Vodafone Judgment 2010

8/6/2019 Vodafone Judgment 2010

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BEFORE THE AUTHORITY FOR ADVANCE RULINGS(INCOME TAX) NEW DELHI

23rd

Day of February 2010

P R E S E N T

Mr. Justice P.V. Reddi (Chairman)Mr. J. Khosla (Member)

A.A.R. NO. 817/2009

Name & address of : M/s Amiantit International Holding Ltd.,the applicant Road 1705, Building 315, Block 317,

Diplomatic Area, P.O.Box 11753Manama, Kingdom of Bahrain.

Commissioner concerned : Director of Income Tax(International Taxation), Mumbai

Present for the Applicant : Mr.Percy Pardiwalla, Sr.Advocate

Ms.Aarti Sathe, AdvocateMr.Pierre Sommereigns, GroupFinancial Controller

Mr.Vijay Dhingra, Partner and Mr. AdityaPatkar, A. Manager of Deloitte Haskins &Sells

Present for the Department : Mr.T.N.Chopra, Advocate

Mr.Shivendra Kumar SinghMr.G.Gurusamy, Addl.Dir.,IT, R.I.,Mumbai.

R U L I N G(By Honble Chairman)

1. This application is filed by a non-resident Company under

Section 245Q(1) of the Income-tax Act 1961 (hereafter referred to as

IT Act). The following facts are stated in the application :

1.1 The applicant (hereafter referred to as AIH) is a company

incorporated in the Kingdom of Bahrain. AIH is an investment


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company having investments in various Asian, European as well as

Latin American companies. AIH is owned 99% by South Arabian

Amiantit Company (SAAC), listed on the Saudi Stock Exchange and

1% by a trustee acting on behalf of SAAC. Amiantit Fiberglass

Industries (India) Private Limited (AFIIL) is an Indian company

engaged in the production of glass reinforced polyester pipes, storage

tanks etc. AIH holds 70% of equity capital of AFIIL and these shares

are held as investments in physical form. Amitech Cyprus Holding

Limited (ACHL) is a company incorporated in Cyprus and is a 100%

subsidiary of AIH. ACHL is an investment company and holds shares

of various other group entities. The only income received by AIH from

AFIIL is dividend. AIH does not have any other source of income from

India.

1.2 AIH proposes to restructure the group and split AIH into two

companies, one owning the business carried on in Europe

(represented by investments made in operating companies

incorporated in Europe) and the other owning business carried on in

Asia, North Africa & Latin America (represented by investments made

in operating companies incorporated in India, North Africa & Latin

America).

1.3 As a part of the restructuring process, by end of 2009, AIH (the

applicant) proposes to hold all international investments relating to pipe

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manufacturing through ACHL (Cyprus). This is mainly due to the

following factors :

* Cyprus belongs to European Commission and enjoys

the credibility of Western Europe directives, lawsand regulations;

* Easier access to international banking and finance in aglobally recognized jurisdiction;

* Cyprus is a Euro country Many of SAAC internationalentities work in or are associated to the Euro zone;

* Cyprus is geographically close to the Middle-East;

* If any interest is shown by a prospective buyer in future

in the international businesses of the group, aCyprus entity might be more acceptable to a Westernor Asian buyer than a Bahraini entity.

1.4 Therefore, AIH proposes to contribute shares of AFIIL (the

Indian Company) along with non-European investments to ACHL. AIH

- the applicant will not receive any consideration for the contribution so

made. Such a contribution akin to a gift is permissible under the

Bahrain legislation. The shareholders approval would be taken for this

purpose. In this connection, AIH would execute a contribution

agreement outside India. A copy of the draft contribution agreement is

filed.

2. It is recited in the draft Contribution agreement as follows:

AIH, the contributor holds 100% of the issued share capital

in ACHL (the Company). The contributor also holds 70% ofthe issued share capital in the Subsidiary listed in theschedule (i.e. 17,500,000 equity shares at par value ofRs.10/- each in AFIL.

The Group has gone and is going thorough a reorganizationprocess which includes, inter alia, holding of participation inthe Subsidiary in the Company.

