Transfer of shares by a foreign company to its wholly owned Indian subsidiary not taxable in India

Praxair Pacific Limited (PPL ), a company incorporated in Mauritius, proposes to transfer its 74% equity stake in Jindal Praxair Oxygen Company Private Limited (JPOCPL) to its wholly owned subsidiary in India, Praxair India Private Limited (Praxair India). The consideration for the proposed transfer is stated to be determined on the basis of cost, unless a higher consideration is required under the pricing guidelines prescribed by the Reserve Bank of India as applicable for transfer of shares.

Issues before the AAR

• Whether the investment held by PPL in equity shares of JPOCPL would be considered as “capital asset” under section 2(14) of the Income-tax Act, 1961 (“ITA”)?
• Whether transfer of JPOCPL from PPL to its wholly owned subsidiary Praxair India would be liable to tax in India in view of the exemption under section 47(iv) of the ITA?

Exemption under section 47(iv) of the ITA is available if the capital asset is transferred by a holding company to its wholly owned Indian subsidiary.

• Whether PPL would be entitled to the benefits of the India – Mauritius Tax Treaty (“Treaty”) and whether the gain arising to PPL would be liable to tax in India having regard to the provisions of Article 13 of the Treaty?
• Whether the gains arising to PPL from the sale of equity shares of JPOCPL would be taxable in India in the absence of Permanent Establishment (“PE”) of PPL in India in light of the provisions of Article 7 read with Article 5 of the Treaty?
• Whether PPL would be liable to Minimum Alternate tax under the ITA?
• Where the gains arising to PPL on account of the proposed transfer is not taxable in India under the Act or the Treaty, whether Praxair India, the transferee company, is required to withhold tax in accordance with the provisions of section 195 of the ITA?
• If the gains are not taxable in India, whether PPL is required to file any return of income of income under section 139 of the ITA? This question was not pressed by PPL.
• Whether the proposed transfer of equity shares by PPL to Praxair India attracts the transfer pricing provisions of section 92 to 92F of the ITA?

Contention of the applicant