BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX) NEW DELHI 2nd Day of May, 2011 A.A.R. Nos. 1006 & 1031 of 2010 Present Mr. Justice P.K.Balasubramanyan (Chairman) Mr. J. Khosla (Member) Mr. V.K. Shridhar (Member) Name & address of the applicant In 1006 of 2010 GoodyearTire and Rubber Company 1144 East Market Street, Akron Ohio -44316-0001, United States of America Name & address of the applicant Goodyear Orient Company (Private) Limited, In AAR 1031 of 2010 39 Changi South Avenue 2 4 th Floor, APICO Industrial Building Singapore, 486352 Present for the applicant Present the Department Mr. Percy Pardiwalla, Senior Advocate Ms Aarti Sathe, Advocate M/s. Nitin Savara, Rahul Mittal, Vivek Katara & Sandeep Gupta, CA Mr. Narender Kumar, Addl. DIT (International Taxation)-I, New Delhi RULING (By V. K. Shridhar) The applicant in AAR No.1006 of 2010 is Goodyear Tire & Rubber Company, USA (GTRC), a company incorporated under the laws of Ohio, USA. The applicant in AAR No.1031 of 2010 is Goodyear Orient Company (Private) Limited, Singapore (GOCPL), a company incorporated under the laws of the Republic of Singapore. The Goodyear India Limited (GIL) is a public company incorporated under the Companies Act, 1956, and listed on the Bombay Stock Exchange. GTRC is the promoter of GIL and presently holds 17,069,215 equity shares representing 74% of the total paid up capital of 1
GIL. The remaining 26% shareholding is presently held by public shareholders. GOCPL is a wholly owned subsidiary of GTRC. 2. The applicant, GTRC, submits that as part of its global corporate strategy, it is contemplating a reorganization of its investment in its Indian arm, GIL. It is seeking to expand the role of its Singapore based GOCPL for the benefit of its other group entities within Asia-Pacific Region by making it a financially strong and important entity of the group. GOCPL is an operating company and manages the natural rubber purchasing, delivery, financing, treasury and quality of the worldwide operations of GTRC and as such there is commonality of business interests of the group with GIL. With this end in view, the applicant proposes to enter into a Share Contribution Deed (SCD) to contribute voluntarily the entire 74% shares it holds in GIL to GOCPL, without any consideration. Based on the above facts, as the transfer of shares would be voluntarily and without any consideration, the applicants, GTRC and GOCPL desire to know their tax liabilities under the Income Tax Act, 1961 (Act). 3. The applicant, GTRC, has sought a ruling on the following questions: 1. Whether the Applicant is liable to tax in India under the provisions of section 45 read with section 48 or under any other provisions of the Income-tax Act, 1961 ( Act ) in relation to the proposed contribution of its shares in Goodyear India Limited ( GIL ) to Goodyear Orient Company (Private) Limited ( GOCPL ) without consideration? 2. Whether the proposed contribution of shares by the Applicant to GOCPL attracts the transfer pricing provisions of section 92 to section 92F of the Act? 3. Whether, under the above mentioned transaction, the Applicant is required to deduct any tax under section 195 of the Act in relation to the proposed contribution of shares to GOCPL? 4. Whether GOCPL, the recipient of shares, is required to withhold tax in accordance with the provisions of section 195 of the Act? 4. The applicant, GOCPL, has sought a ruling on the following questions:- 2
1. Whether the Applicant is liable to tax in India in respect of the contribution of shares of Goodyear India Limited ( GIL ) to the Applicant by Goodyear Tire & Rubber Company ( GTRC ) in light of the provisions of section 56 of the Income Tax Act, 1961 ( Act )? 2. Whether GTRC is required to withhold tax on the aforesaid contribution of shares in accordance with the provisions of section 195 of the Act? 3. Whether the Applicant is required to withhold tax in accordance with the provisions of section 195 of the Act on receipt of shares from GTRC? 4. Whether the proposed contribution of shares by GTRC to the Applicant attracts the transfer pricing provisions of section 92 to section 92F of the Act? The applicant in AAR No.1006 of 2010, Goodyear Tire & Rubber Company, USA (GTRC) 5. The applicant, GTRC, by referring to the proposed SCD, submits that the clause 2.1 stipulates that all present and future rights, title and interest in the shares of GIL will be contributed to GOCPL. The recitals in clause 2.5 stipulates execution and delivery of such further instrument of conveyance and such other action as may be necessary to convey and transfer to CGOPL good title and possession of the contributed shares. The recital in clause 2.4 stipulates that the contribution is made without consideration and GOCPL is not liable to compensate the applicant for the contribution of shares at any time and in relation to the contribution, no obligation or liability of the applicant is being transferred or would be transferred at any time in future to GOCPL. 5.1 The applicant submits that it has voluntarily proposed to transfer/contribute shares in GIL to GOCPL without consideration in money or money s worth. The shares of GIL are capital assets and any profits or gains arising from its transfer are chargeable to income tax under the head Capital gains. Section 48 of the Act deals with the mechanism for computing income chargeable under the head capital gains. However, 3