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Within the framework of the reorganization of Amiantit Groupof Companies, the contributor proposes to contribute theshares in the Subsidiary to the Company by means of acontribution.

The main operative clauses of the draft Contribution

agreement are :

3.1. The Contributor does hereby transfer and set overunto the Company, and the Company does hereby accept,as of the Effective Date, all of the Contributors present andfuture right, title and interest in, under and with respect to theContributed shares.

3.2. The Contributor will at any time and from time totime, after the Effective Date, execute and deliver suchfurther instruments of conveyance and/or transfer and take

such other action as and when requested by the Companyas may be necessary to convey and transfer to the Companygood title in, and possession of, the Contributed Shares. Allthe rights, benefits, interests and burdens of the Contributedshares will be for the account of the Company as of theEffective date.

4. The Contribution is made free of consideration andtherefore the company is not due at the Effective Date andshall not be due at any time in the future to compensate theContributor for the Contribution.

1.9 In reply to the query raised by the Revenue, the Managing

Director of applicant has certified that there is no transfer by ACHL or

on its behalf or at its behest, of any shares, to AIH i.e, the applicant.

2. The following questions are formulated by the applicant for

seeking advance ruling from this Authority :

1) On the facts and circumstances of the case,whether the applicant is liable to tax in India in relation

to the proposed contribution of shares of AFIIL?

2) On the facts and circumstance of the case,whether the proposed contribution of shares by AIH toACHL attracts the transfer pricing provisions of section92 to 92F of the ITA?

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3) On the facts and circumstances of the case,whether ACHL, the recipient company, is required towithhold tax in accordance with the provisions ofsection 195 of the Act?

4) On the facts and circumstances of the case, ifthe contribution is not taxable in India, then, whetherAIH, the applicant, is required to file any return ofincome under section 139 of the Act?

The learned counsel for the applicant has stated that the last

question need not be answered and it may be deleted.

2.1 The core question raised in the application is whether capital

gains tax is liable to be paid in relation to the transfer of 17.5 million

shares held by the applicant in an Indian Group Company in favour of

its subsidiary in Cyprus without stipulating any consideration therefore,

as a part of reorganization of business of the Group.

3. The following are the contentions advanced by both sides with

reference to Question No. 1:-

3.1 The contentions of the applicant are two-fold. Firstly, no profit

or gain has accrued or arisen to the applicant on account of transfer as

no consideration which can be evaluated in terms of money will be

received or receivable by the applicant as a result of transfer of shares.

Hence, the liability to pay capital gains tax does not arise under section

45 read with section 48 of the IT Act. Secondly, the

transfer/contribution of shares (in the course of reorganization) is in the

nature of gift within the contemplation of clause (iii) of section 47 and

therefore the charging provision under Section 45 stands excluded. In

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the application, stress was laid on the second aspect i.e, the transfer

being in the nature of gift. However, in the course of hearing,

arguments were advanced by the learned counsel for the applicant on

both the points.

3.2 The Revenue contends that the charge under section 45 is

squarely attracted and that the mere fact that money consideration has

not passed would not put the transfer out of the domain of section 45.

The purported transfer is not without consideration and it is not gratis; it

is based on business considerations aimed at deriving certain financial

advantages as a part of reorganization process. Though the proposed

contribution of shares has been given the form of gift, there is in

substance no gift because, in ultimately analysis, the donor will not be

poorer to the extent of assets he parted with. It is contended that the

expression gift has to be assigned the meaning which it has under the

general law, i.e. T.P. Act. In the view we have taken, there is no need

for us to discuss whether Section 47(iii) is also attracted in the instant

case.

4. We shall, before proceeding further, refer to the relevant

provisions of IT Act:

Section 45. Capital gains

(1) Any profits or gains arising from the transfer of a capitalasset effected in the previous year shall, save as otherwiseprovided in sections 54, 54B, 54D, 54E,[54EA, 54EB,] 54F,54G and 54H, be chargeable to income-tax under the headCapital gains, and shall be deemed to be the income of theprevious year in which the transfer took place.

