15 March, 2013
The Delhi High Court (“DHC”), has in a recent judgment (delivered on February 27, 2013) affirmed the ruling of the Authority for Advance Rulings (“AAR”), delivered on May 2, 2011, stating that income arising out of transfer of a long term capital asset, such capital asset being equity shares of an Indian listed company (where the transaction of sale of such equity shares is chargeable to securities transaction tax), would be exempt from payment of tax in India.
The issue concerning taxation arose when Goodyear Tire and Rubber Company (“GTRC”), a company incorporated under the laws of USA, transferred seventy four (74%) shares of Goodyear India Limited (“GIL”), a public company in India listed on the Bombay Stock Exchange (“BSE”), to its Singapore subsidiary, Goodyear Orient Company (Private) Limited (“GOCPL”) under a share contribution deed without any monetary consideration.
For the purposes of the transfer of shares, GTRC and GOCPL had approached the AAR, seeking a ruling/clarification on issues pertaining to GTRC’s tax liabilities under the Income Tax Act, 1961 (the “Act”) arising from the transaction of transfer of GIL’s shares from GTRC to GOCPL without any consideration. However, opposing the argument that no consideration was payable for the transfer, the tax department contended that the consideration was present in the transfer in the form of “creation of a better business environment” which was stated to be the object of the transfer of shares. Thus, the income tax department contended before AAR that the transfer would result in capital gains and should be treated accordingly.
The AAR, however, ruled that no consideration would accrue or arise by transfer of shares and no profit/gain has accrued to GTRC by virtue of the said transfer, the applicability of Section 45 read with Section 48 of the Act (the charging provisions in respect of capital gains) does not arise. Furthermore, the AAR observed that since GIL is a company in which the public is substantially interested and its shares are listed on BSE, any income/capital gains arising from the transfer of its shares are otherwise exempt under Section 10(38) of the Act.
The Income Tax Department thereafter filed a writ petition before the DHC against the ruling of the AAR. The tax department also raised a contention before the DHC that the transfer of GIL’s shares to GOCPL amounted to ‘treaty-shopping’, alleging that it was intended to circumvent payment of tax in India. The department based its argument on the India-Singapore Double Taxation Avoidance Treaty, wherein such transactions are only subject to taxation in Singapore as compared with the Indo–US agreement where tax implications arise in both the countries.
The DHC affirming the ruling of the AAR opined that if income arises out of the transfer of a long-term capital asset being an equity share in a listed company, the said income would in any event be exempt under Section 10(38) of the Act.
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