(151.3 KiB, 1,290 DLs)

AAR not bound by own rulings. Transfer pricing & ROI filing provisions apply despite no income. Foreign company is liable for MAT u/s 115JB

The applicant, a Mauritius company, sold shares of Burroughs Wellcome (India) Ltd. The resultant capital gains were not chargeable to tax under the India-Mauritius DTAA. The AAR had to consider whether, as the Applicant had no income chargeable to tax in India, (a) the transfer pricing provisions were applicable to its, (b) section 115JB (MAT) was applicable to it and (c) it was liable to file a return of income. The AAR had to also consider whether it was bound by its own earlier rulings. HELD by the AAR:

(i) The theory of precedents does not have strict application to the AAR. It is bound only by the decisions of the Supreme Court. The decisions of High Courts have only persuasive value. The AAR is not subordinate to any High Court for even Article 227 of the Constitution to apply and there are grave doubts whether the jurisdiction under Article 226 will be attracted to the AAR. While the AAR should be slow in disagreeing with propositions of law laid down in earlier rulings, it should not be deterred from taking a contrary view if it is convinced that the earlier view is not correct;

(ii) Though in Praxair Pacific 326 ITR 276, Vanenburg Group 289 ITR 464 & Dana Corporation 32 DTR 1, it was held that the transfer pricing provisions were machinery provisions and could not apply if the income was not chargeable to tax, this view is not correct because first the computation of the “income” arises before considering its’ chargeability. The fact that the income is not taxable and the transfer pricing exercise may not be fruitful cannot affect the applicability of the statutory provisions;

(iii) A return of income has to be filed u/s 139(1) even if the income is not chargeable to tax;

(iv) Though in Timken 326 ITR 193 (AAR), it was held that s. 115JB does not apply to foreign companies, this view is not correct because s. 115JB applies to every “company” and makes no distinction between a resident company and a non-resident company. S. 2(17) defines a “company” to include a “foreign company”. The fact that the foreign company has no permanent establishment in India makes no difference to the applicability of s. 115JB. There may be practical difficulties for foreign companies to prepare accounts in terms of Schedule VI to the Companies Act but that is no reason to whittle down the scope of s. 115JB. Advance Ruling P No. 14 (234 ITR 335) & Niko Resources 234 ITR 828 followed)

(88.3 KiB, 1,040 DLs)

“Gift” by company to subsidiary appears to be “Dubious tax avoidance scheme”

The Applicant, a Singapore company, “gifted” the shares of Bharath Wind Farm Ltd, an Indian company, to its 99.61% subsidiary Orient Green Power Ltd, another Indian company. As the gift was made prior to the enactment of s. 56(2)(viia) and there was no consideration received, it was claimed that there was no taxable income and that the transfer pricing provisions did not apply. The department opposed the applicant on the ground that it did not appear to be genuine. HELD by the AAR:

U/s 82 of the Companies Act, shares in a company is moveable property transferable in the manner provided by its Articles of Association. The applicant has not shown the gift was authorized by its Articles. It is difficult to imagine the Articles of Association of a company providing for gifting away of the assets in the form of shares in another company by what is attempted to be described as oral gift. A “gift” by one company to another company of shares in a public company appears to be strange, unless it be one which has been set up for some purpose. The revenue’s contention that the purpose of the gift is to avoid tax and s. 56(2)(viia) is not far-fetched. Also, s. 47(i) & (iii) appear to apply to gifts by individuals and HUFs and not by companies. The Authority has the right & the duty to consider the reality of the transaction and genuineness of the transaction, in addition to its validity. When such transactions are entered into involving substantial assets the applicant has to prove to the hilt the factum, genuineness and validity of the transaction, the right to enter into the transaction and the bona fides of the transaction. To postulate that a corporation can give away its assets free to another even orally can only be aiding dubious attempts at avoidance of tax payable under the Act. The AO is in a better position to make a proper enquiry into the question of the genuineness and validity of the transaction. Hence, a ruling is declined.