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[(1A) Notwithstanding anything contained in sub-section (1),where any person receives at any time during any previousyear any money or other assets under an insurance from aninsurer on account of damage to, or destruction of, any capitalasset, as a result of

(i) flood, typhoon, hurricane, cyclone, earthquake

or other convulsion of nature ; or(ii) riot or civil disturbance; or(iii) accidental fire or explosion ; or(iv) action by an enemy or action taken in

combating an enemy (whether with or without adeclaration of war),

then, any profits or gains arising from receipt of such money orother assets shall be chargeable to income-tax under the headCapital gains and shall be deemed to be the income of suchperson of the previous year in which such money or otherasset was received and for the purposes of section 48, valueof any money or the fair market value of other assets on the

date of such receipt shall be deemed to be the full value of theconsideration received or accruing as a result of the transfer ofsuch capital asset.Explanation : For the purposes of this sub-section, theexpression insurer shall have the meaning assigned to it inclause (9) of section 2 of the Insurance Act, 1938 (4 of 1938).]

Section 47. Transactions not regarded as transfer.

Nothing contained in section 45 shall apply to the followingtransfers :

(i) any distribution of capital assets on the total or

partial partition of a Hindu undivided family ;(iii) any transfer of a capital asset under a gift or will

or an irrevocable trust :Provided that this clause shall not apply totransfer under a gift or an irrevocable trust of acapital asset being shares, debentures orwarrants allotted by a company directly orindirectly to its employees under anyEmployees Stock Option Plan or Scheme ofthe company offered to such employees.

Section 48. Mode of computation.

The income chargeable under the head Capital gains shallbe computed, by deducting from the full value of theconsideration received or accruing as a result of the transfer ofthe capital asset the following amounts, namely :

(i) expenditure incurred wholly and exclusively inconnection with such transfer ;

(ii) the cost of acquisition of the asset and the costof any improvement thereto.

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The expression income includes profits and gains (vide section

2(24).

5. Leaving apart the controversy whether Section 47(iii) is

attracted, the answer to the question can be found within the realm of

Sections 45 and 48. The relevant questions which need to be

answered for resolving the controversy are: (i) Did any profit or gain

arise from the transfer of capital asset (in the form of shares of AFIL)?

(ii) Is it possible to identify or quantify the value of the consideration

received or accruing to the applicant as a result of the transfer? It is

obvious that these questions are based on the language of sections 45

and 48 respectively. In our view, the answer to these questions could

only be in the negative. We reach this conclusion by interpreting the

language employed in the charging provision (Section 45) as well as

the computation provision (section 48), drawing support from binding

precedents.

5.1 It is settled law that the charging section relating to capital gains

and the computation provisions together constitute an integrated code.

All transactions encompassed by section 45 must fall under the

governance of its computation provision. When there is a case to

which the computation provision cannot be at all applied, it is not

intended to fall within the charging section [Vide the observations of

Supreme Court in CIT vs B.C. Srinivasa Setty1 a decision which has

1 [1981] (128 ITR 294)

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been constantly followed till date]. Therefore, it is permissible,

perhaps, imperative to read both the provisions together to test the

correctness of the contentions advanced. For this purpose, we have to

explore the scope and meaning of the expressions profits and gains

and accrue and arise in the light of decided cases.

5.2 In Calcutta Co. Ltd. v. CIT*, the Supreme Court having stated

that the expression profits and gains has to be understood in its

commercial sense, approvingly referred to the following observations

of Lord Herschell in Russel vs Town and Country Bank Ltd. (1888) 13

A.C. 418 at 424 :

The profit of a trade or business is the surplus by which the receiptsfrom the trade or business exceed the expenditure necessary for the

purpose of earning those receipts. That seems to me to be themeaning of the word profits in relation to any trade or business.Unless and until you have ascertained that there is such a balance,nothing exists to which the name profits can properly be applied.

5.3 It is also relevant to notice what Fletcher Moulton L.J. said in Re

Spanish Prospecting Co. Ltd. (1911) 1 Ch. 92 -

The word profits has a well defined legal meaning, and thismeaning coincides with the fundamental conception of profits ingeneral parlance, although in mercantile phraseology the word mayat times bear meanings indicated by the special context whichdeviate in some respects from this fundamental signification. Profitsimplies a comparison between the state of a business at two specificdates usually separated by an interval of a year. The fundamentalmeaning is the amount of gain made by the business during theyear. This can only be ascertained by a comparison of the asset of

the business at the two dates.

