25 January 2016 EY Tax Alert AAR rules that transfer of shares of Indian subsidiary by a Mauritius company to a Singapore group entity is not a tax avoidant transaction Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes a recent decision of Authority for Advance Rulings (AAR) in the case of Dow AgroSciences Agricultural Products Ltd. (Applicant) [1], on the issue of whether the transfer of shares of an Indian company (ICo) by the Applicant to its Singapore group entity (SCo [2] ) upon re-organization would amount to tax avoidant transaction. Considering the period of holding of shares as well as the objective of re-organization of the group structure the AAR held that the transaction of transfer of ICo s shares was not a tax avoidant transaction. Accordingly, it was held that capital gains arising on such transfer would be exempt from tax in India under Article 13(4) of India-Mauritius Double Taxation Avoidance Agreement (DTAA). [1] Dow AgroSciences Agricultural Products Ltd. [TS-15-AAR-2016] [2] Singapore Company was one of the upcoming entities of the Group in Asia-Pacific region
Background and facts The Applicant is part of a large multi-national enterprise group (Group) and a company resident and incorporated in Mauritius. The Applicant held majority (nearly 99.99%) of the shares of ICo which was acquired by it in various tranches over a period of 10 years from 1995 to 2005. The Group had presence all over the world and was divided into various regions based on their geographical locations. The Applicant belonged to the European region, while ICo belonged to the IMEA region. In the past, the IMEA region was dismantled and entities were realigned with other regions as per the geographical convenience. As a result of this realignment, ICo has now become a part of the Asia-Pacific region. In order to achieve the objective of operational excellence, better control and administrative convenience, it was proposed to realign the holding of ICo and shift it to an entity in the Asia- Pacific Region. Accordingly, it was proposed that Applicant would contribute the shares in ICo as its capital in one of its group entity in Singapore i.e., SCo. a substantial cost cannot amount to a scheme to avoid payment of taxes in India. The Applicant has been operating for more than 10 years in Mauritius and hence it cannot be said to be a shell company. Investment in ICo s shares was carried out with prior approval of the Department of Industrial Policy and Promotion and Reserve Bank of India. In these circumstances, it cannot be said that shares were acquired with a view to sell them in future. The need for realignment of the Group arose upon dismantling of the IMEA group in 2010. As a result, and in order to ensure better control, ICO s holding was shifted from an entity in European region to Asia-Pacific region. SCo was an upcoming entity in the Asia-Pacific region and, hence, it was proposed to realign the holding of ICo from the Applicant to SCo. Additionally, the share acquisition was undertaken five years prior to the proposed re-organization of the group. Hence the proposed transaction is for sound business consideration. Issues before the AAR Whether the entire arrangement of transfer of ICo s shares in favor of SCo was a scheme to avoid taxes in India? Whether the Applicant had a Permanent Establishment (PE) in India? Whether income arising from such a transfer was taxable in India? Ruling of the AAR On the issue of whether the arrangement was a tax avoidant transaction For the following reasons it was held that the transaction of contributing ICo s shares to SCo by the Applicant was not a tax avoidance transaction: The Applicant had acquired shares of ICo in various tranches over a 10 year period. Such share acquisition which was carried out around 20 years ago for Setting up of the Mauritius company with an eye on Tax Treaty will not itself make it a tax avoidant arrangement. On the issue of PE It was a stated fact that the Applicant did not have an office or employees or agents in India. Neither did it have any activities in India. A tax residency certificate from Mauritius was also furnished by the Applicant. Further nothing was brought on record to show that Applicant had a PE in India. Therefore, it was held that the Applicant does not have a PE in India. Further, considering the accounting treatment, intention, as also quantum of the transaction, the equity shares held by the Applicant in ICo should be considered as capital asset and not stock-in-trade.
