Capital Gains

Transfer of shares on account of reorganisation — American company is not liable to pay any capital gain under s 45 read with s 47(iii) on transfer of shares of Indian subsidiary to Singapore subsidiary without consideration on account of reorganisation as same amounts to gift — as held by AAR in Deere and Co, In re ; AAR No. 934 of 2010

Deere and Co., In re

Authority for Advance Rulings, New Delhi

AAR No. 934 of 2010

P.K. Balasubramanyan, Chairman J. Khosla and V.K. Shridhar, Members

Decided on: 27 May 2011

Counsel appeared:

Rajan S. Vora, Rajesh Parikh, Satish Nadiger and Pushkar for the applicant

Saroj Mahapatra for the Commissioner

Ruling

J. Khosla, Member

1. The applicant, Deere and Company, USA, is a foreign company incorporated under the laws of

the USA. It has worldwide subsidiaries. It provides advanced products and services for

agriculture, forestry, construction, lawn and turf care, landscaping and irrigation. The Deere

Group also provides financial services worldwide and manufactures and markets engines used in

heavy equipments. John Deere India Private Limited (JDIPL) is a company incorporated in India

and is a subsidiary of the applicant. It is engaged in manufacture of tractors and provides services

in the field of water solutions, crop solutions, information technology and Income-tax enabled

services. The applicant holds 344,857,343 equity shares of JDIPL (representing 99.99 per cent of

the paid-up share capital) and the balance 10 shares are jointly owned by the applicant and Mr.

Klaus Ramsauer.

1.1 John Deere Asia (Singapore) is a Pvt. Limited company incorporated in the Republic of

Singapore and owned by the applicant through John Deere Asia, Netherlands BV. This company

is incorporated in Netherlands. This company serves as Deere Group's Marketing Organization

for its various businesses in South-East Asia and its Regional Headquarters.

1.2 With aspirations to serve it's customers worldwide in a more efficient and effective manner it

restructures the entire business organizations of the company. While boosting its global network,

technology and expertise, it transferred its 99.99 per cent shares held in JDIPL to John Deere

Asia, Singapore without consideration. The other share held jointly by the applicant and Mr.

Klaus Ramsauer was also transferred to John Deere Asia, Singapore without consideration. It is

claimed by the applicant that these shares are transferred as gift to John Deere, Asia, Singapore.

According to the applicant, as these shares are transferred as a gift, it is not liable to pay any

capital gain tax under section 45 of the Income-tax Act read with section 47(iii) of the Act.

1.3 While submitting the above facts, the applicant seeks the rulings of this authority on the

following questions:

"1. Based on the facts and circumstances of the case, pursuant to group re-organization,

whether transfer of shares of John Deere India Private Limited (JDIPL) by the applicant

to John Deere Asia (Singapore) Private Limited (JD Asia) without consideration is

taxable as per the provisions of the Income-tax Act?

2. Based on the facts and circumstances of the case, since the transfer of shares by the

applicant to JD Asia is without consideration, whether the provisions of section 92 to

section 92F of the Income-tax Act relating to transfer pricing would be applicable. (This

question is re-framed at the time of hearing)

3. Based on the facts and circumstance of the case, whether JD Asia the recipient of

shares of JDIPL, is required to withhold tax in accordance with the provisions of section

195 of the Income-tax Act?

4. Based on the facts and circumstances of the case, if the transfer of shares of JDIPL is

not taxable in India, whether the applicant is required to file any return of income under

section 139 of the Income-tax Act?

1.4 The applicant's application was allowed under section 245R(2) of the Income-tax Act on 31-

3-2011 after hearing both the parties and the question No. 2 supra is a recasted one.

2. Prelude to the transfer of shares by the applicant, a new Global operating Model was

announced for reorganization of the holding structure of the Deere Group of Companies. Pursuant

to it, the applicant in its letter dated 23-4-2010 to the company Director and Secretary, John

Deere Asia (Singapore) Pvt. Ltd. conveyed its intention to transfer entire shares held in JDIPL to

the company. The company Director and Secretary had agreed to accept the shares vide its letter

dated 26-4-2011 to the applicant and these shares were transferred consequently without any

consideration by means gift deeds.