(114.5 KiB, 3,959 DLs)

A subsidiary created for Indian business is a PE of the foreign parent

The applicant, a Singapore company, entered into an agreement with an Indian group subsidiary company for the performance of shipment transport services within & outside India. The agreement was on a principal to principal basis. The applicant claimed that as it had no office, equipment, employee or agent in India and did not carry out operations in India, it did not have a PE in India and no part of the receipts from outbound and inbound consignments was taxable in India. HELD by the AAR:

(i) A “permanent establishment” is something which enables a non-resident to carry on a part of its whole business in a particular country. The Aramex group could not have done business in India without a presence in India. This presence in India can be achieved through an independent entity or through a subsidiary. If the entity is an independent & uncontrolled entity, then there is no PE if the requirements in Article 5(2) of the DTAC are not satisfied. However, if a 100% subsidiary is created for the purpose of attending to the business of the group, the subsidiary must be taken to be a PE of the group in India applying common sense.

(ii) As the subsidiary has a fixed place of business in India and the business of the applicant is carried on through it, the definition in Article 5(1) is satisfied. The subsidiary is also a PE under Article 5(8) because it habitually secures orders in India wholly for the Aramex group and concludes contracts for the group. The exception in Article 5(10) that the fact that a subsidiary carries on business shall not of itself constitute that company a PE of the foreign company does not apply because it is not a case of the subsidiary carrying on “its business” in India but it is a case of the entire group carrying on business in India through the subsidiary. Also, the fact that the agreement refers to the subsidiary as “independent” and “non-exclusive” is not relevant because it is a mere camouflage to screen the fact that the subsidiary is really a PE of the applicant’s group in India.

(120.5 KiB, 1,439 DLs)

Composite contract cannot be split to exempt profits from offshore supply of goods. A joint contract constitutes an AOP despite separate responsibility of parties

The Applicant, a foreign company, entered into a consortium agreement with three other cpmpanies for the submission of a joint bid in response to the Bangalore Metro Rail Corporation Ltd’s (BMRC) tender for “design, manufacture, supply, installation, testing & commissioning of signaling/ train control and communication systems”. The consortium parties agreed to be jointly and severally liable to BMRC for the performance of all obligations under the contract. However, the respective obligations of the parties was split up & each was separately responsible for its own profit/loss. The bid was accepted by BMRC and a contract between BMRC and the Consortium was entered into. The applicant filed an applicant for advance ruling and claimed, relying on Ishikawajima–Harima 288 ITR 408 (SC), Hyundai Heavy Industries 291 ITR 482 (SC) & Hyosung Corp 341 ITR 18 (AAR), that the income derived by it from offshore supply of plant and materials was not taxable in India as the title to the goods had passed, and payment was received, outside India. It was also claimed that as each consortium member had separate responsibility and was accountable for its own profit/ loss, the fact that the contract with BMRC was joint, did not make the consortium an “AOP”. HELD by the AAR rejecting the plea:

(i) Though in Ishikawajima–Harima 288 ITR 408 (SC), Hyundai Heavy Industries 291 ITR 482 (SC) & Hyosung Corp 341 ITR 18 (AAR), it was held that that a composite contract was capable of being dissected and it was open to the assessee to raise the contention that parts of the contract should be treated separately for the purpose of deciding whether income from the performance of that part of the contract arose onshore or offshore and that part of the income attributable to offshore transaction cannot be taxed in India, this is no longer good law in view of the larger bench decision in Vodafone International Holdings where it was held that the transaction has to be looked at as a whole and not by adopting a dissecting approach. The basic principle in interpretation of a contract is to read it as a whole and to construe all its terms in the context of the object sought to be achieved. Reading parts of the contract as imposing distinct obligations is not the proper way to understand a composite contract;

(ii) On facts, the contract entered into with BMRC was a composite one for the design, manufacture, supply, installation, testing & commissioning of signaling system for which a lump sum consideration was paid. Such a contract cannot be split up into separate parts as consisting of independent supply or sale of goods and for installation at the work site, leading to the commissioning and so on (Linde AG AAR 962/2010 & Roxar Maximum (AAR) followed).