as the full value of consideration received or accruing as a result of the transfer of shares of GIL is nil, the mechanism to charge the capital gains to tax fails. The applicant further submits that as the contribution of shares is by way of gift, it would not amount to transfer under section 45 read with section 47(iii) of the Act. 6. The learned Additional DIT (Intl. Tax), appearing on behalf of the Revenue stated that by holding 74% shares in GIL, and GOCPL being its subsidiary, the effective control of both these entities is with GTRC. The proposed transaction virtually tantamount to transferring shares from one pocket to another. As the consideration for transferring the shares is for creation of a better business environment, that itself is a consideration and the transaction would not be termed as gift in view of the meaning assigned to it in Webster s dictionary. It is further argued that it is a case of treaty shopping for avoidance of capital gains tax at a future date since in case the transferee company gifts or sells these shares to another entity, the transaction will not be taxable in India in view of the DTAA between India and Singapore and that would not be the case in the context of the Treaty between India and the USA. It is stated that the bar under proviso to section 245R (2) relating to the transaction designed for avoidance of tax covers both present and future scenarios. 6.1 The Learned Senior Advocate appearing on behalf of the applicants draws our attention to the Ruling of this Authority in the cases of Amiantit International Holding Ltd, AAR No.817 of 2009, [2010] 189 Taxman 149 and Dana Corporation, AAR No 788 of 2008, [2010] 186 Taxman 187. It is stated that in the case of Amiantit International Holding Ltd, the applicant had proposed to restructure the group by contributing shares of Indian company in which it was holding 70% of the equity capital, without any consideration. A draft contribution agreement was drawn. The contention of 4
the applicant that no profit or gain would accrue or arise on account of transfer as no consideration which could be evaluated in terms of money would be received or was receivable as a result of transfer of shares, found favour with the Authority. It was held that the liability to capital gains would not arise under section 45 read with section 48 of the Act. In the alternative, it was contended that the contribution/transfer of shares carried out in the course of reorganization was in the nature of gift within the contemplation of section 47(iii) of the Act and therefore the charging provision under section 45 stood excluded. Relying on the decision in George Henderson and Co. Ltd. [1967] 66 ITR 622 (SC), it is argued that the expression full value of consideration appearing in section 48 of the Act can not be construed as having reference to the market value of the asset transferred. 7. The relevant provisions of the Act are extracted below: Section 45. Capital gains (1) Any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in sections 54, 54B, 54D, 54E,[54EA, 54EB,] 54F, 54G and 54H, be chargeable to income-tax under the head Capital gains, and shall be deemed to be the income of the previous year in which the transfer took place. [(1A) Notwithstanding anything contained in sub-section (1), where any person receives at any time during any previous year any money or other assets under an insurance from an insurer on account of damage to, or destruction of, any capital asset, as a result of (i) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature ; or (ii) riot or civil disturbance; or (iii) accidental fire or explosion ; or (iv) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), then, any profits or gains arising from receipt of such money or other assets shall be chargeable to income-tax under the head Capital gains and shall be deemed to be the income of such person of the previous year in which such money or other asset was received and for the purposes of section 48, value of any money or the fair market value of other assets on the date of such receipt shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of such capital asset. 5
