Transfer of shares to wholly owned Indian subsidiary not taxable in India

Transfer of shares to wholly owned Indian subsidiary not taxable in India

Court : Authority for Advance Rulings (AAR)

Brief : Authority for Advance Rulings (AAR) concluded that gains derived from the transfer of shares by a Mauritius company to its wholly owned subsidiary in India would not be taxable in India under the Indian Income Tax Act (ITA), nor would such gains be subject to the Minimum Alternate Tax (MAT) (Praxair Pacific Limited (A.A.R. No. 855/2009)). The AAR further clarified that benefits under the India-Mauritius tax treaty would be available to the Mauritius Company.

Citation : Praxair Pacific Limited (A.A.R. No. 855/2009)

Background:-Praxair Pacific Limited (“PPL”), a company incorporated in Mauritius, proposes to transfer its 74% equity stake in Jindal Praxair Oxygen Company Private Limited (“JPOCPL”) to its wholly owned subsidiary in India, Praxair India Private Limited (“Praxair India”). The consideration for the proposed transfer is stated to be determined on the basis of cost, unless a higher consideration is required under the pricing guidelines prescribed by the Reserve Bank of India as applicable for transfer of shares.

Issues before the AAR

• Whether the investment held by PPL in equity shares of JPOCPL would be considered as “capital asset” under section 2(14) of the Income-tax Act, 1961 (“ITA”)?

• Whether transfer of JPOCPL from PPL to its wholly owned subsidiary Praxair India would be liable to tax in India in view of the exemption under section 47(iv) of the ITA?

Please note Exemption under section 47(iv) of the ITA is available if the capital asset is transferred by a holding company to its wholly owned Indian subsidiary.

• Whether PPL would be entitled to the benefits of the India – Mauritius Tax Treaty (“Treaty”) and whether the gain arising to PPL would be liable to tax in India having regard to the provisions of Article 13 of the Treaty?

•Whether the gains arising to PPL from the sale of equity shares of JPOCPL would be taxable in India in the absence of Permanent Establishment (“PE”) of PPL in India in light of the provisions of Article 7 read with Article 5 of the Treaty?

•Whether PPL would be liable to Minimum Alternate tax under the ITA?

•Where the gains arising to PPL on account of the proposed transfer is not taxable in India under the Act or the Treaty, whether Praxair India, the transferee company, is required to withhold tax in accordance with the provisions of section 195 of the ITA?

•If the gains are not taxable in India, whether PPL is required to file any return of income of income under section 139 of the ITA? This question was not pressed by PPL.

•Whether the proposed transfer of equity shares by PPL to Praxair India attracts the transfer pricing provisions of section 92 to 92F of the ITA?

Contention of the applicant

• The shares held by PPL in JPOCPL are not held as stock-in-trade but represent investments and thus should be classified as a capital asset.

• As PPL proposes to transfer its equity shareholding in JPOCPL to Praxair India, its wholly owned subsidiary in India, the provisions of section 47(iv) of the ITA are fulfilled. Gains, if any, on the transfer of equity shares in JPOCPL would not be taxable in India.

• PPL would not be liable to tax book profits or Minimum Alternate tax under the ITA as the provisions of section 11 5JB would be applicable only to domestic companies and not to foreign companies.

• The gains from the proposed transfer of shares in JPOCPL by the Applicant would not be taxable in India as capital gains or business income in the light of the treaty.

• In case the proposed gains are not considered as capital gains but as business income, such business income will not be taxable in India since PPL does not have a PE in India.

Observations / Rulings of the AAR

• The shares in JPOCPL have been held as “Non-current assets – investment in subsidiaries” since 1995 and were never a subject matter of any transaction till date. As the shares were not held as stock in trade, the nature of the investment in these shares is held to be a “capital asset” as defined in section 2(14) of the ITA.

• As PPL proposes to transfer its equity share holding in JPOCPL to Praxair India which is its wholly owned subsidiary in India, the conditions under section 47(iv) of the ITA are fulfilled and hence the gains if any arising on transfer would not be taxable in India.

• As PPL is tax resident of Mauritius and has been issued Tax Residency Certificate by the Mauritius Revenue Authority, it would not be subjected to tax in India on the capital gains arising from the proposed transaction in India under the Treaty.