This passage was quoted with approval by the Supreme Court

in CIT vs. Ashokbhai Chimanbhai**.

* [1959] 37 ITR 1** [1965] 56 ITR 42

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5.4 Broadly speaking, gains is really the equivalent of profits (vide

Mersey Docks Board vs Joseph Lucas (VIII App.cases, 891, H.L).

However, as observed by the Rajasthan High Court in the case ofCIT

vs. Hycon India Ltd. (308 ITR 251) the word gain is not limited to

pecuniary gain unlike profits, though profit includes an element of

gain.

5.5 It is clarified in more than one decision that income is a more

general term than profits or gains and the expression income is not

limited by the words profits and gains (Vide the observations ofPrivy

Council in Raja Bahadur Kamakshya Narain Singh vs CIT(11 ITR 513

at 522).

5.6 In Poona Electricity Co. Ltd. vs CIT ^ the Supreme Court

clarified that income tax is a tax on real income i.e. the profits arrived

at on commercial principles subject to the provisions of the Income-tax

Act. The same idea was expressed in different words in CIT vs

Shoorji Vallabhdas & Co Ltd. (46 ITR 144). It was said that income-

tax is a levy on income. No doubt, the income-tax Act takes into

account two points of time at which the liability to tax is attracted, viz.

the accrual of the income or its receipt; but the substance of the matter

is the income. If income does not result at all, there cannot be a tax,

even though in book keeping, an entry is made about a hypothetical

income, which does not materialize.

^ 57 ITR 521

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5.7 We shall now look to the meaning of the expressions accrue or

arise. The dicta of Mukherji, J. in Rogers Pyatt Shellac vs Secretary

of State for India (ILR 52 Cal 1) has been quoted with approval in a

series of decisions of the Supreme Court (Vide E.D. Sassoon & Co. vs.

CIT (26 ITR 27) etc.)-

Now what is income? The term is nowhere defined in theAct. In the absence of a statutory definition we must take itsordinary dictionary meaning The word clearly impliesthe idea of receipt, actual or constructive. The policy of the

Act is to make the amount taxable when it is paid or receivedeither actually or constructively. Accrues, arises and isreceived are three distinct items. So far as receiving of

income is concerned, there can be no difficulty; it conveys aclear and definite meaning, and I can think of no expressionwhich makes its meaning plainer than the wordreceiving itself. The words accrue and arise also are notdefined in the Act. The ordinary dictionary meanings of thesewords have to be taken as the meanings attaching to them.Accruing is synonymous with arising in the sense ofspringing as a natural growth or result. The three expressionsaccrues, arises and is received having been used in thesection, strictly speaking, accrues should not be taken assynonymous with arises but in the distinct sense of growingup by way of addition or increase or as an accession or

advantage; while the word arises means comes intoexistence or notice or presents itself. The former connotes theidea of growth or accumulation and the latter of the growth oraccumulation with a tangible shape so as to be receivable.

Then, in Sassoons case, the observation of Fry LJ in

Colquhoun v. Brooks to the effect that the words arising or accruing

are general words descriptive of a right to receive profits was also

referred to. The Supreme Court then observed that if the assessee

acquires a right to receive the income, the income can be said to have

accrued to him though it may be received later on its being

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ascertained. The basic conception is that he must have acquired a

right to receive the income.

5.8 In CIT vs Ashokbhai Chimanbhai (Supra), J.C. Shah, J.

observed that the words accruing and arising are used to contra-

distinguish the word receive. Income is said to be received when it

reaches the assessee: when the right to receive the income becomes

vested in the assessee, it is said to accrue or arise.

5.9 In CIT vs Ahmedbhai Umarbhai & Co.^^ which is a decision of a

five Judge bench of the Supreme Court, M.C. Mahajan, J observed at

page 496 thus-

Whether the words derive and produce are or are notsynonymous with the words accrue or arise it can be saidwithout hesitation that words accrue and arise though notdefined in the Act are certainly synonymous and are used inthe sense of bringing in as a natural result. Strictly speaking,the word accrue is not synonymous with arise, the formerconnoting the idea of growth or accumulation and the latter ofthe growth or accumulation with a tangible shape so as to be

receivable. There is a distinction in the dictionary meaningof these words, but throughout the Act they seem to denotethe same idea or ideas very similar and the difference only liesin this that one is more appropriate when applied to a

particular case.

