The Tax Publishers2020 TaxPub(DT) 5340 (Mad-HC) : (2021) 430 ITR 0298


Sections 45 & 47

Where assessee had transferred its entire shareholding in one of its wholly owned subsidiaries to its overseas step down another subsidiary located in tax haven country with an intent to evade tax, the voluntary transfer of shares by assessee to entity abroad without consideration was not a gift falling under section 47(iii) because this was done by way of restructuring the company investment in its non-resident subsidiary company located in Free Trade Zone at Dubai and more so, the transaction was not a gift as defined in section 122 of the Transfer of Property Act, 1882, therefore, capital gains tax is imputable on said transfer of shares.

Capital gains - Transfer of shares - Business restructuring of investment, whether gift of shares - Applicability of section 47(iv)

Assessee, Redington India (RI), was a listed company. There was a Singapore Branch of Redington, which was owning the brand/trademark of Redington. Assessee was formed to take over the Singapore Branch and thereby became a listed entity in India. The assessee had a number of subsidiaries, one being a wholly-owned Redington Gulf FZE (RG FZE) in Dubai Free Trade Zone. Arising out of business funding considerations, the assessee formed a company called Redington Mauritius (RM) which, in turn, floated a down stream company called Redington Cayman Islands (RC). Subsequently the assessee transferred its shareholding in RG FZE to the Cayman Islands entity and claimed this to be outside the scope of capital gains tax as it was fitting into section 47(iii). Consequential to this, immediately within 4 days of the 'gifting' of shares, one private equity investor (PE) Investcorp invested USD 65 million in the Cayman Islands entity in return for a 27.17% shareholding in RG FZE. The case of the revenue was that this fell in the scope of section 47(iv) and since the transferee was not an Indian entity there can be no capital gains exemption. Besides this, the corporate gift to be valid needs to be accepted by the donee and voluntarily and willingly as being an artificial corporate person and since this was not manifested the reading of gift itself was erroneous. Arising out of statements given by the CFO of the assessee the TPO also held that this circuitous layering route was only to evade Income taxes in India. The assessee if they had transferred the holding in RG FZE directly to the Private Equity--PE investor Investcorp would have paid capital gains in India and it is to thwart this they have formed dual layers in the form of Mauritius and then in Cayman Islands. It was also confirmed by the fact of the dividends payout made directly by RG FZE to the assessee and those made by RG FZE to post investment by Investcorp which manifested that the layering was certainly a mechanism to deprive India of its share of taxes by having it in these tax havens. Accordingly, the TPO when he was called to value the transfer presuming it one of not being a gift he held the closest valuation would have been the price at which the shares exchanged hands from the Cayman Islands entity to Investcorp the PE entity which was then attributed and TP additions were sustained under capital gains for Rs. 885 crores in the hands of the assessee. The plea of the assessee before the ITAT was that this was a valid gift made which was to enable them to strategically develop the RG, FZE Middle East entity and list it overseas and this was possible only by offshoring and bringing in an investor and since it fell in the scope of section 47(iii) no capital gains can be taxed. Besides this, the reading of the TPO was perverse as there was no consideration which accrued to the assessee and thus no capital gains can be read in an imputed/notional manner, especially given that GAAR provisions were also not in vogue in that year of appeal 2008 plus the provisions of Transfer Pricing cannot be read incongruous to taxing provisions of the entire Income tax law. The DRP read the valuation of the TPO of the underlying 'transferred gift' but gave a risk discount of 10%. citing that a PE investment was not that high risky in proposition given that the assessee had buy back covenants also on the same. On higher appeal, the ITAT upheld the views of the assessee confirming the gift and since it did not fall in the scope of capital gains and there being no consideration, the provisions of transfer pricing also could not be applied and the additions made by revenue stood quashed. Aggrieved, the revenue went in higher appeal with the plea that the entire transaction was one entered into with an intent to evade taxes, the gift being incorrect and thus TP provisions ought to have to be read into the same. Held: Factually this court has held that the transaction is not covered under section 47(iii), as it is not a transfer of capital asset under a gift and the authorities below rightly classified the transaction under Clause (iv) of section 47. Therefore, the transaction effected in favour of RG would undoubtedly fall within clause (iv) of section 47 and the incorporation of the step down subsidiary and transfer of shares in favour of a third party investor within a short span of less than a week for a stake of more than 27% and surrounding circumstances will clearly bring the transaction as transfer of the capital asset by a company to its subsidiary company and therefore, to be classified as a transaction under section 47(iv). The reading of gift by the ITAT was incomplete, in as much as the meaning of gift and its characteristics were as per the Transfer of Property Act, 1882. The transaction of gifting was an after-thought to evade taxes. The TPO's valuation of the capital gains @ Rs. 885 crores was upheld. The layering pointed clearly to a circuitous route to deprive India of capital gains taxes. The logic of this being without consideration, and no consideration means no capital gains cannot be read incorrectly, especially given the evading structuring adopted by the assessee. The order of the ITAT was found to be perverse and deserved quashing.

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