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

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

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

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)

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

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)

The clauses in the offshore supply contract agreement regarding the transfer of ownership, the payment mechanism in the form of letter of credit which ensures the credit of the amount in foreign currency to the applicant’s foreign bank account on receipt of shipment advice and insurance clause establish that the transaction of sale and the title took place outside Indian Territory. The ownership and property in goods passed outside India. The transit risk borne by the applicant till the goods reach the site in India is not necessarily inconsistent with the sale of goods taking place outside India. The parties may decide between them as to when the title of the goods should pass. As the consideration for the sale portion is separately specified, it can well be separated from the whole. (Ishikwajima Harima 288 ITR 410 (SC) & Hyosung Corporation 314 ITR 343 (AAR) followed; Ansaldo Energia SPA 310 ITR 237 (Mad) distinguished)

The expression “before giving effect to the 2nd proviso to s. 48‟ in the Proviso to s. 112(1) pre-supposes the existence of a case where computation of long-term capital gains could be made in accordance with the formula contained in the 2nd proviso in s. 48. It means that the asset must be one qualified for indexation under the second proviso to s. 48. There is no justification in not giving effect to the words used in the proviso. As the 2nd proviso to s. 48 is not applicable to non-residents, occasion to apply the proviso to s. 112(1) does not arise. A non-resident foreign company cannot claim the double benefit of protection against rupee value fluctuation as well as indexation. Timken 294 ITR 513 (AAR) not followed; BASF AG 293 ITR (AT) 1 followed

In determining the arms length price, all economically relevant factors (including the “implicit support” that the subsidiary enjoys from the holding company) have to be considered. The explicit guarantee by the holding company also has a value to the subsidiary (Para 1.6 of the OECD Commentary on Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations referred). The question is how much an arm’s length party, benefiting from the implicit guarantee would be willing to pay for the explicit guarantee