(iii) Further, as the applicant and the others came together for jointly executing the project, they constituted an AOP & were liable to be taxed as such. The argument that the obligations undertaken by the Consortium jointly and directly under the contract were not relevant in considering the question whether there was an AOP but what was relevant was only their relationship inter se is not acceptable. The fact that between themselves, the members of the Consortium divide the performance of the obligation does not affect the nature and content of the obligation undertaken by them jointly.

(99.5 KiB, 1,127 DLs)

A composite contract for installation & commissioning cannot be split so as to exempt the profits from offshore supply of goods

The Applicant entered into a contract with ONGC for “services for supply, installation and commissioning of 36 manometer gauges”. The applicant claimed that the contract, though composite, had to be split into various components in line with Ishikawajima-Harima Heavy Industries 288 ITR 408 (SC), Hyundai Heavy Industries 291 ITR 482 (SC) & Hyosung Corporation 314 ITR 343 (AAR), and that the income attributable to the supply of manometer gauges was not taxable in India because the title to the goods had passed outside India & the payment was received outside India. HELD by the AAR rejecting the plea:

Though in Ishikawajima-Harima, a two judge bench of the Supreme Court had adopted a dissecting approach by dissecting a composite contract into two parts and holding one of the parts not amenable to taxation in India, this cannot be followed in view of the 3 Judge verdict in Vodafone International Holdings vs. UOI 345 ITR 1 (SC) where it was held that a transaction had to be “looked at and not looked through” and seen as a whole and not by adopting a “dissecting approach”. A contract for sale of goods differs from a contract for installation and commissioning of a project. The tests relevant for considering where the title to the equipment, passed would not be relevant while construing the terms of a supply and erection contract. On facts, the contract is for erection and commissioning of 36 manometer gauges and not one for sale of equipment or erection of the equipment. It is a composite & indivisible contract for supply and erection at sites within the territory of India and cannot be split. The income accrued in India and was assessable u/s 44BB.

(187.0 KiB, 1,456 DLs)

Selective buy-back of shares in lieu of dividend is a “colourable transaction”

The Applicant’s shares were held 48.87 % by a US company & 25.06% by a Mauritius company. The rest was held by a Singapore company and the public. The Mauritius company was ultimately held by another US company. Since 1.4.2003, when s. 115-O was introduced, the Applicant did not (to avoid DDT) distribute dividend. Instead, it let its reserves grow and offered a buy-back in the year 2008. The buy-back was accepted only by the Mauritius company, in whose hands the capital gains u/s 46A, were not assessable under the India-Mauritius DTAA. The other shareholders did not accept the offer. A second offer was proposed which also was accepted only by the Mauritius company and not by the other shareholders. The Applicant sought a ruling on whether the gains as a result of the buy-back would be capital gains u/s 46A in the hands of the Mauritius company and exempt under Article 13 of the India-Mauritius DTAA. HELD by the AAR;

Though the Applicant was making regular profits, it did not declare any dividends after the introduction of s. 115-O and allowed its reserves to grow. This was only to avoid paying DDT. The buy-back was a “colourable device” devised to avoid tax on distributed profits u/s 115-O because while it would result in repatriation of funds to the Mauritius company, that would constitute “capital gains” in the hands of the recipient, and not be assessable to tax in India under Article 13 of the India-Mauritius DTAA. The fact that the other major shareholders did not accept the buy-back was significant. A buy-back results in a release of accumulated profits which is assessable as “dividend”. The exemption to treat the buy-back proceeds as capital gains is only in respect of a genuine buy-back of shares. As the transaction is colourable, it is not a transaction in the eye of law and has to be ignored and the arrangement has to be treated as a distribution of profits by a company to its shareholders which is assessable as dividend in the hands of the recipient.

