By Geeta Jani, Dhishat B. Mehta Chartered Accountants
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On facts, capital gains arising from transfer of 50% shares of Indian company held by Netherlands company are not chargeable in India in terms of Article 13(5) of India-Netherlands DTAA. Hence, the transfer would not attract transfer pricing provisions and the purchaser would not be liable to withhold tax. However, the seller would be required to file return of income in India.
Facts:
The applicant was a company incorporated in, and a tax resident of Netherlands (‘DutchCo’). DutchCo was subsidiary of another Netherlands company. DutchCo held entire capital of an Indian company (‘IndCo1’). IndCo1 entered into a scheme of arrangement with another Indian company (‘IndCo2’) for demerger of one of the divisions of IndCo1 into IndCo2. Subsequently, DutchCo transferred 50% of the shares in IndCo2 to a Switzerland company resulting in substantial capital gains for DutchCo.
DutchCo sought ruling of AAR on the following questions:
- Whether capital gains earned by DutchCo were liable to tax in India under Income-tax Act and India-Netherlands DTAA?
- Whether the transfer would attract transfer pricing provisions under Income-tax Act?
- Whether the purchaser of the shares would be liable to withhold tax u/s. 195 of Incometax Act?
- If capital gains are not taxable in India, whether DutchCo is required to file return of income u/s. 139 of Income-tax Act?
Held:
- In terms of Article 13(5) of India-Netherlands DTAA, capital gains would be taxable only in Netherlands and not in India.
- Since capital gains are not taxable in India, the transfer would not attract transfer pricing provisions under the Income-tax Act.
- The purchaser of the shares would not be liable to withhold tax u/s. 195 of the Incometax Act.
- Under the Income-tax Act, every company is required to file return of its income or loss and a foreign company is also included within the definition of ‘company’. While casting an obligation to file return of income, the Legislature has omitted expression ‘exceeded the maximum amount which is not chargeable to income tax’. In terms of section 5, DutchCo is liable to pay tax in India — though, due to treaty applicability, no tax is actually paid in India, but is only paid in the Netherlands. Once power to tax a particular income exists, it is difficult to claim that there is no obligation to file return of income. The Income-tax Act has specifically provided for exemption from filing of return of income where it is not necessary for non-resident to file return of income. Such exemption is not provided in this case. Hence, DutchCo would be required to file income of return. The AAR also observed:
Apart, it is necessary to have all the facts connected with the question on which the ruling is sought or is proposed to be sought in a wide amplitude by way of a return of income than alone by way of an application seeking advance ruling in Form 34C under IT Rules. Instead of causing inconvenience to the applicant, the process of filing of return would facilitate the applicant in all future interactions with the Income-tax Department.
