India - Although share transfers not taxable, transfer pricing provisions apply 

Rulings from the AAR are legally binding only on the taxpayers involved in a particular case. Still, an AAR ruling has persuasive value in similar matters before the Indian tax authorities and courts.

The KPMG member firm in India has provided reports that describe the transactions presented to the AAR for rulings in the three cases (read the August 2012 reports by clicking on the hyperlinks below).

• Transfer pricing provisions apply even though a transfer of shares in Indian company to Singapore company by a Mauritius holding company (as a part of internal restructuring) is not subject to capital gains tax under the India-Mauritius tax treaty: The AAR determined that: (1) a transfer of shares of an Indian company to a Singapore company by a Mauritius holding company as a part of internal re-structuring is not subject to capital gains tax under the Article 13(4) of India-Mauritius income tax treaty; (2) that since the minimum alternative tax (MAT) provisions under the Income-tax Act, 1961, do not distinguish between Indian and foreign companies, the MAT provisions apply to foreign companies; and (3) the transfer pricing provisions are applicable to the facts of this case even though the underlying share transfers are not taxable under the tax treaty.
  
  The case is: Castleton Investment Ltd. Read an August 2012 report [PDF 238 KB]



• Buy-back of shares by Indian company from Mauritian company is not a tax avoidance scheme, and not subject to capital gains tax under India-Mauritius income tax treaty; nevertheless, the transfer pricing provisions apply: The AAR determined that a proposed buy-back of shares by an Indian company from a Mauritian company is not a tax avoidance scheme and would not be subject to capital gains tax in India under the India-Mauritius income tax treaty. The AAR, however, found that the transaction is not exempt under section 47(iv) of Income-tax Act, 1961, because the entire share capital is not held by the applicant “or” its nominees. Furthermore, the AAR concluded that the proposed buy-back is an international transaction between related parties and that it produces income; therefore, the share buy-back is subject to India’s transfer pricing provisions.
  
  The case is: Armstrong World Industries Mauritius Multiconsult Ltd. Read an August 2012 report [PDF 225 KB]



• Capital gain arising from the transfer of shares of an Indian company by a Mauritian company is not taxable under the India-Mauritius income tax treaty; however, the transfer pricing provisions are applicable to the foreign company: The AAR determined that capital gains arising on the proposed transfer of shares of an Indian company by a Mauritian company to a Singapore company is not taxable under the Article 13(4) of India-Mauritius income tax treaty. Thus, the consideration received by the taxpayer is not subject to the withholding tax provisions of the Income-tax Act, 1961. Nevertheless, the AAR concluded that: (1) the foreign taxpayer must file an income tax return because the capital gains would be subject to tax in India—even though ultimately they are not taxable under the income tax treaty; (2) the minimum alternate tax provisions apply; and (3) the transfer pricing provisions under sections 92 to 92F of India’s tax law apply.
  
  The case is: SmithKline Beecham Port Louis Ltd. Read an August 2012 report [PDF 213 KB]

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