(119.3 KiB, 1,152 DLs)

S. 47(iv) relief not available if holding co and nominees hold 100% of subsidiary

The applicant, a German company, held 99.99% of the shareholding of an Indian company. The rest of the shares were held by other companies as nominees of the applicant. The Indian company proposed a buy back of shares u/s 77A of the Companies Act which would have resulted in transfer of shares of the Indian company from the applicant to the Indian company at a price to be determined. The applicant claimed that as it and its nominees held 100% of the shares of the Indian company, the exemption conferred by s. 47(iv) on transfers between holding company and 100% subsidiary applied and s. 46A would not apply. HELD by the AAR:

(i) S. 47(iv) exempts a transfer of a capital asset by a company to its subsidiary if “the parent company or its nominees hold the whole of the share capital of the subsidiary company”. The word used is “or” and not “and”. The assessee held only 99.99% of the shareholding. The shares held by the nominees cannot be considered as held by the assessee. If, under Indian law (s. 49 (3) of the Companies Act), a company cannot by itself hold 100% of the shares in a subsidiary, it would only mean that Parliament did not intend to confer the benefit of s. 47(iv) on such a parent company. Though this approach confines the relief to a particular species of parent companies, it does not mean that the provision is unworkable. If the nominees are treated as holding the shares benami for the parent company, it would offend the Benami Transactions (Prohibition) Act, 1988 and also violate s. 49(3) of the Companies Act. The nominees can also not be regarded as a trustee in view of s. 153 of the Companies Act. The result is that the applicant does not hold 100% of the share capital of the subsidiary and so s. 47(iv) is not attracted;

(ii) S. 46A, which provides that in the case of a buyback, the difference between the consideration and the cost of acquisition shall be deemed to be capital gains is a special provision and prevails s. 45. S. 47 overrides s. 45 but not s. 46A. There is no reason to enquire whether s. 46A is a charging section or not. The result is that even if the exemption in s. 47(iv) is held applicable, it does not override s. 46A and the applicant is subject to capital gains.

(157.2 KiB, 811 DLs)

S. 245R(2): Pendency of question in payee’s hands disbars payer’s application

The Applicant, a PSU, entered into an offshore services contract with a Russian company for setting up a power plant. The Applicant claimed that the income arising to the Russian company from offshore supply of equipment was not chargeable to tax in India and that it was not liable to deduct/ bear TDS thereon u/s 195. However, as in the assessment of the Russian company, the AO had already taken the view that the income from offshore supply was chargeable to tax u/s 44BBB and the issue was pending before the Tribunal, the question arose whether the application was maintainable in view of clause (1) of the Proviso to s. 245R(2) which provides that an application is not maintainable if the question raised in it “is already pending before any income-tax authority or Appellate Tribunal, or any Court.” The Applicant claimed that the pendency in the case of the recipient did not affect the maintainability in the context of the payer’s obligation to deduct tax u/s 195. HELD rejecting the application:

The argument that the pendency of the question in the case of the recipient cannot bar the application in the case of the payer is not acceptable because an “advance ruling” is a determination in relation to a “transaction”. A “transaction” always involves the payer and payee. It is not possible to separate an applicant from a transaction while he is seeking a Ruling, since the Ruling relates to a transaction undertaken by him or to be undertaken by him. A ruling also cannot be divorced from a transaction. The question posed before the income-tax authorities in the case of the recipient and before the AAR in the case of the payer is the same, namely, whether the income is assessable to tax. Consequently, the bar in s. 245R(2) applies and the payer’s application is not maintainable. The contrary view taken by the AAR in Airports Authority of India In re 168 Taxman 158 is not correct (Foster (AAR No. 975 of 2009) followed).

