It also has a subsidiary in India by the name of Amiantit Fiberglass Industries (India) Pvt. Ltd. (‘AFIIPL’) in which AIH held 70% shares.

Due to restructuring, AIH, Bahrain proposed to transfer its shares in AFIIPL India to ACHL, Cyprus. The shares were to be transferred without any consideration. The result of such a transfer would end in certain business advantages such as easier access to International Banking, enjoying credibility of western Europe directives laws and regulations, geographical advantage, etc.

Enquiries sought by the applicant with the AAR:

• Whether AIH is liable to tax in India in respect of the proposed transfer of shares to ACHL, Cyprus?
• Whether Indian transfer pricing regulations would apply to the facts of the present case?
• Whether ACHL, Cyprus has any withholding tax obligations in India as a result of the proposed transaction?

Applicant’s arguments

• No profit or gain accrues or arises to the applicant since the shares are transferred without any consideration. The
  advantage that may be derived by AIH cannot be evaluated in money terms.
• There is no transfer of shares by AHCL Cyprus to AIH as a result of this proposed transaction
• Transfer of shares without any consideration is in the nature of gift and hence not liable to capital gains tax in

India Revenue’s arguments:

• Even though there is no monetary consideration for the transfer of shares, AIH would derive certain business and financial advantages as a result of such transfer.
• Since ACHL, Cyprus is a 100% subsidiary of AIH, AIH does not part with the shares of AFIIPL in real sense since it would continue to own the shares through ACHL. Hence, the transfer of shares is not in the nature of gift.
• Since the transfer of shares to ACHL, Cyprus is an international transaction, the gain or loss arising therefrom should be determined on arms length considerations

Advance Ruling

• Income‐tax is a tax on real income. The income to be charged to tax should be arrived at on commercial principles, since the shares will be transferred without any consideration, no profit or gain would accrue or arise to AIH
• The benefit that AIH will receive as a result of the transfer of the shares cannot be quantified in money terms. There is also no quid pro quo for the transfer of shares.
• Where gain arising from a transaction cannot be quantified, it cannot be charged to tax – Supreme Court decision in case of B C Srinivasa Shetty was relied upon.
• The possibility that AIH may receive certain business and financial advantages in future cannot be treated as consideration for transfer of shares. Capital gains cannot arise on the basis of uncertain and indefinite future contingencies or hypothetical or imaginary estimations. Hence, no capital gain.
• Where there is no capital gains tax liability, the question of applying transfer pricing provisions would not arise. The TP provisions under the Indian Tax Law can be applied only when there is income chargeable to tax that arises from an international transaction.

OUR COMMENTS

The AAR has followed a settled legal position that where the gain cannot be quantified, it cannot be charged to tax. Section 9 of the Income‐tax Act, 1961 states that income arising from the transfer of a capital asset situated in India is deemed to accrue or arise in India and hence taxable in India. The AAR has proceeded on the footing that even for the application of this deeming fiction, there should be some quantifiable real income in the first place.

It seems the AAR was not influenced by the fact that the transaction/arrangement was between related parties and thus should be subject to transfer pricing. Transfer pricing regulations should also equally apply to the transactions where no consideration is prescribed and whether a nil consideration satisfies the arm’s length test should also be determined.

Nevertheless, the AAR ruling would certainly help foreign companies that wish to restructure their operations/holding structure. But in light of the intense scrutiny of cross‐border transactions by the Tax Authorities in recent times, the possibility that this ruling will be challenged by the Tax Department before the Supreme Court cannot be ruled out. Hence, it is imperative that any cross border transaction be independently and carefully examined to analyse the possible tax implications and the aforesaid Ruling can not be followed straightaway.

It is also pertinent to note that Budget 2010 has proposed that in case of transfer of shares of a company (in which public is not substantially interested) by any person to a firm or a company (in which public is not substantially interested) without any consideration or for inadequate consideration, such receipt of shares by the firm or company would be chargeable to tax under the head income from other sources. However, while computing the capital gain at the time of transfer of such shares in the hands of the firm or the company, the value adopted for taxing the said income would be considered as the cost of acquisition of the shares. If this proposal becomes law, one has to consider this aspect also while undertaking restructuring.

It is worthy to note that an advance ruling is binding with respect to the transactions; on the Commissioner and the income‐tax authorities subordinate to him in respect of the applicant and on the applicant who has sought it. It also has a persuasive value on other assessee. An advance ruling is required to be pronounced by the Authority within six months from the application.