In Re Dana Corporation (AAR)

No capital gains in a business reorganization if consideration not determinable. Transfer pricing law does not apply if there is no income

The applicant, a USA company, held shares in an Indian company. As part of a bankruptcy reorganization process, the shares in the Indian company together with other non-Indian assets & liabilities were transferred to other USA companies. The liabilities taken over were more than the assets. The agreement provided that the transfer of the shares was without consideration. The AAR had to consider (i) whether the liabilities of the transferor taken over by the transferee could be said to be “consideration” for transfer of the Indian shares so as to make it chargeable to capital gains and (ii) whether even if there was no chargeable ‘capital gains’, the applicant could be assessed on an ‘arms length” basis under the transfer pricing provisions. HELD answering both questions in favour of the applicant:

(i) The effect of B. C. Srinivasa Setty 128 ITR 294 (SC) is that ss. 45 & 48 are an integrated code and must be read together. If there is no ‘consideration’ u/s 48 there can be no capital gains u/s 45. The ‘profit or gain’ or ‘the full value of the consideration’ envisaged by ss. 45 & 48 is not something which remains ambivalent or indefinite or indeterminable and cannot be arrived at on notional or hypothetical basis. It must be a distinctly and clearly identifiable component of the transaction. It cannot be implied or assumed;

(ii) The liabilities of the applicant taken over as a part of reorganization cannot be treated as consideration nor can it adopted as a measure of consideration for the transfer of shares. The parties did not intend that a specified extent of liabilities taken over should be treated as consideration for the transfer of shares. One cannot find consideration for the transfer by means of conjectures and assumptions. When entire assets and liabilities are taken over in order to reorganize the business, it is difficult to envisage that a proportion of liabilities constitutes consideration for a particular transfer. No commercial or accountancy principle supports such inference. It is difficult if not impossible to predicate that a given part of the liabilities represents the consideration for transfer and such consideration has been passed on to the transferor. One has to consider the entire purpose and substratum of reorganization and cannot import artificial notions of consideration. Accordingly, the take over of liabilities under the reorganization plan cannot be treated as consideration for the transfer of the Indian company shares by the applicant;

(iii) The argument of the Revenue that the transfer pricing provisions will apply even if there is no income is not acceptable. S. 92 is not an independent charging provision but deals with “Computation of income from international transactions”. It provides that “any income arising from an international transaction shall be computed having regard to the arm’s length price”. The expression ‘income arising’ postulates that the income has arisen under the substantive charging provisions of the Act. S. 92 is not intended to bring in a new head of income or to charge tax on income which is not otherwise chargeable under the Act.