Background
The applicant, a German company, held 99.99% of the shareholding of an Indian public limited company. The remaining shares were held by six other companies as nominees of the applicant.
The shares were held by the nominees in order to comply with the requirements of the Companies Act, 1956 with regard to the minimum number of members for a public limited company.
The Indian company proposed a buy-back of shares under section 77A of the Companies Act which would result in transfer of shares of the Indian company from the applicant to the Indian company at a price to be determined.
Issue before the AAR
Whether the transfer of shares of the Indian subsidiary in the course of the proposed buy-back of shares, be exempt from tax in India in the hands of the applicant, in view of the provisions of section 47(iv) of the Income Tax Act („ITA‟)?
Without prejudice to Question 1, whether the applicant would not be liable to tax under the provisions of section 115JB of the ITA, in the absence of any business presence or permanent establishment („PE‟) in India?
Whether the applicant is entitled to receive the amount on buy-back of shares without any deduction of tax at source?
Contentions of the applicant
Under the provisions of section 47(iv), any transfer of a capital asset by a holding company to its subsidiary would not be taxable in India provided the parent company or its nominees hold the whole of the share capital of the subsidiary and such subsidiary is an Indian company. Therefore, the assessee was of the view that the proposed transfer of shares would get covered under the purview of section 47(iv).
The buyback of shares would be chargeable to tax under section 45(1) and section 47(iv) of the ITA was applicable; therefore under the provisions of 47(iv), such a transfer was not taxable in India.
Under the provisions of section 46A, the difference between the cost of acquisition and the value of consideration received by the shareholders shall be deemed to be capital gains. In the view of the applicant, such provision was clarificatory in nature.
In the context of section 49(3) of the Companies Act, 1956, there cannot exist a subsidiary (Indian) company, whether public or private, in which the parent company could legally hold 100% of the shares.
Observations and Ruling of the AAR
Section 47(iv) exempts a transfer of a capital asset by a company to its subsidiary if “the parent company or its nominees hold the whole of the share capital of the subsidiary company”. The word used is “or” and not “and”.
The assessee held only 99.99% of the shareholding. The shares held by the nominees cannot be considered as held by the assessee. In other words, it cannot be inferred that the applicant was holding 100% shares in the subsidiary.
Section 47(iv) postulates that a company must hold 100% shares in a subsidiary Indian company, either directly or through its nominees. In its wisdom, the Parliament thought that the benefit under this provision must be confined to cases where a parent company holds 100% shares in an Indian subsidiary through its nominees. This makes this provision workable.
Section 46A, which provides that in the case of a buyback, the difference between the consideration and the cost of acquisition shall be deemed to be capital gains is a special provision and prevails over section 45.
Section 47 overrides section 45 but not section 46A. The result is that even if the exemption in section 47(iv) is held applicable, it does not override section 46A and the applicant is subject to capital gains.
Hence, the proposed buy-back would be taxable as capital gains under section 46A of the ITA.
In so far as question 2 is concerned, it was not pursued further since the parties proceeded as if the provisions of section 115JB may have no application.
On question 3, it was held that the applicant was not entitled receive the amount on buy-back of shares without deduction of tax at source.
Conclusion
This ruling would be of prime importance to wholly owned Indian subsidiaries contemplating a buy-back of shares or where there is a transfer of capital asset by a holding company to a subsidiary (other than a buyback). This also has significance as it explains the interplay between section 45, 47(iv), 46A of the ITA as also some of the related provisions of the Indian Companies Act, 1956.
Source: AAR in the case of RST. No 1067 of 2011
The applicant, a German company, held 99.99% of the shareholding of an Indian public limited company. The remaining shares were held by six other companies as nominees of the applicant.
The shares were held by the nominees in order to comply with the requirements of the Companies Act, 1956 with regard to the minimum number of members for a public limited company.
The Indian company proposed a buy-back of shares under section 77A of the Companies Act which would result in transfer of shares of the Indian company from the applicant to the Indian company at a price to be determined.
Issue before the AAR
Whether the transfer of shares of the Indian subsidiary in the course of the proposed buy-back of shares, be exempt from tax in India in the hands of the applicant, in view of the provisions of section 47(iv) of the Income Tax Act („ITA‟)?
Without prejudice to Question 1, whether the applicant would not be liable to tax under the provisions of section 115JB of the ITA, in the absence of any business presence or permanent establishment („PE‟) in India?
Whether the applicant is entitled to receive the amount on buy-back of shares without any deduction of tax at source?
Contentions of the applicant
Under the provisions of section 47(iv), any transfer of a capital asset by a holding company to its subsidiary would not be taxable in India provided the parent company or its nominees hold the whole of the share capital of the subsidiary and such subsidiary is an Indian company. Therefore, the assessee was of the view that the proposed transfer of shares would get covered under the purview of section 47(iv).
The buyback of shares would be chargeable to tax under section 45(1) and section 47(iv) of the ITA was applicable; therefore under the provisions of 47(iv), such a transfer was not taxable in India.
Under the provisions of section 46A, the difference between the cost of acquisition and the value of consideration received by the shareholders shall be deemed to be capital gains. In the view of the applicant, such provision was clarificatory in nature.
In the context of section 49(3) of the Companies Act, 1956, there cannot exist a subsidiary (Indian) company, whether public or private, in which the parent company could legally hold 100% of the shares.
Observations and Ruling of the AAR
Section 47(iv) exempts a transfer of a capital asset by a company to its subsidiary if “the parent company or its nominees hold the whole of the share capital of the subsidiary company”. The word used is “or” and not “and”.
The assessee held only 99.99% of the shareholding. The shares held by the nominees cannot be considered as held by the assessee. In other words, it cannot be inferred that the applicant was holding 100% shares in the subsidiary.
Section 47(iv) postulates that a company must hold 100% shares in a subsidiary Indian company, either directly or through its nominees. In its wisdom, the Parliament thought that the benefit under this provision must be confined to cases where a parent company holds 100% shares in an Indian subsidiary through its nominees. This makes this provision workable.
Section 46A, which provides that in the case of a buyback, the difference between the consideration and the cost of acquisition shall be deemed to be capital gains is a special provision and prevails over section 45.
Section 47 overrides section 45 but not section 46A. The result is that even if the exemption in section 47(iv) is held applicable, it does not override section 46A and the applicant is subject to capital gains.
Hence, the proposed buy-back would be taxable as capital gains under section 46A of the ITA.
In so far as question 2 is concerned, it was not pursued further since the parties proceeded as if the provisions of section 115JB may have no application.
On question 3, it was held that the applicant was not entitled receive the amount on buy-back of shares without deduction of tax at source.
Conclusion
This ruling would be of prime importance to wholly owned Indian subsidiaries contemplating a buy-back of shares or where there is a transfer of capital asset by a holding company to a subsidiary (other than a buyback). This also has significance as it explains the interplay between section 45, 47(iv), 46A of the ITA as also some of the related provisions of the Indian Companies Act, 1956.
Source: AAR in the case of RST. No 1067 of 2011
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