2.1 The learned Counsel for the applicant while submitting the facts has argued that the transfers

of shares are without consideration and hence termed the transfer as gift. According to the

Learned Counsel, the shares are capital assets of the company. With the transfer of shares, no

gain or profit arises and, therefore, the transfer of shares do not fall within the ambit of section 45

of the Income-tax Act and as such not exigible to Capital Gains Tax. Section 45(1) is extracted

below:

"Section 45(1)

Any profits or gains arising from the transfer of a capital asset effected in the previous

year shall, save as otherwise provided in sections [...] [54,54B, [...] [[54D, [54E, [54EA,

54EB,] 54F [54G and 54H]]]] be chargeable to income-tax under the head "Capital

gains", and shall be deemed to be the income of the previous year in which the transfer

took place.

2.2 The learned counsel argued that these shares were transferred in 2010 as gift. The learned

Counsel also brought to our attention the provisions contained in section 47(iii) which is quoted

below.

"Section 47 nothing contained in section 45 shall apply to the following transfers:

(i) xxx

(ii) [...]

(iii) Any transfer of a capital asset under a gift or will or an irrevocable trust:

[Provided that this clause shall not apply to transfer under a gift or an irrevocable trust of

a capital asset being shares, debentures or warrants allotted by a company directly or

indirectly to its employees under [any Employees' Stock Option Plan or Scheme of the

company offered to such employees in accordance with the guidelines issued by the

Central Government in this behalf];]

2.3 As per section 47(iii), transfer of shares under a gift will not be regarded as a transfer in terms

of section 45 of the Act. The learned Counsel argued that as the transfer of shares do not give rise

to any gain or profit, the question of paying capital gain tax does not arise. No gain or profit

accrued or arose in these transfers of shares as gift.

2.4 The Hon'ble Supreme Court in CIT v. B.C. Srinivasa Setty [1981] [128 ITR 294/5 Taxman 1

has observed:-

"Section 45 charges the profits or gains arising from the transfer of a capital asset to

income-tax. The asset must be one which falls within the contemplation of the section. It

must bear that quality which brings section 45 into play. To determine whether the

goodwill of a new business is such an asset, it is permissible, as we shall presently show,

to refer to certain other sections of the head "Capital gains". Section 45 is a charging

section. For the purpose of imposing the charge, Parliament has enacted detailed

provisions in order to compute the profits or gains under that head. No existing principle

or provision at variance with them can be applied for determining the chargeable profits

and gains. All transactions encompassed by section 45 must fall under the governance of

its computation provisions. A transaction to which those provisions cannot be applied

must be regarded as never intended by section 45 to be the subject of the charge. This

inference flows from the general arrangement of the provisions in the Income-tax Act,

where under each head of income the charging provision is accompanied by a set of

provisions for computing the income subject to that charge. The character of the

computation provisions in each case bears a relationship to the nature of the charge. Thus,

the charging section and the computation provisions together constitute an integrated

code. When there is a case to which the computation provisions cannot apply at all, it is

evident that such a case was not intended to fall within the charging section. Otherwise,

one would be driven to conclude that while a certain income seems to fall within the

charging section there is no scheme of computation for quantifying it. The legislative

pattern discernible in the Act is against such a conclusion. It must be borne in mind that

the legislative intent is presumed to run uniformly thorough the entire conspectus of

provisions pertaining to each head of income. No doubt there is a qualitative difference

between the charging provision and a computation provision. and ordinarily the operation

of the charging provision cannot be affected by the construction of a particular

computation provision. But the question here is whether it is possible to apply the

computation provision at all if a certain interpretation is pressed on the charging

provision. That pertains on the charging provision. That pertains to the fundamental

integrality of the statutory scheme provided for each head."