On the taxability of transfer of shares of ICo The transaction as explained above is not a colorable device to avoid taxes in India. Also, it is incorrect to state that since ICo has not declared and distributed dividend for the past few years, the sale proceeds to the extent of accumulated profits should be taxed as dividend in India. The shares of ICo were held for a very long period of time (10-20 years). The objective of acquiring ICo s shares as stated by the Applicant was not to trade in them but to hold them as investments. In fact, there was no trading in ICo s shares by the Applicant, except for the proposed transfer. Hence, the shares of ICo would constitute capital asset in the hands of Applicant. Reliance in this regard was also placed on the decisions in the case of G.Venkata Swami Naidu and Company [3], Raja Bahadur Kamakhya Narain Singh [4] and Praxair Pacific Ltd. [5]. Consequently gains from transfer of shares of ICo would result in capital gains in the hands of the Applicant. Such capital gains is taxable in India under the provisions of the Income Tax Laws. Thus gains on contribution of ICo s shares would be covered by Article 13(4) and, therefore, exempt from tax in India. Other observations Relying on the Supreme Court ruling in the case of Castleton Investments and also the press release dated 24 September 2015, it was ruled that in absence of PE in India, Minimum Alternate Tax provisions do not apply to the Applicant. As the transfer of ICo s shares is not taxable in India, transfer pricing provisions and withholding tax provisions are not applicable. The Applicant was not required to file a return of income in the absence of any taxable income. Reference was made to the decision of FactSet Research Systems Inc. [6] and Vanenburg Group B.V. [7], wherein it was held that machinery provisions cannot be applied in absence of any liability to tax. Article 13(2) of India-Mauritius DTAA provides that any gains arising from immovable property which forms part of the business property of a PE of an enterprise of one State in the other Contracting SState or the alienation of PE, may be taxed in the other Contracting State. Further Article 13(4) of the DTAA provides that alienation of (i) any property other than immovable property as covered in Article 6, (ii) property covered in Article 13(2), (iii) ships and aircrafts, would be taxable only in the resident State. The Applicant does not have a PE in India and, hence, Article 13(2) is not applicable to the facts of the present case. The contention that ICo is to be treated as a PE of the Applicant s parent company in the US and, therefore, the gains on transfer of ICo s shares should be treated as taxable in the hands of Applicant s parent under Article 13(2) is incorrect. [3] G.Venkata Swami Naidu and Company v. CIT [1959] 35 ITR 594 (SC) [4] Raja Bahadur Kamakhya Narain Singh v. CIT [1970] 77 ITR 253 (SC) [5] Praxair Pacific Ltd. AAR 855 of 2009 [6] FactSet Research Systems Inc. [Refer EY Tax alert dated 10 July 2009 titled AAR rules right to use database not royalty ] [7] Vanenburg Group B.V. vs. CIT [AAR No.727 of 2006]
Comments The AAR ruling is a welcome decision especially for entities having inbound investments in India. It reiterates that as long as strong commercial reasons exist for undertaking a transaction, it cannot be questioned merely on the ground that the investment is routed through a specific treaty favorable jurisdiction. It also gives insights on what factors may be considered as relevant for justifying substance in a share transfer arrangement. The ruling also reiterates that in absence of taxable income, the transfer pricing and withholding provisions do not apply. Interestingly, the AAR has also differentiated its earlier ruling in the case of Castleton Investments and held that in the absence of any liability to tax, there is also no obligation to file a tax return in India [8]. [8] In Castleton investment (AAR No. 999 of 2010), AAR held that the obligation to file return of income does not disappear merely because a person is entitled to claim the benefits of a DTAA.
Our offices Ahmedabad 2nd floor, Shivalik Ishaan Near. C.N Vidhyalaya Ambawadi, Ahmedabad 380 015 Tel: + 91 79 6608 3800 Fax: + 91 79 6608 3900 Bengaluru 6th, 12th & 13th floor U B City Canberra Block No.24, Vittal Mallya Road Bengaluru 560 001 Tel: + 91 80 4027 5000 + 91 80 6727 5000 Fax: + 91 80 2210 6000 + 91 80 2224 0695 Prestige Emerald, No. 4, 1st Floor, Madras Bank Road, Lavelle Road Junction, Bangalore - 560001 Chandigarh 1st Floor SCO: 166-167 Sectr 9-C, Madhya Marg Chandigarh 160 009 Tel: + 91 172 671 7800 Fax: + 91 172 671 7888 Chennai Tidel Park, 6th & 7th Floor A Block (Module 601,701-702) No.4, Rajiv Gandhi Salai Taramani Chennai 600 113 Tel: + 91 44 6654 8100 Fax: + 91 44 2254 0120 Hyderabad Oval Office 18, ilabs Centre, Hitech City, Madhapur, Hyderabad 500 081 Tel: + 91 40 6736 2000 Fax: + 91 40 6736 2200 Kochi 9th Floor ABAD Nucleus NH-49, Maradu PO, Kochi 682 304 Tel: + 91 484 304 4000 Fax: + 91 484 270 5393 Mumbai 14th Floor, The Ruby 29 Senapati Bapat Marg Dadar (west) Mumbai 400 028 Tel + 91 22 6192 0000 Fax + 91 22 6192 1000 5th Floor Block B-2, Nirlon Knowledge Park Off. Western Express Highway Goregaon (E) Mumbai 400 063 Tel: + 91 22 6192 0000 Fax: + 91 22 6192 3000 NCR Golf View Corporate Tower B Near DLF Golf Course, Sector 42 Gurgaon 122 002 Tel: + 91 124 464 4000 Fax: + 91 124 464 4050 3rd & 6th Floor, Worldmark-1 IGI Airport Hospitality District Aerocity, New Delhi-110037, India Tel: +91 11 6671 8000 Fax: +91 11 6671 9999 4th & 5th Floor, Plot No 2B, Tower 2, Sector 126, Noida 201 304 Gautam Budh Nagar, U.P. India Tel: + 91 120 671 7000 Fax: + 91 120 671 7171 Pune C 401, 4th floor Panchshil Tech Park Yerwada (Near Don Bosco School) Pune 411 006 Tel: + 91 20 6603 6000 Fax: + 91 20 6601 5900 Ernst & Young LLP EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is one of the Indian client serving member firms of EYGM Limited. For more information about our organization, please visit www.ey.com/in. Ernst & Young LLP is a Limited Liability Partnership, registered under the Limited Liability Partnership Act, 2008 in India, having its registered office at 22 Camac Street, 3rd Floor, Block C, Kolkata 700016. 2016 Ernst & Young LLP. Published in India. All Rights Reserved. ED None This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. Kolkata 22, Camac Street 3rd Floor, Block C Kolkata 700 016 Tel: + 91 33 6615 3400 Fax: + 91 33 2281 7750 EY refers to global organization, and/or one or more of the independent member firms of Ernst & Young Global Limited Join India Tax Insights from EY on