Authority for Advance Rulings (AAR) [2010-TIOL-07- ARA-IT] in the case of Amiantit International Holding Ltd. (Applicant) on the issue of whether the transfer of shares held by the Applicant in an Indian company, to its Cyprus-based 100% subsidiary under a re-organization scheme, is taxable as per the provisions of the Indian Tax Law (ITL) held that the transfer of shares did not result in any consideration and, therefore, it could not be taxed as capital gains under the provisions of the ITL.
The AAR also held that even though the transfer was an international transaction between Associated Enterprises (AEs), as there was no income arising as per the charging provisions of the ITL, the transfer pricing (TP) provisions could not be applied to determine taxable gain based on arm’s length principles.
Background and facts of the case
- The Applicant, an investment company incorporated in Bahrain, had investments in Europe, Asia, North Africa and Latin America. The Applicant was wholly owned by South Arabian Amiantit Company (SAAC) which was a listed entity in Saudi Arabia. The Applicant held 70% equity shares in an Indian company which was engaged in the production of glass-reinforced polyester pipes, storage tanks etc. The Applicant also held 100% shares in another investment company incorporated in Cyprus (Cyprus subsidiary) which held shares of various group entities.
- The Applicant proposed to reorganize its group and thereby split itself into two companies, one owning the business in Europe and the other owning businesses in Asia, North Africa and Latin America. As part of the reorganization scheme, the Applicant proposed to hold all international investments relating to pipe manufacturing through its Cyprus subsidiary for certain commercial reasons.
- The Applicant, therefore, proposed to contribute the shares of the Indian company without any consideration, along with the other non-European investments, to its Cyprus subsidiary under a ‘Contribution agreement’ which was executed outside India. Such a contribution, akin to a gift, was permissible under Bahrain legislation. Furthermore, such shares transferred to its Cyprus subsidiary would not be re-transferred to the Applicant.
Contentions of the Applicant