2.5 Tax planning is legal and as argued by the Learned Counsel within the ambit of law. Law

provides that transfer of shares as gift is not taxable as no profit or gain accrues from such

transfer. Lord Tomlin in IRC v. Duke of Westminister 1936 AC 1 (HL) Act has observed

"Everyone is entitled if he can to order his affairs so that the tax attaching under the appropriate

Acts is less than it otherwise would be if he succeed in ordering them so as to serve this result,

however, unappreciative the Commissioner of Inland revenue on his fellow tax gatherer may be

of his ingenuity, he cannot be compelled to pay an increased tax".

The Constitution Bench of the Supreme Court in McDowell and Co. Ltd. v. CTO [1985] 22

Taxman 11. While relying on the above observation has stated that tax planning may be

legitimate provided it is within the frame work of law. Colourable devises cannot be part tax

planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the

payment at tax by resorting to dubious methods. It is the obligation of every citizen to pay taxes

honestly without resorting to subterfuges.

This was followed in Union of India v. Azadi Bacaho Andolan [2003] 132 Taxman 373 (SC).

All these decisions support the concept of tax planning within the legal framework. Therefore the

contention of the revenue that it is a device to avoid payment of tax is illogical as contended by

the Learned Counsel.

3. The revenue had a filed report in this case. The learned departmental representative has argued

that the shares of JDIPL represent Capital Asset of the assessee and so the transfer of these shares

irrespective of its mode of transfer involves transfer of Capital Asset giving rise to Capital Gains.

The learned representative further argued that there is a transfer of shares between two corporate

entities. In case of a gift, an element of love and affection should be there but in this instant case

no love and affection between two corporate entities can be said to be subsisting and the concept

of gift is devised just to hoodwink the revenue. It is argued that the applicant is an American

company and the shares are transferred to a Singapore based company and so the transfer is a

cross border transaction. Transfer pricing issues will be applicable to such transaction and section

92 to 92F of the Income-tax Act will be squarely applicable to such transaction. It is also argued

that in the transaction, the capital gains arise in the hands of the applicant which is taxable in

India. Consequently TDS provision as per section 195 of the Income-tax Act will be squarely

applicable before effecting any transfer in this regard. It is strenuously argued that under such

circumstances the applicant is required to file a return of income under section 139 of the Incometax

Act. Therefore, it is submitted that the questions have to be answered against the applicant.

4. The learned counsel for the applicant on the other hand has argued that there is no element of

love and affection attached to the gift. According to ordinary meaning, "gift" means a thing given

willingly to some one without payment. The learned counsel further brought to our notice the

definition of "gift" given in section 122 of the Transfer Property Act 1882, "Gift" is the transfer

of certain existing movable or immovable property made voluntarily and without consideration

by one person called the donor to another called donee, and accepted by or on behalf of the

donee. The meaning of gift supra reflect no element of love and affection and therefore the

contention of the Departmental representative in this regard is without substance. The gift of

shares by the applicant to John Deere Asia (Singapore) is made without any consideration and

therefore the transfer has to be held to be a gift.

5. The learned counsel has cited decisions to buttress the applicant's stand, some of which we will

deal with hereunder. This authority had occasion to deal with such cases in the past and the case

of Amiantit International Holding Ltd., In re [2010] 322 ITR 678/189 Taxman 149 (AAR - New

Delhi) is one such. We extract below para 31from this Ruling which is relevant for this case.

"Viewed from any angle, we are unable to perceive as to how any profit or gain has

accrued or arisen to the applicant by virtue of the transfer of shares to its subsidiary

company. It is not possible to identify or pinpoint anything which has the characteristic of

profit or gain or any consideration which is capable of being valued in praesenti. As

pointed out earlier, the income in the sense of profit and gain should be real but not

hypothetical income. We may take it that the income may be in cash or in kind and need

not necessarily be pecuniary in nature. As stated in the Law and Practice of Income-tax

(by Kanga, Palkhivala and Vyas) income, profits and gains may be realized in the form of

money's worth as well as money, in kind as well as in cash. Even then, the alleged

consideration for which the shares are to be transferred should be capable of being

evaluated on commercial and accounting principles.

