Company gifting shares to a foreign company is exempt u/s 47(iii) and also not an international transaction u/s 92B – Chennai ITAT


Redington (India) Limited v JCIT (ITA No.513/Mds/2014 dated 07.07.2014) – Chennai ITAT

Background:

The assessee, M/s. Redington (India) Limited provides end-to-end supply chain solutions for all categories of Information Technology(IT) products. The assessee has a wholly owned subsidiary company M/s. Redington Gulf FZE(‘RGF Gulf’) in Dubai. In 2008, a Private Equity Fund(PE fund)- IVC evinced interest to invest in the overseas operations of the assessee group. The assessee company set up another wholly owned subsidiary company in Mauritius in July, 2008 (‘RIML Mauritius’). The assessee made an initial investment of US$ 25000 equivalent of ` 10.78 lakhs. The said newly set up subsidiary M/s. RIML Mauritius, in turn, set up its own wholly owned subsidiary in Cayman Islands (‘RIHL Cayman’). IVC has infused a sum of US$ 65 millions into M/s. RIHL Cayman for fresh allotment of shares.

After the above incorporation exercises, the assessee company transferred its entire shareholding in M/s. RGF Gulf to M/s. RIHL Cayman on 13th November, 2008. The transfer was made without any consideration. Once this transfer of shareholding was made, RGF Gulf became a step down subsidiary of RIML Mauritius and the assessee company. As the shares were transferred without consideration, the assessee company took the stand that it is a gift within the meaning of section 47(iii) and therefore, not chargeable to tax as capital gains. Further, it is also not an international transaction. It stated that in order to come under the purview of an international transaction, the transaction must generate income. 

The TPO held that the transfer of shares made by the assessee is an international transaction. In computing the value of shares transferred by the assessee, the TPO has adopted the price paid by IVC, the PE fund on allotment of shares in RIHL Cayman, as the comparable. The fresh infusion of funds by M/s. IVC and allotment of shares in M/s. RIHL Cayman, resulted in M/s. IVC, holding a stake of 27.17%. The TPO extrapolated the said shareholding and determined an amount of US$ 174.23 millions, as representing 100% of the value of M/s. RIHL Cayman and on that basis determined the ALP of RGF Gulf shares transferred by the assessee. Accordingly, the TPO determined the ALP of M/s. RGF Gulf shares at Rs 865,40,04,100. The Assessing Officer modified the above gross amount by setting off the indexed cost of acquisition and determined the long term capital gains adjustment at Rs 610,15,75,820.

The DRP stated that a gift as generally understood is made out of love and affection by natural persons; that corporate entities cannot make gifts, as the term “gift” in sec.47(iii) is used in conjunction with the word “will”. It directed to give a marginal relief in the capital gains addition proposed against the transfer of shares. They accepted the argument that in view of the buy-back agreement between the Venture capital fund (PE fund) and the assessee, the PE investment was relatively risk-free. Consequently, the DRP agreed that to the extent of the risk premium, the market price of the shares would be less than what was paid by the PE fund. The DRP estimated this risk factor at 10% and directed the Assessing Officer to allow 10% adjustment by way of reduction in the ALP of RGF Gulf shares. This relief is worked out at ` 88.51 crores.

Assessee’s contentions:

  • • The exercise was based purely on commercial and business expediency and there was no motive to avoid tax.
  • • The transaction of gift of shares is a valid gift and, therefore, exempt from capital gains in the light of specific exemption under section 47(iii) of the Act.
  • Without prejudice to the above, the DRP having accepted that the transaction is undertaken without consideration, the transaction would not result in any chargeable capital gains, as the mechanism for computation fails to operate.
  • • As the transaction of gift of shares is not chargeable to tax in India, the T.P. provisions would not be applicable.
  • Without prejudice to all the above, even if the transaction needs to be tested for ALP, the price paid by the PE fund, M/s. IVC for allotment of shares in M/s. RIHL Cayman cannot be regarded as comparable under the CUP method. Even if adjustments are made for eliminating differences on account of economic and functional differences, the DCF method would be the most appropriate method for valuation of shares of a company.

