Transfer of shares without consideration doesn't attract capital gains tax: Authority for Advance Rulings

MUMBAI: Transfer of shares for the purpose of business reorganisation, if done without consideration, does not attract capital gains tax, according to a ruling by the Authority for Advance Rulings (AAR) in the case of US-based Goodyear Tire and Rubber Company .

In the ruling given on May 2, AAR, a quasi-judicial authority that decides on tax liability of transactions involving foreign companies, also held that Transfer Pricing provisions and rules governing withholding tax would apply only if the income is chargeable in India.

In this case, the US company wanted to transfer shares of its Indian subsidiary to its Singapore subsidiary without consideration. Since the transfer is without consideration, the US company claimed it is not liable to pay capital gains. The I-T department held that the arrangement is "treaty shopping" that will facilitate tax avoidance whenever shares are sold in future, taking advantage of the Indian-Singapore tax treaty.

The AAR decided in favour of the taxpayer. Under the facts of the case, the US company has a fully-owned subsidiary in Singapore - Goodyear Orient Company . The US company also owns 74% of Goodyear India . The US company was proposing to contribute its 74% paid-up capital in the Indian company to GOCPL Singapore, as part of its reorgansiation of the Asia-Pacific business.

The US company told the AAR that since the transfer of shares is without monetary consideration, the question of capital gains tax would not arise. Besides, as the transfer of shares was in the nature of gift, it cannot be construed as transfer of shares in the regular nature to attract provisions of capital gains.

But revenue department defended the case by saying that the transfer is for a better business environment and therefore not a gift. The revenue department also sees it as a treaty shopping to avoid capital gains tax in further, using the India-Singapore tax treaty.

The AAR viewed it as a transaction without consideration and therefore no question of capital gains. Secondly the AAR held that the consideration cannot be valued as there is no clear date of occurrence of taxable event. Besides, the shares are long term capital asset and therefore the assets of capital gains tax would not arise.

The AAR held there is no liability to tax in India and therefore provisions for transfer pricing rules and withholding tax would not apply in this case.