In the case of Dana Corpn., In re [2010] 321 ITR 178/186 Taxman 187, this Authority held that:

"The profit or gain envisaged by section 45 is not something which remains ambivalent

or indefinite or indeterminable. The profit or gain or the full value of the consideration,

cannot be arrived at on notional or hypothetical basis. The profit or gain to the transferor

must be a distinctly and clearly identifiable component of the transaction. The

consideration for the transfer of shares in terms of money or money's worth is not

something which can be implied or assumed. No profit or gain in the form of

consideration for transfer can be inferred by a process of deeming or on presumptive

basis. There must be a casual nexus between the transfer of capital asset and the profit or

gain accruing to or received by the assessee as pointed out by the Gujarat High Court in

CIT v. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300."

In view of the legal position thus explained, question No. 1 has to be answered in the negative.

6. With regard to question No. 2, the Learned Counsel argues that section 92 of Income-tax Act

provides that computation of income arising from an international transactions having regard to

the arm's length price. This provision cannot be applied to a transaction which is not chargeable

to tax under the Income-tax Act. Only when income accrues, it can be computed having regard to

the arm's length price. He cites the following rulings of this Authority in aid of his contention.

(i) Vanenburg Group B.V., In re [2007] 289 ITR 464/159 Taxman 219 (AAR - New

Delhi)

"Coming to the question of transfer pricing, it is seen that sections 92 to 92F are

contained in Chapter-X of the Act under heading "Special Provisions Relating to

Avoidance of Tax". These provisions are aimed at preventing avoidance of tax by

certain well known devices, determination of arm's length price, computation of

income in certain cases etc. in relation to international transactions. These are

again machinery provisions which would not apply in the absence of liability to

pay tax."

(ii) Praxair Pacific Ltd., In re [2010] 326 ITR 276/193 Taxman 1 (AAR - New Delhi)

"Regarding answer to question No. 9, the transfer of equity shares by the

applicant to Praxin India would not attract the transfer pricing provisions of

sections 92 to 92F of the Act in the absence of liability to pay the tax on the

capital gain"

(iii) Goodyear Tire and Rubber Co., In re [2011] 199 Taxman 121/11 Taxmann.com 43

(AAR - New Delhi), Goodyear Orient Co. (P.) Ltd. (AAR No. 1031 of 2010).

"As there is no income liable to tax in the hands of the applicant, the provisions

of sections 92 to 92F of the Act will not be applicable and the transfer pricing

provisions in Chapter - X are not attracted."

(iv) VNU International B.V., In re [2011] 198 Taxman 454/10 Taxmann.com 157 (AAR -

New Delhi)

"The transfer of share VNU International to IMS AG is not liable to be taxed in

India and also does not attract the transfer pricing provisions of sections 92 to

92F of the Act."

In the light of the above rulings, the Learned Counsel argues that in the absence any income

accruing by the transfer of shares, the question of application of Chapter-X does not arise. Having

regard to the principles enunciated in the above rulings we answer the question in the negative.

7. Regarding question No. 3, the Learned Counsel argued that transfer of shares is not taxable in

India and therefore deduction of tax does not arise. In the light of the rulings cited, this question is

also answered in favour of the applicant.

8. For question No. 4, it is submitted that when there is no taxability under the Act, the question

of filing a return does not arise. Rulings of the Authority in Factset Research Systems, In re

[2009] 317 ITR 169/182 Taxman 268 and Vanenburg Group B.V.'s case (supra) are cited to

support the stand.

This authority in the recent rulings in VNU International B.V.'s case (supra) and ABC, In re

(AAR No. 840 of 2010) has held that when there is chargeability under the Income-tax Act

notwithstanding that no tax may be payable, there is an obligation to file a return under section

139 of the Act. In that view, the question No. 4 is answered in the affirmative and it is ruled that

the applicant is bound to file the return.

9. In view of our above discussion, we answer question Nos. 1, 2 and 3 in the negative and

question No. 4 in the affirmative and rule accordingly.