Goodyear Tire and Rubber Company (2011) (AAR No. 1006 & 1031 of 2010) Sections 45, 48, 56(2)(viia), 195 of Incometax Act Dated: 2-5-2011

• Transfer of shares held in an Indian company, by one foreign company to its foreign subsidiary would not be chargeable to capital gains and such receipt cannot be considered as income in the hands of the recipient foreign company.
• In terms of section 45 r.w.s. 48, transfer of shares without consideration is not chargeable to tax under the head capital gains.
• In an international transaction, transfer pricing provisions can apply only when income is chargeable to tax in India.
• If transaction is not liable to tax in India, withholding tax implications u/s.195 do not arise.

Facts:
USCO holds 74% shares in Indian listed company (ICO). USCO also holds 100% shares of an operating company in Singapore (SingCo) which managed natural rubber purchases, delivery finances and treasury operations of various entities in the Group. As part of USCO’s global strategy, USCO contemplated restructuring of its Indian investment. For this purpose, USCO voluntarily contributed entire 74% stake in ICO to Singco without any consideration. The contribution deed made it clear that SingCo was not liable to compensate USCO for contribution of shares at any time and there was no obligation on the part of Singco to takeover any liability of USCO.

The proposed transaction is pictorially depicted as given on next page.

Application was filed by USCO and Singco raising issues regarding taxability of contribution in the hands of USCO. Consequentially, questions were also raised about applicability of TDS obligation of Singco as also applicability of transfer pricing provisions to the transaction.

Before AAR, it was contended that:

• Proposed transfer of shares of ICO to USCO to SingCo is without consideration in money or money’s worth.
• As consideration for transfer is incapable of being valued in definite monetary terms, the mechanism to charge capital gains u/s.45 r.w.s. 48 of Income-tax Act would fail.
• Contribution is in the form of gift and would therefore not amount to transfer u/s.45 r.w.s. 47(iii) of the Act.

The Tax Department put forth the following contentions:

• Proposed transfer is for creation of a better business environment, which itself is a consideration. Hence, the transaction cannot be regarded as a gift or as a voluntary contribution without consideration.
• The transfer of shares, is an attempt of case of ‘treaty shopping’ for avoidance of capital gains tax at a future date, since in case transferee company gifts/sells these shares to another entity, the transaction will not be taxable in India in view of India-Singapore DTAA, which otherwise would not be the case in the context of India-USA DTAA.
• The bar under proviso to section 245R(2) of the Act relating to the transaction designed for avoidance of tax covers both present and future scenarios.

AAR held:

• Computation mechanism is integral and fundamental to the scheme of taxation.
• Capital gain needs to be calculated after taking into account full value of consideration. There is distinction between ‘full value of consideration’ and ‘fair market value of capital asset transferred’.
• Having regard to the earlier rulings in case of Amiantit International Holding and Dana Corporation2, the transferor cannot be regarded as having derived any profit or made any gain if transfer without consideration is made in favour of 100% subsidiary. If the transfer is without consideration and is incapable of being valued in definite monetary terms, the same is unascertainable and cannot form the basis of taxation u/s. 48.
• As there are no tax implications within the realm of sections 45 and 48 of the Act, applicability of section 47(iii) is academic.
• ICO, being a listed entity, any gains arising on transfer of its shares, being a long-term capital asset, is otherwise exempt u/s. 10(38) of the Act. Hence, the transaction cannot be said to be designed for avoidance of tax through treaty shopping.
• ICO is a company in which public are substantially interested. Hence, the provisions of section 56(2)(viia) of the Act would not be attracted on proposed transfer of its shares.
• Transfer pricing provisions u/s. 92 to 92F of the Act would not be applicable in the absence of liability to pay tax.
• As income is not chargeable to tax, the question of withholding tax by GTRC/GOCPL u/s. 195 does not arise.