Authority for Advance Rulings (AAR): Capital Gain arising on transfer of shares of Indian listed company was held to be exempt from tax in India in the hands of a company resident of Mauritius. Transfer pricing provisions were held to be applicable to such transaction. Foreign company to be subject to MAT provisions. AAR can correct its earlier ruling and is bound only by the decisions of the Supreme Court. (Castleton Investment Limited - AAR No.999 of 2010)
Castleton Investment Limited (the applicant), a company resident of Mauritius, was a part of Glaxo Smithkline group of companies (GSK group). Glaxo Smithkline Pharmaceuticals Limited (GSKPL), an Indian listed company, was also a part of the GSK group. The applicant had acquired shares in GSKPL in the year 1993 and 1996. The applicant has proposed to transfer the shares of GSKPL to GSK Pte. Ltd. (GSK Pte.), the Singapore Company, for cash consideration at fair market value. The transfer of shares is proposed to be off the market and not through a recognized stock exchange, without attracting securities transaction tax. The applicant has no office, employees or agents in India and hence, there is no permanent establishment in India.
Questions raised before the Authority for Advance Rulings (AAR):
The main questions on which the applicant has sought ruling are as under:
- Whether capital gains arising from transfer of shares of GSKPL by the applicant to GSK Pte. would be subject to tax in India?
- If the transfer of shares by the applicant to GSK Pte. is not taxable, whether the provisions of Sections 92 to 92F of the Income tax Act (Act) relating to transfer pricing would be applicable?
- Whether the sale consideration receivable by the applicant should suffer any withholding tax as per Section 195 of the Act?
- If the transfer of shares of GSKPL is not taxable in India, whether the applicant is required to file any return of income under Section 139 of the Act?
- Whether the provisions of Section 115JB of the Act shall be applicable to the applicant?
Observations and decision of the AAR:
- As per Article 13(4) of the Double Tax Avoidance Convention (DTAC) between India and Mauritius, by invoking Section 90(2) of the Act, the capital gains that would arise would not be chargeable to tax in India. The argument that unless the applicant is actually taxed in Mauritius or is liable to be actually taxed on the capital gains that would arise in Mauritius, the DTAC is attracted since a DTAC can apply only when there is actual taxation in two countries, though may sound attractive cannot be accepted. Though the view was taken by this Authority in Cyril Eugene Pereira, In re (239 ITR 650) that unless
- there is real double taxation, the DTAC cannot be invoked, the said view was disapproved by the Supreme Court in UOI v. Azadi Bachao Andolan. This Authority is bound by this decision.
- According to the applicant, Section 92 can be applied only to a transaction chargeable to tax under the Act. The applicant does not dispute that the transaction in question is an international transaction within the meaning of section 92 of the Act. But, since the transaction in question is not chargeable to tax in India in view of Article 13(4) of the DTAC, Section 92 of the Act is not attracted. The applicant relies on the earlier Rulings of this Authority in Praxair Pacific Limited [326 ITR 276] and in Vanenburg Group BV [289 ITR 464].
- The AAR has observed that the theory of precedents may not have strict application in proceedings before the Authority. The Authority is bound only by the decisions of the Supreme Court. The decisions of High Courts have only persuasive value. The Authority is not subordinate to any High Court for even Article 227 of the Constitution to apply. The authority expressed grave doubts whether the jurisdiction under Article 226 will itself be attracted. As regards prior ruling of the Authority is concerned, no doubt the Authority should be slow in disagreeing with a proposition of law unrelated to facts, enunciated therein. However, when the Authority is convinced that a view already expressed may not be correct, it should not deter the Authority from expressing itself. If a view different from the one taken earlier is taken, the controversy can obviously be set at rest only by the Supreme Court stepping in and rendering a binding decision.