• The annual accounts of the applicant cannot be prepared in accordance with Schedule VI of the Companies Act 1956. The provision under the ITA relating to Book Profits Tax is not designed to be applicable to a foreign company which has no presence or PE in India. The AAR relied on its ruling in the case of Timken USA (AAR 836 of 2009) where it was held that under the Companies Act 1956 only such foreign companies who have established a place of business within India are required to make out a Balance Sheet and Profit and Loss account as required under the said Act.

• Sections 11 5JB of the ITA is not attracted in the case of PPL.

• The transfer pricing provisions of section 92 to 92F of the ITA would not be attracted in the absence of liability to pay tax on the capital gain.

Conclusion: - Gains from the transfer of shares by a Mauritius company to its wholly owned subsidiary in India would not be taxable in India either under the ITA. The AAR has also reiterated the benefit of the India- Mauritius tax treaty would be available to PPL as it had adequate tax residency certificate issued by the Mauritius Revenue Authority. Further, the gains from such transfer would not be subject to Minimum Alternate Tax as the provisions under the ITA governing such tax do not apply to a foreign company that has no presence or PE in India

Software is “goods”, its supply may be a “service” and not a “sale”

Infotech Software Dealers Association vs. UOI (Madras High Court)

Though software is “goods”, its supply may be a “service” and not a “sale”

S. 65(105)(zzzze) of the Finance Act, 1995 inserted by the F (No. 2) Act, 2009 provides for the levy of service tax on “any service provided … to any person, by any other person in relation to information technology software for use in the course, or furtherance, of business or commerce, including … acquiring the right to use information technology software …” The Petitioner, an association of software resellers, contented inter alia that as software had been held to be “goods” by the Supreme Court in Tata Consultancy Services 271 ITR 401 and as there was a “sale” attracting VAT, there could not also be a “service” and that s. 65(105)(zzzze) was unconstitutional. HELD dismissing the Petition:

(i) Two questions arise for consideration: (a) whether software is goods and (b) if so, whether in all case of transactions, it would amount to sale or in some transactions it could be considered to be a service;

(ii) All software is “goods”. Article 366(12) of the Constitution defines the term “goods” to include all materials, commodities and articles. It is an inclusive definition. Though a software programme consists of various commands which enable the computer to perform a designated task and the copyright in that programme remains with the originator of the programme, yet because software is an article of value, it is “goods”. Indian law does not make a distinction between tangible property and intangible property. Tata Consultancy Services 271 ITR 401 (SC) followed;

(iii) However, while software is “goods”, all transactions are not necessarily a “sale”. The transaction may be one which is either an ‘exclusive sale’ or ‘an exclusive service’ or one which has the elements of a sale and service. A perusal of a sample ‘End User Licence Agreement’ (EULA) shows that the dominant intention of the parties is that the developer keeps the copyright of each software is only the right to use with copyright protection. By the agreement, the developer does not sell the software as such. The Petitioner in turn enters into a EULA for marketing the software to the end-user. Accordingly, when a transaction takes place between the Petitioner and its customers, it is not the sale of the software as such, but only the contents of the data stored in the software which would amount to only service. To bring the deemed sale under Article 366(29A)(d) of the Constitution, there must be a transfer of right to use any goods and when the goods as such is not transferred, the question of deeming sale of goods does not arise and in that sense, the transaction would be only a service and not a sale;

(iv) Accordingly, the argument that as software is ‘goods’, all transactions of canned / packaged software or customized software is a sale is not acceptable. The question whether a transaction amounts to a sale or service depends upon the individual transaction. Parliament cannot be said not to have the legislative competence to tax the transaction if it is shown to be a service.

Note: In Velankani Mauritius vs. DDIT (ITAT Bangalore), Kansai Nerolac Paints vs. ADIT (ITAT Mumbai) & Dassault Systems 229 CTR 105 (AAR) it has been held relying on Tata Consultancy Services 271 ITR 401 (SC) that income from software supply is not “royalty” but is “business profits” & not chargeable to tax in the absence of a PE. See Also update on Samsung Electronics 227 CTR 335 (Kar).