Gift of shares not to attract tax liability

Nowadays, the trend seems to be towards expanding the role of existing entities as regional hubs in order to cater to the needs of other group entities in that geographical region. The ruling of the Authority for Advance Rulings (AAR) in the case of Goodyear Tire and Rubber Company (GTRC) and Goodyear Orient Company (Pvt) Ltd (GOCPL), dealing with internal group reorganisation involving India, merits closer look.

Background facts

GTRC, a company incorporated under the laws of the US, proposed to voluntarily contribute its entire shareholding of 74 per cent in Goodyear India Limited (GIL), an Indian company listed on the Bombay Stock Exchange, to its wholly owned subsidiary GOCPL, a tax-resident of Singapore in order to expand the role of GOCPL for the benefits of other group entities within the Asia-Pacific Region.

The Income-Tax Act, 1961 (the Act) levies capital gains tax on gains arising from transfer of a capital asset. The term ‘transfer' has been widely defined under the Act to cover transfer of property by various modes barring a few exceptions. Section 47(iii) of the Act provides that any transfer of a capital asset under a gift shall not be regarded as transfer. Further, w.e.f June 1, 2010, the Act is amended to provide that fair market value of shares of a company in which public are not substantially interested e.g. a private company, transferred without consideration to another company shall be considered as income of the recipient company.

As regard taxation of capital gains on transfer of shares, while under the India-US Tax Treaty, a US company would be liable to capital gains tax in India as per the local laws of India, the gains on sale of shares by a Singapore company would not be taxable in India under the India-Singapore Tax Treaty. In the backdrop of the above factsand legal provisions, GTRC and GOCPL approached the AAR and sought a ruling on whether: GTRC was liable to capital gains tax in India; the Indian transfer pricing provisions would be attracted; GTRC and/or GOPCL would be required to deduct any tax in India; and GOPCL is liable to tax in India in light of the provisions of Section 56 of the Act.

It was contended that GTRC had voluntarily proposed to contribute the shares of GIL to GOCPL without any consideration by way of ‘gift'and hence, it would not amount to ‘transfer' under Section 45 read with Section 47 (iii) of the Act and consequently GTRC would not be chargeable to capital gains tax in India. However, the tax authorities argued that the effective control of both GOCPL and GIL rested with GTRC and that such transfer of shares was a case of ‘treaty shopping' for avoidance of capital gains tax.

The ruling

The AAR observed that, in the proposed transaction, GIL is a listed company; therefore any income arising from the transfer of the shares (which is long-term capital asset) would be otherwise exempt under Section 10(38). Hence, the question of avoidance of tax by way of Treaty shopping does not arise.

The AAR also held that no consideration would accrue or arise to the applicants by such transfer of shares and t since the consideration is incapable of being valued in definite terms or it remains unascertainable, the mechanism to charge the capital gains to tax fails and consequently GTRC will not be liable to capital gains tax.

The AAR held that in the absence of liability to pay tax, Indian transfer pricing and withholding tax provisions are not attracted.

Further, GOCPL will not be subjected to tax in respect of contribution of shares of GIL received from GTRC as provisions of Section 56(2)(viia) were not attracted because GIL, being a listed company, is a company in which public have substantial interest.

This ruling would be of significant interest to organisations holding the shares of Indian companies and contemplating restructuring operations of their Indian arms.

(The authors are Executive Director and Associate Director, Tax & Regulatory Services, PwC India, respectively.)

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