Explanation: For the purposes of this sub-section, the expression insurer shall have the meaning assigned to it in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938).] Section 48. Mode of computation. The income chargeable under the head Capital gains shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely: (i) expenditure incurred wholly and exclusively in connection with such transfer ; (ii) the cost of acquisition of the asset and the cost of any improvement thereto. 8. It is settled law that Section 45 must be read with Section 48 and if the computation provision cannot be given effect to for any reason, the charge under Section 45 fails. The Hon ble Supreme Court has explained the interplay and relative scope of the two Sections in the cases of B.C.Srinivas Setty, 128 ITR 294 and Sunil Siddarthbhai 156 ITR 509. In Srinivasa Setty s case, the legal position was explained thus:. No doubt there is a qualitative difference between the charging provision and a computation provision. And ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is placed on the charging provision. That pertains to the fundamental integrality of the statutory scheme provided for each head. The meaning of the expression full value of the consideration on transfer of the capital asset appearing in section 48 is explained by the Hon ble Supreme Court in the case of George Henderson and Co Ltd. in [1967] 66 ITR 622, as under: The expression full value of consideration cannot be construed as having reference to the market value of the asset transferred but the expression only means the full value of the thing received by the transferor in exchange of the asset transferred and it is not right to say that the asset transferred and parted with is itself the consideration for the transfer. It is evident that legislature itself has made a distinction between the two expressions full value of consideration and fair market value of the capital asset transfer. We are of the opinion that the expression full value of the consideration cannot be construed as the market value but as the price bargained for by the parties to the same. 6
On a similar issue in the case of Amiantit International Holding Ltd cited supra, this authority was of the view that: Viewed from any angle, we are unable to perceive as to how any profit or gain has accrued or arisen to the applicant by virtue of the transfer of shares to its subsidiary company. It is not possible to identify or pinpoint anything which has the characteristic of profit or gain or any consideration which is capable of being valued in praesenti. As pointed out earlier, the income in the sense of profit and gain should be real but not hypothetical income. We may take it that the income may be in cash or in kind and need not necessarily be pecuniary in nature. As stated in the Law and Practice of Income-tax (by Kanga, Palkhivala and Vyas) income, profits and gains may be realized in the form of money s worth as well as money, in kind as well as in cash. Even then, the alleged consideration for which the shares are to be transferred should be capable of being evaluated on commercial and accounting principles The objection of the revenue in Amiantit International Holding Ltd was that the purported transfer was based on business considerations aimed at driving certain financial advantages as a part of reorganization process, that in substance there is nothing which can be said to have been gifted as donor will not be poorer to the extent of assets he parted with; and that the expression gift has to be assigned the meaning under T.P. Act. On these facts and the arguments advanced, there this Authority expressed the view that: The possibility of applicant transferor improving its overall business by virtue of re-organization and the mere possibility or chance of the applicant making better returns in the near or distant future as a consequence of reorganization can hardly be regarded as a consideration accruing or arising to the transferor when he has no right to receive a definite or an ascertainable amount or benefit from the transferee. It was then held that: Viewed from another angle, has the transferor acquired any right to receive and identifiable and monetarily convertible benefit though not money from the transferee? Is there anything concrete or definite which the transferee gives or make over to the transferor as a quid pro quo for the receipt of shares? The answer to all these questions could only be in the negative. One has to grope in darkness to find valuable consideration for transfer. While transferring Indian company shares to its 100 per cent subsidiary, the applicant, in our view, will derive no profit and make no gain. Nothing in the form of money or money s worth or nothing capable of being turned into money will accrue or arise to the applicant on the date of transfer. Therefore, the contention of the Revenue has to be rejected. 7