(224.5 KiB, 1,428 DLs)

Gains arising on sale of shares of foreign company by NR to NR taxable in India if the foreign co only held Indian assets

Two French companies named “Murieux Alliance” (‘MA’) and “Groupe Industrial Marcel Dassault” (“GIMD”) held shares in another French company named “ShanH”. MA & GIMD acquired shares in an Indian company named “Shantha Biotechnics Ltd” (“Shantha”). The shares in Shantha were transferred to ShanH. MA and GIMD subsequently sold the shares in ShanH to another French company named “Sanofi Pasteur Holding”. The assessees filed an application for advance ruling claiming that as the two French companies had sold the shares of another French company to a third French company, the gains were not chargeable to tax in India. The department opposed the application on the ground that ShanH was formed with no purpose other than to hold the shares of the Indian company and that the transaction was taxable in India. HELD upholding the department’s plea:

(i) Azadi Bachao Andolan, though binding on the AAR, may not be the final word because under the proviso to s. 245R(2), the AAR is entitled to disallow an application if the question raised therein relates to an issue which is designed, prime facie, for the avoidance of income-tax. The AAR is entitled to see whether the steps taken were a device to avoid liability to tax. Also it is difficult to accept the arguments based on Azadi Bachao Andolan because that judgement appears to proceed on the basis that the views expressed by Chinnappa Reddy, J. were his own and did not represent the view of the Court as a whole. The view that has emerged is that notwithstanding the legal validity of a transaction or a set of transactions, if the purpose was to create a legal smoke screen to avoid the payment of tax that would legitimately be due as having arisen on the basis of a transaction or an event, the legal effect of the transaction in the context of the taxing statute, has to be considered, notwithstanding its reality or validity;

(ii) On facts, the French company’s (ShanH) only asset were the shares in the Indian company & it had no other business. When its shares were sold, what really passes were the underlying assets and the control of the Indian company. A gain was generated by the transaction. If the transaction is accepted at face value, control over Indian assets and business can pass from hand to hand without incurring any liability to tax in India. Such transactions have to be treated as ineffectual. It is not necessary to ignore the existence of ShanH to come to a conclusion that what is put up is a facade in the context of the tax law and would amount to a scheme for avoidance of tax;

(iii) Under Article 14(5) of the India-France DTAA, gains from the alienation of shares representing a participation of at least 10% in an Indian company may be taxed in India. Here, though the shares being transferred are that of a French company, the situs of the underlying assets & controlling interest cannot be ignored. What is involved in the transaction is an alienation of the assets and controlling interest of an Indian company. Consequently, even though such interest is not an alienation of the shares of an Indian company, still, on a purposive construction of Article 14(5), the capital gains is taxable in India.

(315.4 KiB, 1,156 DLs)

License fee for Software, even if “copyrighted article”, taxable as “royalty”

The applicant was the developer of software. It granted a non-exclusive and non-transferable license to an Indian company to use the software without any sub-licensing rights. The licensee was not allowed to modify the software programme and could make copies only for its own use. The applicant filed an application for advance ruling in which it claimed, relying on Dassault Systems 322 ITR 125 (AAR) and Tata Consultancy Services 271 ITR 401 (SC), that the transaction involved the use/ right to use of a “copyrighted article” but not the “copyright” itself and so the license fees were not assessable to tax as “royalty” u/s 9(1)(vi) of the Act & Article 12 of the India-Sri Lanka DTAA. HELD rejecting the applicant’s plea:

S. 9(1)(vi) & Article 12 define the term “royalty” to include any payment for the use of, or the right to use, a “copyright” of scientific work. Software programmes are a “copyright” and are protected under the Copyright Act, 1957. As the software programme is a “copyright”, any payment received for transferring the right to use it is “royalty” as defined in the Act. The argument that there is a distinction between a “copyright” and a “copyrighted article” is not acceptable because there is no such distinction made either in the Income-tax Act or the Copyright Act. The use of software involves the use of the copyright; the software cannot be divorced from the copyright itself. Accordingly, even a fee for the use of a “copyrighted article” is assessable as “royalty”. (Microsoft/Gracemac 42 SOT 550 (Del) followed; Dassault Systems 322 ITR 125 (AAR) not followed; Tata Consultancy 271 ITR 401 (SC) distinguished)