6. In the context of sections 45 and 48, the expression arising

employed therein may very well comprehend actual receipt of income.

At the same time, the primary meaning of these words as connoting a

right to receive still holds good.

^^ 18 ITR 472

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7. In the light of above analysis of the expressions profits and

gains and accruing or arising, we have to examine the issue that has

presented itself in the instant case.

Viewed from any angle, we are unable to perceive as to how

any profit or gain has accrued or arisen to the applicant by virtue of the

transfer of shares to its subsidiary company. It is not possible to

identify or pinpoint anything which has the characteristic of profit or

gain or any consideration which is capable of being valued in

praesenti. As pointed out earlier, the income in the sense of profit and

gain should be real but not hypothetical income. We may take it that

the income may be in cash or in kind and need not necessarily be

pecuniary in nature. As stated in the Law and Practice of Income-tax

(by Kanga, Palkhivala and Vyas) income, profits and gains maybe

realized in the form of moneys worth as well as money, in kind as well

as in cash. Even then, the alleged consideration for which the shares

are to be transferred should be capable of being evaluated on

commercial and accounting principles. The possibility of applicant

transferor improving its overall business by virtue of re-organization

and the mere possibility or chance of the applicant making better

returns in the near or distant future as a consequence of reorganization

can hardly be regarded as a consideration accruing or arising to the

transferor when he has no right to receive a definite or an

ascertainable amount or benefit from the transferee. A capital gain

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cannot arise on the basis of uncertain and indefinite future

contingencies or hypothetical and imaginary estimations. There is

really no effective answer from the Revenues side to the question as

to what is the valuable consideration that has accrued or arisen to the

transferor and how it can be converted into moneys worth for the

purpose of computing the alleged capital gain. The only endeavor of

Revenues counsel was to take a plea that the benefits and

advantages mentioned by the applicant in para H of page 7 of the

application represent the valuable consideration for transfer. This is

the stand taken at page 11-12 of written submissions of Revenues

counsel. Thus, the full value of consideration for the transfer of shares

is sought to be deduced from the overall objectives of reorganization

and the resultant changes in investment. It is not explained how they

can be evaluated in terms of money or to borrow the words of P.N.

Bhagwati, J #, how they are capable of being turned to pecuniary

account. Viewed from another angle, has the transferor acquired any

right to receive an identifiable and monetarily convertible benefit

though not money from the transferee? Is there anything concrete or

definite which the transferee gives or makes over to the transferor as a

quid pro quo for the receipt of shares? The answers to all these

questions could only be in the negative. One has to grope in darkness

to find valuable consideration for the transfer. By transferring the

Indian Company shares to its 100% subsidiary, the applicant, in our

# in 56 ITR 152

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view, will derive no profit and make no gain. Nothing in the form of

money or moneys worth or nothing capable of being turned into

money will accrue or arise to the applicant on the date of transfer.

Therefore, the contention of the Revenue has to be rejected.

7.1 The exposition of law in the case of Acharya D.V. Pande vs

CIT## is quite instructive. The question in that case was whether the

household expenses defrayed out of the funds of the institution of

which the assessee was the Acharya can be considered to be his

income. The following observations of P.N. Bhagwati J, speaking for

the Division Bench of Gujarat High Court (at page 165) are quite

apposite in deciding the issue in the present case:

But, howsoever broad may be the connotation of the word income,one thing is clear that income for tax purposes must be money ormoneys worth. It is not necessary that income must be received incash. It may also be received in kind but that must representmoneys worth, that is, something which is capable of beingconverted in terms of money. As observed by Lord Halsbury L.C. In

