AAR on tax liability of a partnership firm to be formed in Canada by a Canadian company for executing its PSCs in India

RELEVANT PARAGRAPH 

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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