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Part C — Tribunal & AAR International Tax Decisions
14 Dana Corporation (AAR)
(2009–TIOL-29-ARA-IT)
30 November, 2009
Issues :
Facts :
The applicant, a US company (USCo), held shares in three
Indian companies (ICos), two US entities [viz Dana World trade Corporation
(DWTC) and Dana Global Products (DGP)] and other companies outside USA.
As part of a bankruptcy reorganization process, initiated
under the Bankruptcy Code of US, shares held in ICos, together with other
non-Indian assets and liabilities were transferred to DWTC and DGP, wholly owned
subsidiaries of USCo. The transfer was for no consideration and involved
reorganization in that shares which the applicant held directly in ICos (each
with > 50% stake) were now held indirectly through wholly owned subsidiaries.
The liabilities taken over by DHC from DC were more than the assets.
It was explained that one of the reasons for such transfer
was to achieve homogeneity of business in the same or similar products dealt
with by the group entities.
As part of bankruptcy transfers, the following
steps/transactions were undertaken:
-
Two new
entities DHC and DCLLC were formed by USCo.
-
An
independent private equity concern infused funds (capital) into DHC in
exchange for shares of DHC.
-
Additional
shares of DHC were distributed as settlement for certain claims made against
USCo in bankruptcy. DHC thus became publicly held entity.
-
DC
transferred shares held by it in the three Indian companies to DWTC and DGP.
-
DC
transferred shares held in DWTC and DGP to DHC.
-
Finally, USCo
merged with DCLLC.
The basic issue raised before the AAR was whether transfer of
shares of ICOs to DWTC and DGP attracted tax implications in India.
USCo raised the following contentions before the AAR:
-
The shares of
ICOs were transferred without consideration. As the transfer was part of the
overall reorganization under the Bankruptcy Code, no consideration can be
attributed to such a transfer of shares. In the absence of or
non-determinability of the full value of the consideration, the computation
mechanism stipulated under the Income Tax Act failed and, consequently, the
charge also failed.
-
Since the
transfer of shares under the proposed reorganization did not result in any
income chargeable to tax under the provisions of the Act, the T.P provisions
cannot be applied.
The tax
department raised the following contentions:
-
Consideration
did exist for transfer of ICo shares under the proposed reorganization. The
liabilities taken over by DHC can be legitimately taken as consideration for
transfer of shares. The tax department referred to and relied on the
Bankruptcy Court Order which stated that the transfer was for ‘fair value’ and
for ‘fair consideration’.
-
The applicant
did not provide details of valuation of assets, including shares of the Indian
companies. And whether such values have been considered while agreeing to the
proposed reorganization. It cannot, therefore, be said that there was no
consideration merely because the applicant had failed to identify the
consideration attributable to ICos shares.
• In any case, since the transfer of ICos shares was between
associated persons, the arm’s length price determined under T.P provisions will
form the basis.
Held
Relying on Supreme Court’s judgments in the case of B C
Srinivasa Shetty (128 ITR 294) and Sunil Siddharthbhai (156 ITR 509), the AAR
held that the charging section must be construed harmoniously with the
computation mechanism. If the computation provision cannot be given effect to,
the charging section fails.
The profits taxable as capital gains are those which are
definite, determinable and clearly identifiable. Notional or hypothetical basis
cannot be considered.
The liabilities of the applicant, taken over as part of the
reorganization, cannot be treated as the consideration or a measure of the
consideration for the transfer. When the entire assets and liabilities have been
taken over in order to re-organize the business, it is difficult to envisage
that a proportion of the liabilities constitute the consideration for the
transfer. It cannot be said that the applicant derived profit by transferring
shares of the Indian companies to its US-based subsidiaries. In the
circumstances, the contention that the transfer was without consideration was
accepted to be the correct position.
The Annual Report of the transferees does not support the proposition
that a definite or agreed consideration has been received
by the applicant for transferring the shares of the Indian companies. The
shares may have been notionally valued for the purpose of preparing such financial statements
or to facilitate the reorganization
process. But, it cannot be said that the book value or the market value of the
shares represents the consideration for the transfer or the profit arising from
such a transfer.
The observations of the Bankruptcy Court, in its
order on ‘fair value’ and ‘fair consideration’ are with respect to the
creditors of the applicant and not with reference to the applicant itself or
its share-holders. As part of the reorganization, the claims of the creditors
were compromised and, therefore, the creditors received certain shares of DHC.
The T.P provisions under the Income Tax Law are applicable
only when there is income arising from an international transaction. The T.P
provisions are not independent of
charging provisions. The expression ‘income arising’ postulates that the income has
already arisen under the charging provisions of the Income Tax Law. Therefore, if no chargeable income
has arisen due to failure of the computation mechanism, then the T.P
provisions cannot be applied. In this
context, the AAR referred to its earlier ruling in the case of
Vanenbury Group B.V [289 ITR 464] which held that the T.P provisions are
machinery provisions which do not apply in the absence of liability to tax.
