Dtd. : 23rd
April, 2009
Issue
^ A foreign
partnership can be assessed as a partnership firm under the Indian Income-tax
Law.
^ Provisions
of Transfer Pricing Regulations override provisions of Section 45(3) of the
Act. Capital gains in respect of contribution of asset to a partnership firm,
if in the nature of international transaction, attracts tax liability w.r.t.
fair market value.
^
Nationality non-discrimination provision cannot be invoked for claiming non
applicability of transfer pricing provisions which are based on residential
status of the parties.
Facts
Applicant, a
company registered in Canada, is engaged in the business of exploration and
production of petroleum and natural gas. In India, applicant held
participating interest (PI) in three oil blocks. Amongst others, it held 60%
PI in Amguri development block (Amguri block). The Amguri block had good
commercial prospects and had known commercial discovery while the other two
blocks were at nascent stage.
The
applicant proposed to restructure its business in India with a view to
attracting investments in Amguri block and with a view to holding Amguri block
in a separate entity. It proposed to transfer its PI in Amguri block to a
partnership firm (Firm) to be formed in Canada. The Firm was proposed between
the Applicant and its wholly-owned Canadian subsidiary as partners.
Before the
AAR, the applicant raised the following contention.
a) The
Canadian firm should be assessed to tax as a ‘firm’. The applicant furnished
copy of the partnership Act of Alberta, Canada to show that the provisions
of that Partnership Act were almost at par with the provisions of the Indian
Partnership Act. It was explained that the Act of Alberta recognised the
principle of agency between partners; the liability of partners was joint
and several; properties of the firm belonged to the partners collectively;
the firm had no separate legal personality of its own, etc.
b) It is
enough that the mechanism of sharing is described or defined on a certain
basis; it is not necessary to express or set out the fractional or other
shares, so as to enable the entity to be assessed as firm in compliance with
Section 184 of the Act.
c) The
capital gains income, if any, arising from transfer of PI to the proposed
firm should be computed as per provisions of Section 45(3) of the Act by
adopting contribution value. In view of the special provisions of charging
Section of Section 45(3), the transfer pricing provisions cannot be applied.
As against
that, the Tax Department contended :
a) The
application deserved to be rejected having regard to the provisions of
Section 245R(2) of the Act as the transaction was for avoidance of
Income-tax. The proposed restructuring was merely a ruse for avoidance of
tax and the applicant had failed to substantiate how its object of
attracting investments was sub-served. The proposal was prone to tax
avoidance since the proposed restructuring would facilitate the applicant to
exit from Amguri block by transferring its stake in the firm without payment
of tax in India.
b) A
partnership firm can be assessed as a firm under the Act only if it is a
partnership firm as understood under the Indian Law. The proposed
partnership firm would have characteristic of a company or a corporation and
should be taxed in India as a foreign company. For this purpose, the Tax
Department sought to place reliance on features like managing partner of the
firm having power akin to that of a managing director, likely feature of
payment of dividend, etc.
c) The
proposed partnership deed was so worded that it failed to specify the
individual shares of the partners in the instrument of partnership and hence
also the firm cannot be assessed as a partnership firm under the Act in view
of provisions of Section 184 of the Act.
d) The
transaction between the applicant and the firm is in the nature of
international transaction between two associated persons. Therefore, the
transfer pricing regulations would require that the capital gains income is
computed with reference to the arm’s-length price.
The AAR Held
(1) In the case of Azadi Bachao Andolan (263 ITR 706),
the Supreme Court has approved the principle that a taxpayer is entitled to
resort to a legal method available to him to plan his tax liability. The AAR
noted that it may reject the application, provided it relates to a
transaction which is designed prima facie for avoidance of tax. The
expression ‘prima facie’ can be understood as ‘at first sight’; ‘on
first appearance’; ‘on the face of it’; etc. The future possibility of the
applicant’s exit from Amguri block by transferring PI to someone cannot by
itself be a ground to conclude that the arrangement was, on the face of it
to avoid tax.
