10.1 It is the common stand of both – the applicant and the Revenue, that the nature of income arising from the transfer of the applicant’s participating interest in Amguri block to the proposed partnership firm, shall be capital gains. Where they differ is regarding the mode of computation of that income. Whereas the applicant submits that sub-section( 3) of section 45 of the Act provides a particular mode of computation of value of consideration, the contention of the Revenue is that the said transaction shall be in the nature of international transaction between two associated persons, and so, the transfer pricing provisions will be attracted and the value of capital gains should be computed with reference to arm’s length price. The response of the applicant to this is that sub-section( 3) of section 45 is a special provision so far as computation of capital gains arising from the capital contribution made by a partner to the firm is concerned, and for this purpose, the provisions of sections 92 to 92F relating to computation of income from international transactions are general provisions. The applicant submits that in the present case, the provisions of sub-section (3) of section 45 would prevail over the transfer pricing provisions contained in sections 92 to 92F.
10.2 In order to examine the rival contentions, it would be appropriate to first peruse the relevant provisions. Sections 45 to 55A deal with `capital gains’. Sections 45 and 48 are relevant for the present purpose. Sub-section (1) of section 45 states that gains arising from the transfer of capital asset shall be regarded as `capital gains’ and assessed as such. Section 48 specifies the method of computation of capital gains. According to this provision, capital gains shall be computed by deducting the cost of acquisition of the asset, including the cost of improvements, if any, and the expenditure incurred in connection with its transfer, from the full value of the consideration. Sub-section (3) of section 45 which provides for special mode for computation of capital gains in respect of transfer of capital asset by a partner to the firm, is extracted below:
“Section 45 Capital Gains
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(3) The profits or gains arising from the transfer of a capital asset by a person to a firm or other association of persons or body of individuals (not being a company or a co-operative society) in which he is or becomes a partner or member, by way of capital contribution or otherwise, shall be chargeable to tax as his income of the previous year in which such transfer takes place and, for the purposes of section 48, the amount recorded in the books of account of the firm, association or body as the value of the capital asset shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset.”
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Sub-section( 3) was inserted by the Finance Act, 1987 w.e.f. 1.4.1988. Explaining the amendment, the CBDT Circular No. 495 dated 22.09.1987 states that, to avoid payment of tax on capital gains, many assessees used to convert individual asset into asset of a firm in which the assessee would be a partner. With a view to plugging this loophole, sub-section( 3) has been inserted in section 45. As stated in the said circular-
“The effect of this amendment is that profits and gains arising from the transfer of a capital asset by a partner to a firm shall be chargeable as the partner’s income of the previous year in which the transfer took place. For purposes of computing the capital gains, the value of the asset recorded in the books of the firm on the date of the transfer shall be deemed to be the full value of the consideration received or accrued as a result of the transfer of the capital asset”.
10.3 We may now turn to sections 92 to 92F. These find place under Chapter X of the Act under the heading `Special Provisions Relating to Avoidance of Tax’. Provisions on the subject existed even in the Income-tax Act, 1922 in the form of section 42(2). The corresponding provision contained in section 92 of the present Act was thoroughly amended w.e.f. 1.4.2002 by the Finance Act, 2001. Section 92 was substituted by sections 92 to 92F. The amended section 92 now reads as under-
“Computation of income from international transaction having regard to arm’s length price.
92. (1) Any income arising from an international transaction shall be computed having regard to the arm’s length price.
Explanation.— For the removal of doubts, it is hereby clarified that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the arm’s length price.
(2) Where in an international transaction, two or more associated enterprises enter into a mutual agreement or arrangement for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm’s length price of such benefit, service or facility, as the case may be.
(3) The provisions of this section shall not apply in a case where the computation of income under sub-section (1) or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or expense allocated or apportioned, or, as the case may be, contributed under subsection (2), has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into.] (Emphasis supplied)
Section 92A defines `associated enterprise’; section 92B gives the meaning of `international transaction’; section 92C specifies the methods of determining `arm’s length price’ and the rest of the sections are procedural in nature. CBDT Circular No. 14 of 2001 explains the reasons for making these amendments and the object sought to be achieved. It states that the increasing participation of multi-national companies in our economic activity gave rise to new and complex issues. Cross border transactions between the group companies could be manipulated leading to loss of revenue. The erstwhile provision of section 92 was limited in scope and inadequate to tackle the emerging problems. With a view to providing a detailed statutory framework for computation of reasonable, fair and equitable profits and tax in India, the new sections 92-92F have been inserted.
10.4 As may be seen from the above, sub-section (3) of section 45 provides for a method of computation of capital gains, which is different from the general method specified in section 48. This special provision is, however, limited in scope, inasmuch as it only applies to computation of capital gains in relation to capital contribution made by a partner to the firm. This provision does not distinguish between residents and non-residents, or between domestic and international transactions. Sections 92-92F, on the other hand, provide for determination of fair and equitable profits and tax in India in relation to international transactions, regardless of their nature. The wordings used in these sections suggest that they apply to all kinds of international transactions entered into between a resident and a non-resident and between two non-residents. No particular type of international transaction has been kept out of its purview. We notice from the foregoing that section 45(3) is a special provision insofar as computation of capital gains resulting from capital contribution made by a partner to the firm is concerned, and sections 92 to 92F are special provisions so far as international transactions are concerned. It is also noticed that sub-section( 3) of section 45 was inserted earlier and the transfer pricing provisions were comprehensively updated later. Thus a doubt is created as to what would be the most appropriate provision for computing capital gains in the present case.
