(3) of section 45 is a special provision so far as computation of capital gains arising from the capital contribution made by a partner to the firm is concerned, and for this purpose, the provisions of sections 92 to 92F relating to computation of income from international transactions are general provisions. The applicant submits that in the present case, the provisions of sub-section(3) of section 45 would prevail over the transfer pricing provisions contained in sections 92 to 92F. 10.2 In order to examine the rival contentions, it would be appropriate to first peruse the relevant provisions. Sections 45 to 55A deal with 'capital gains'. Sections 45 and 48 are relevant for the present purpose. Sub-section(1) of section 45 states that gains arising from the transfer of capital asset shall be regarded as 'capital gains' and assessed as such. Section 48 specifies the method of computation of capital gains. According to this provision, capital gains shall be computed by deducting the cost of acquisition of the asset, including the cost of improvements, if any, and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 92 now reads as under- "Computation of income from international transaction having regard to arm's length price. 92. (1) Any income arising from an international transaction shall be computed having regard to the arm's length price. Explanation.— For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm's length price. (2) Where in an international transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. (3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or the determination of the allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m capital contribution made by a partner to the firm is concerned, and sections 92 to 92F are special provisions so far as international transactions are concerned. It is also noticed that sub-section(3) of section 45 was inserted earlier and the transfer pricing provisions were comprehensively updated later. Thus a doubt is created as to what would be the most appropriate provision for computing capital gains in the present case. 10.5 It may be stated that conflict between the provisions of two different statutes or between different provisions of the same enactment, is not a new issue. This has been comprehensively dealt with in the works of eminent jurists and decisions of law courts. 'Maxwell on the Interpretation of Statutes (Twelfth Edition)' states - " If two sections of the same statute "are repugnant, the known rule is that the last must prevail". But, on the general principle that an author must be supposed not to have intended to contradict himself, the Court will endeavour to construe the language of the legislature in such a way as to avoid having to apply the rule, leges posteriores priores contrarias aborgant…………… One way in which repugnancy can be avoided is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en made will not be fully achieved and many transactions will go out of its purview. We are of the view that the provisions of sub-section(3) of section 45 and the relevant transfer pricing provisions, when read in harmony, would lead to the inference that sub-section(3) would not apply to international transactions, which should be dealt with in accordance with the transfer pricing provisions. As such, when a transaction referred to in section 45(3) is in the nature of international transaction, the value of consideration shall not be the value as recorded in the firm's account books, but the same shall be determined on the basis of arm's length price in accordance with transfer pricing provisions contained in Chapter-X of the Act. 11. We shall now deal with the last contention of the applicant relating to conflict between article-24 of DTAA and the transfer pricing provisions of the Act. The relevant provisions of the said article are extracted below- "ARTICLE 24 : Non-discrimination - 1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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