- Without resort to provisions of Sections 92 to 92F, the capital gains from an international transaction cannot be determined. Only on determining whether capital gains have arisen, would the question arise whether the gain is chargeable to tax or not under the Act. Clearly, in cases governed by the Act alone, they would be chargeable to tax. In a case when an option is exercised to opt for benefits under a DTAC, then the question would arise whether the gain is taxable in this country and if yes, to what extent. The question of chargeability to tax would arise only at a later stage. The application of Section 92 cannot be kept at bay by jumping to the second stage straight away. The AAR has taken the view that whether ultimately the gain or income is taxable in the country or not, Sections 92 to 92F would apply if the transaction is one coming within those provisions. In cases, where there is no liability what would be the purpose of undertaking a transfer pricing exercise is not a question that would affect the operation or rigour of a statutory provision on its plain words.
- About the applicability of withholding tax is concerned, the AAR has held that as per GE Technology Centre P. Ltd. v. CIT [327 ITR 456(SC)] in cases where there is no chargeability to tax under the provisions of the Act, there will be no obligation to withhold.
- As regards the filing of return of income is concerned, the applicant argued that since the income is not taxable in India, there is no obligation on the applicant to file a return of income under Section 139 of the Act. The AAR has observed that Section 139 insists that every person, being a company, firm or a person other than, a company or firm, if its or his total income exceeds the maximum amount which is not chargeable to income-tax, has to file a return of income. A company which is entitled to claim the benefit of a DTAC might have an income exceeding the maximum amount which is not chargeable to tax under the Act. On the language of Section 139, such a person is bound to file a return of income. When a person claims the benefit of a DTAC, that person is invoking Section 90(2) of the Act to do so. In other words, a person earning an income that is chargeable to tax under the Act, has to make a claim by invoking Section 90(2) of the Act for getting the benefit of a DTAC. So even if he would be entitled to seek relief under the DTAC, he has to seek it and that would be during the consideration of his return of income or at best while filing his return. If so, the obligation under Section 139 of the Act cannot simply disappear merely because a person may be entitled to claim the benefit of a DTAC. The AAR has held that the applicant will have an obligation to file return of income under Section 139 of the Act.
- As regards the applicability of minimum alternate tax (MAT), the AAR has observed that Section 115JB of the Act on its wording makes no distinction between a resident company and a non-resident company. Prima facie, it applies to all companies. The definition of a company in Section 2(17) of the Act means an Indian company or any company incorporated by or under the laws of a country outside India. As per AAR ruling in the case of Niko Resources (234 ITR 828) Section 115JB of the Act would apply to the foreign company also.
This is a very important ruling, wherein AAR has taken a contrary view to its own rulings pronounced earlier in the case of Praxair Pacific Limited (326 ITR 276), Vanenburg Group BV (289 ITR 464) and in Dana Corporation (321 ITR 178). In those cases, the AAR has held that when there is no income chargeable to tax in India, the transfer pricing provisions do not apply to such income. The AAR has now held that chargeability of the income to tax and the applicability of the transfer pricing provisions are independent and even if the income is not chargeable to tax, transfer pricing provisions would apply to the transaction.
As regards the applicability of MAT is concerned, although the Authority in the case of Timken (326 ITR 193 (AAR) held that Section 115JB would not apply to foreign companies that has no presence or PE in India, the AAR has now opinied that 115JB would apply to the applicant because section 115JB applies to every "company" and makes no distinction between a resident company and a non-resident company [Reliance placed on Niko Resources Ltd. (234 ITR828) (AAR) and PNo.14 Of 1987 (234 ITR 335) (AAR)].
The AAR has observed that the theory of precedents may not have strict application in proceedings before the Authority. The Authority is bound only by the decisions of the Supreme Court. The decisions of High Courts have only persuasive value. The AAR has also observed that the AAR is not subordinate to any High Court for even Article 227 of the Constitution to apply. Such observations are not in accordance with the observations of the Supreme Court in the case of Columbia Sportswear Company (SLP no. 31543 of 2011) wherein the Supreme Court has held that the AAR is body exercising judicial power conferred on it by Chapter XIX –B of the Act and is a tribunal within the meaning of the expression in Article 136 and 227 of the Constitution. It has also held that even though the ruling of the AAR are binding, that does not bar the jurisdiction of the Supreme Court under Article 136 of the Constitution or the jurisdiction of the High Court under Articles 226 and 227 of the Constitution to entertain a challenge to the ruling of the Authority.
Originally published August 17, 2012.
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