10.5 It may be stated that conflict between the provisions of two different statutes or between different provisions of the same enactment, is not a new issue. This has been comprehensively dealt with in the works of eminent jurists and decisions of law courts. `Maxwell on the Interpretation of Statutes (Twelfth Edition)’ states –
“If two sections of the same statute “are repugnant, the known rule is that the last must prevail”. But, on the general principle that an author must be supposed not to have intended to contradict himself, the Court will endeavor to construe the language of the legislature in such a way as to avoid having to apply the rule, leges posteriores priores contrarias aborgant…………… One way in which repugnancy can be avoided is by regarding two apparently conflicting provisions as dealing with distinct matters or situations……….. Collision may also be avoided by holding that one section, which is ex-facie in conflict with another, merely provides for an exception from the general rule contained in that order”.
A Constitution Bench of the Supreme Court, in the case of Ashoka Marketing Ltd. Vs. Punjab National Bank (  4 SCC 406) considered an apparent conflict between the provisions of the Delhi Rent Control Act, 1958 and the Public Premises (Eviction of Unauthorized Occupants) Act, 1971, with regard to the manner of eviction of a tenant whose tenancy has been terminated. While reconciling the conflict, the Court referred to a large number of cases on the subject decided earlier. The Court held –
“The principle which emerges from these decisions is that in the case of inconsistency between the provisions of two enactments, both of which can be regarded as special in nature, the conflict has to be resolved by reference to the purpose and policy underlying the two enactments and the clear intendment conveyed by the language of the relevant provisions therein.”
10.6 Coming back to the present case, since transfer pricing provisions are later in time, the rule of leges posteriores priores contrarias aborgant would be attracted. However, leaving that apart, it appears from the close reading of CBDT Circular No. 495 dated 22.9.1987 that the mischief which was sought to be curbed by insertion of sub-section (3) in section 45 related to the prevailing domestic practice. It was perhaps the propensity of some residents to avoid payment of capital gains tax by making transfer of asset look like capital contribution to the firm. However, the wordings of the said sub-section (3) are wide enough to cover even an international transaction. On the other hand, sections 92 to 92F apply exclusively to international transactions carried out between associated persons – whether individuals, firm or company. These provisions are aimed at tackling the issue of price manipulation associated with international transactions. The apprehension of price manipulation is real even in international transactions between partners and firm, who are associated persons. Therefore, transfer pricing provisions should apply to such transactions as well. Otherwise, the purpose for which these provisions have been made will not be fully achieved and many transactions will go out of its purview. We are of the view that the provisions of sub-section( 3) of section 45 and the relevant transfer pricing provisions, when read in harmony, would lead to the inference that sub-section( 3) would not apply to international transactions, which should be dealt with in accordance with the transfer pricing provisions. As such, when a transaction referred to in section 45(3) is in the nature of international transaction, the value of consideration shall not be the value as recorded in the firm’s account books, but the same shall be determined on the basis of arm’s length price in accordance with transfer pricing provisions contained in Chapter-X of the Act.
11. We shall now deal with the last contention of the applicant relating to conflict between article-24 of DTAA and the transfer pricing provisions of the Act. The relevant provisions of the said article are extracted below-
“ARTICLE 24: Non-discrimination – 1. Nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of that other State in the same circumstances are or may be subjected.
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Article 24 contains a non-discrimination provision. It prohibits a Contracting State from making any discrimination in the matter of taxation between its own national and a national of the other Contracting State, who are placed in similar circumstances. In other words, a Contracting State is obliged to provide the same tax treatment to a national of the other Contracting State as it would give to its own nationals. Article 3(h) of the DTAA defines the term `national’ to include both – natural persons and artificial persons, such as companies, etc.. The transfer pricing provisions relate to international transactions between associated enterprises. As we have noticed above, international transactions give rise to their own peculiar problems. `International transaction’ has been defined in section 92B of the Act to mean transaction between enterprises, either or both of whom are non-residents. It may also be seen that section 92B makes a distinction between enterprises on the basis of their residential status, and not with reference to their nationality. As we know, the residential status of an individual depends on the number of days he lives in India. In the case of a legal person, like a company, or in the case of a firm, it would depend on factors, such as place of registration, situs of control and management, etc. It is possible that a national of India could be a non-resident for the purpose of this Act and a national of the other Contracting State could be a resident. Be that as it may, a cross-border transaction between Indian nationals, one or both of whom are non-residents and who are associated enterprises, will also attract the transfer pricing provisions, as they would apply to similarly situated Canadian nationals. Viewed from this angle, the plea of discrimination raised by the applicant has no basis.
12. In the light of the above discussion, we rule as follows-
(1) The proposed partnership firm to be formed by the applicant with Legasi Petroleum International Inc. at Alberta, Canada can be assessed as a firm under the Income-tax Act, 1961, provided the requirements of section 184 are complied with.
(2) The aforesaid firm shall be liable to tax @ 30 per cent plus applicable surcharge and cess in accordance with paragraph (c) of the First Schedule of the Finance Act, 2008.
(3) The residential status of the said partnership firm is a question of fact which can be determined by the assessing officer at the relevant point of time.
(4) If the proposed partnership is assessed as a firm, then the share of the partners in the total income of the firm shall not be included in the total income of such partners.
(5) & the proposed transfer of the participating interest of the applicant
(6) in Amguri block to the partnership firm shall be regarded as an international transaction between two associated enterprises, and the resulting capital gains can be assessed in accordance with the transfer pricing provisions contained in Chapter X of the Act. As regards the second part of the question, the answer is in the negative.