HELD:

  • Gift is definitely a transfer of property. The mother law governing the subject matter of transfer of property is Transfer of Property Act, 1882 (TP Act). Section 5 of the Transfer of Property Act, 1882, defines the term “transfer of property”, as an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself , or to himself and one or more other living persons; and “ to transfer property” is to perform such act. 
  • • The law provides in the same sec.5 of the TP Act, 1882 that “living person” includes a company or association or body of individuals, whether incorporated or not. 
  • • When the provisions of law contained in sections 5 & 122 of the TP Act read together, it emerges that a company being a living person can transfer property by way of gift.
  • • As a pre-condition for making a valid gift, the law does not prescribe any attributes like “love and affection”.
  • • The “gift” for the purpose of Gift Tax Act, 1958 is defined in the said Act in section 2(xii), as the transfer by one person to another person of any existing movable or immovable property made voluntarily and without consideration in money or money’s worth.
  • • Further, Gift Tax Act defines a person which includes a company, as well. 
  • • In the Gift Tax Act also, there is no attributes like “love and affection”.
  • • The ITAT, Mumbai in the case of DP World (P) Ltd. vs. DCIT (140 ITD 694) had held that corporate body can make a gift. The Tribunal held that as long as the donor company permits by its Articles of Association, it can do so under section 82 of the Companies Act, 1956. The Tribunal held that gift of shares of an Indian Company to a foreign company without consideration has to be treated as gift within the meaning of sec.47(iii) of the IT Act.
  • • The Hon’ble High Court of Delhi in the case of Vodafone Essar Ltd. & Others vs. Vodafone Essar Infrastructure Ltd., 163 comp. case 119, has held that there is no legal impediment to a company transferring property to another company, by gift.
  • Hon’ble AAR in rulings given in the case of Deere & Co. (337 ITR 277) have held that “love and affection” are not required to make a gift.
  • • There is no restriction provided under the Act, which prohibits a company from claiming exemption under sec.47(iii). When there is no such specific rider in section 47(iii) in respect of a person eligible for claiming exemption under sec.47(iii), there is no need to read down the law to make an interpretation that a company cannot claim exemption under sec.47(iii).
  • • In order to apply section 47(iv), it is mandatory that the subsidiary company is an Indian company. In the present case, the step down subsidiary, RIHL Cayman is not an Indian company. The argument of the Revenue crashes at the threshold itself.
  • • We accept the contention of the assessee company that the transfer of shares made by the assesse company to its step down subsidiary, RIHL Cayman is a gift eligible for exemption under sec.47(iii). Accordingly, no capital gains tax is imputable to the said transfer of shares.
  • • Another issue to be considered is, whether sec.45, which is the charging section of capital gains taxation, could be invoked in the present case or not.
  • As the transfer of shares was made without consideration, the foremost ingredient of computation provisions is missing and as such, capital gains cannot be computed under sec.48. This leads to a situation, where sec.45 cannot be invoked and charge of capital gains taxation fails. Therefore, in the present case, even otherwise, as it was a transfer without consideration, no levy of capital gains tax can be made. (reliance placed on CIT vs. B.C.Srinivasa Setty, 128 ITR 294 (SC)
  • • The shares were transferred by way of gift and no income arose in the hands of the assessee. The gift of shares cannot therefore, be subjected to TP provisions

Other Issues:

In relation to Corporate and bank guarantees issued by the assessee company, relying on the Delhi ITAT ruling in the case of Bharti Airtel Ltd. vs. Addl. CIT, 43 Taxmann.com 150, it was held that the guarantee provided by an assessee does not have any bearing on profits, income, loss or assets of the assessee. Therefore, the TP addition made against corporate and bank guarantees is not sustainable in law.


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