9. Applying the legal position enunciated above and the test laid down by the honourable judges in the cases cited in the rulings of Amiantit International Holding Ltd. and Dana Corporation, we have no hesitation in holding that no consideration would accrue or arise to the applicant by the transfer of shares and the applicant cannot be said to have derived any profit or gain from the transaction. We are of the view that as the consideration is incapable of being valued in definite terms or it remains unascertainable on the date of occurrence of taxable event, the question of applying section 45 read with section 48 of the Act would not arise. As GIL is a company in which public is substantially interested and its shares are listed on BSE, any income arising from the transfer of the shares (long-term capital asset) are otherwise exempt under section 10(38) of the Act. This is an answer to the Revenue s argument that the transaction is designed for avoidance of tax and/or that the applicant has resorted to Treaty- shopping. We need to mention that as we have found the answer to the questions raised within the realm of sections 45 and 48 of the Act, there is no necessity to discuss whether section 47(iii) of the Act is also attracted. 10. As no consideration will pass on transfer of shares of GIL by GTRC, no income will arise. The provision of section 92 to 92F of the Act will not be applicable in the absence of liability to pay tax. We are of the view that the transfer pricing provision in Chapter X is not attracted. In view of our answer to question No.1 & 2, as the income is not chargeable to tax as per the finding recorded above, the question of withholding of tax under section 195 of the Act by GTRC does not arise. That will also be true in the case of GOCPL, as evident from the discussion that follows. 11. All questions are answered in the affirmative, and ruled accordingly. The applicant in AAR No.1031 of 2010, Goodyear Orient Company (Private) Limited, Singapore (GOCPL) 8
12. The Learned Senior Advocate has drawn our attention to the provision of section 56(2)(viia) of the Act which is extracted as under: Income from other sources. 56. (1) xxx xxx xxx (2) (i) to (vii) xxx xxx xxx [(viia) Where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1 st day of June, 2010, any property, being shares of a company not being a company in which the public are substantially interest, - (i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property; (ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration : Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47. Explanation. For the purposes of this clause, fair market value of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);] 9
The Learned Senior Advocate submits that GIL is a company in which public are substantially interested. Its shares are listed on BSE, a recognised stock exchange in India. It is, therefore, a company in which public is substantially interested. Further, as GOCPL is the wholly owned subsidiary of GTRC, GOCPL is also not a company in what public are substantially interested. It is stated that provision of section 56(2) (viia) are not attracted. 13 The revenue has not challenged the averments made on behalf of the applicant and its application on the facts of the case. We have perused the provision of section 56(2) (viia). On the basis of the facts placed before us, we do not find any infirmity in the interpretation given on behalf of the applicant. We hold that there is no income liable to tax in India within the meaning of the provision of section 56(2) (viia) of the Act. Accordingly question No.1 is answered in the affirmative. 14 As there is no income liable to tax in the hands of the applicant, the provision of section 92 to 92F of the Act will not be applicable and the transfer pricing provision in Chapter X are not attracted. Accordingly Question No. 4 is answered in the affirmative. In view of our answer to question No.1 & 4, GOCPL is not obliged to withhold tax under section 195 of the Act. When the income is not chargeable to tax as per the finding recorded above, the question of withholding of tax does not arise. It will also be true in the case of GTRC. 15. All questions are answered in the affirmative, and ruled accordingly. Accordingly ruling is given and pronounced on 2nd Day of May, 2011. Sd/- Sd/- Sd/- (J. Khosla) (P.K.Balasubramanyan) (V.K.Shridhar) Member Chairman Member 10