Case Law Details
Case Name : Re. Goodyear Tire and Rubber Company (AAR)
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Advance Rulings
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Recently, the Authority for Advance Ruling (AAR) in the case Goodyear Tire and Rubber Company [2011] 11 taxmann.com 43 (AAR) and Goodyear Orient Company (Private) Limited, relying upon the principle laid down in Dana Corporation [2010] 186 Taxman 187 (AAR) and Amiantit International Holding Ltd [2010] 189 Taxman 149 (AAR)., held that capital gains provisions are not attracted in case of transfer of shares without consideration.
Further, the AAR held that the transfer pricing provisions in an international transaction can be applied only when income is chargeable to tax in India and since in the present case no income was chargeable to tax in India the question of applicability of Transfer Pricing provisions and withholding tax under Section 195 of the Income-tax Act, 1961 (the Act) does not arise.
Facts of the Case
- The Taxpayer, a company incorporated under the laws of USA, was holding 74 percent of the total paid up share capital of an Indian listed company, Goodyear India Limited (GIL).
- The Taxpayer has a wholly owned subsidiary in Singapore, namely, Goodyear Orient Company (Private) Limited (GOCPL).
- The Taxpayer as a part of its global corporate strategy is contemplating a reorganization of its investment in its Indian arm, GIL.
- The Taxpayer intends to expand the role of GOCPL, for the benefit of other group entities within Asia-Pacific Region by making it financially strong and independent entity.
- GOCPL is an operating entity and there exists commonality of the business interests of the group with GIL.
- Therefore, the Taxpayer is proposing to enter into a Share Contribution Deed to voluntarily contribute its entire 74 percent stake in GIL to GOCPL, without consideration.
Issues for Consideration
- Whether any profit or gain within the meaning of Section 45 of the Act, arose to the Taxpayer on account of transfer of shares in GIL to its GOCPL without consideration.
- Whether GOCPL is liable to tax in respect of contribution of shares of GIL under Section 56(2)(viia) of the Act.
- Whether Transfer Pricing laws were applicable to the aforesaid transaction.
- Whether tax is required to be deducted under the provisions of Section 195 of the Act either by the Taxpayer or GOCPL
Taxpayer’s Contention
- The proposed transfer of shares of GIL to GOCPL is without consideration in money or money’s worth.
- As the full value of consideration received or accruing as a result of the transfer of shares of GIL is nil, the mechanism to charge the capital gains to tax, as provided under Section 48 of the Act fails.
- Further as contribution of shares is by way of ‘gift’ it would not amount to transfer under Section 45 read with Section 47(iii) of the Act.
Revenue’s Contention
- Transfer is for creation of a better business environment, which itself is a consideration, and the transaction would not be regarded as ‘gift’.
- It is case of ‘treaty shopping’ for avoidance of capital gains tax at a future date since in case the transferee company gifts/ sells these shares to another entity, the transaction will not be taxable in India in view of the tax treaty between India and Singapore and that would not be the case in the context of the tax treaty between India and the USA.
- The bar under proviso to Section 245R (2) of the Act relating to the transaction designed for avoidance of tax covers both present and future scenarios.
AAR’s ruling
- Applying the legal position enunciated above and the test laid down by the Honorable judges in the cases cited in the rulings of Amiantit International Holding Ltd and Dana Corporation it was held that no consideration would accrue or arise to the applicant by the transfer of shares and the applicant cannot be said to have derived any profit or gain from the transaction.
- The AAR observed that as the ‘consideration’ is incapable of being valued in definite terms or it remains unascertainable on the date of occurrence of taxable event, the question of applying Section 45 read with Section 48 of the Act would not arise.
- GIL, being a listed entity, any gains arising on transfer of its shares, being a long term capital asset, is exempt under Section 10(38) of the Act and hence the question of avoidance of tax through treaty shopping by the Taxpayer does not arise.
- As the transaction is not liable to tax under Section 45 read with Section 48, there was no need to discuss the applicability of Section 47(iii) of the Act.
- GIL, is a company in which public is substantially interested and hence the provisions of Section 56(2)(viia) of the Act would not be attracted on the proposed transfer of its shares.
- As regards applicability of the Transfer Pricing provisions to the aforesaid transfer of shares, the AAR held that the provisions of Section 92 to 92F of the Act would not be applicable in the absence of liability to pay tax.
- As income is not chargeable to tax, the question of withholding of tax under Section 195 of the Act does not arise.
Our Comments:
As discussed above, the AAR has reiterated some important principles laid down in Dana Corporation and Amiantit International Holding Ltd.
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