Tennant v. Smith(1892) AC 150; 3 Tax Cas.158, income includesanything capable of being turned into money from its own nature. Ofcourse there are certain things which are not capable of beingturned into money from their own nature and yet they have by statutebeen artificially deemed to be income, but the general principle isclear that income must be money or moneys worth. There must be,as observed by the Privy Council in Raja Raghunandan PrasadSingh v. Commissioner of Income-tax(1933) 1 ITR 113 at 119, anactually realized or realizable profit or loss. If, therefore, a benefit oradvantage is received by an assessee, he would be assessable inrespect of the value of such benefit or advantage if it consists ofmoney or moneys worth. Where the benefit or advantage consists ofmoney, there is no difficulty, but where it does not consist of money,the test would be, is it something capable of being turned to

pecuniary account? If it is, then its value would be the income of theassessee. Of course there may be cases where the assessee mayreceive a benefit or advantage in the shape of satisfaction of

pecuniary obligation which the assessee has incurred. Such abenefit or advantage would give an immunity to the assessee against

pecuniary obligation already incurred and would, therefore, representmoneys worth and would, as such, be chargeable to tax. This

## 56 ITR 152

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statement of the law is amply borne out by the decisions which werecited before us.

7.2 Applying the legal position enunciated in the above passage

and the test laid down by the learned judges in the above case, we

have no hesitation in holding that no consideration would accrue or

arise to the applicant by the transfer of shares and the applicant cannot

be said to have derived any profit or gain from the transaction. We

may add that if the consideration is such that it is incapable of being

valued in definite terms or it remains unascertainable on the date of

occurrence of taxable event, the question of applying Section 45 read

with section 48 of the IT Act does not arise.

7.3 In the case ofK.P. Varghese vs ITO (SC) @, the Supreme Court

laid stress on the words full value of the consideration received or

accruing and observed what in fact never accrued or was never

received cannot be computed as capital gains under section 48.

Considering the inter-play between sub-section(2) of section 52 and

section 48, the Supreme Court further observed -

Moreover, if sub-s.(2) is literally construed as applying even tocases where the full value of the consideration in respect of thetransfer is correctly declared or disclosed by the assessee and thereis no understatement of the consideration, it would result in anamount being taxed which has neither accrued to the assessee norbeen received by him and which from no view-point can be rationallyconsidered as capital gains or any other type of income. It is well

settled rule of interpretation that the court should as far as possibleavoid that construction which attributes irrationality to the Legislature.Besides, under entry 82 in List I of the Seventh Schedule to theConstitution, which deals with Taxes on income other thanagricultural income and under which the IT Act, 1961 has beenenacted, Parliament cannot choose to tax as income an item whichin no rational sense can be regarded as a citizenss income or even

@ 131 ITR 597

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receipt. Sub-section (2) would, therefore, on the construction of therevenue, go outside the legislative power of Parliament.

If the Revenues contention is to be accepted, the situation would more

or less be the same as pointed out in the above decision and it would

lead to irrational results. It is therefore, not possible to countenance

the argument of the Revenue that valuable consideration within the

meaning of section 48 has to be attributed to the transfer in question.

Such attribution would be inherently arbitrary and irrational and cannot

be supported in law.

8. At page 12 of the Written Submissions, the learned counsel for

the Revenue has raised the contention that the shares of the Indian

company have specific cost of acquisition and the transfer of such

shares with nil consideration apparently leads to capital loss which

amounts to negative capital gains and therefore Section 45 is

attracted. Reference in this connection is made to the decision of the

Supreme Court in CIT Delhi vs. Har Prasad & Co $ wherein it was

observed that the words income, profits or gains should be

understood as including loss also so that in one sense profits and

gains represent plus income whereas loss represents minus income.

Then it was observed:

In other words, loss is negative profit. Both positive and negative profits are of a revenue character. Both must enter intocomputation wherever it becomes material.

$ 99 ITR 118

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Tribunal. Thus, the character of loss - whether it was capital loss or

business loss, was the issue in that case.

The following observation of the High Court in the above case

indicates that the test to be applied is the same as that formulated by

Bhagwati J in the Gujarat decision :

The Tribunal has rightly observed that the said right can beassessed in monetary value which would be the consideration for thetransfer of capital asset.

In the light of foregoing discussion, the 1st question is answered

in the negative.

Question No. 2

9. It is contended by the Revenue that once transfer of capital

asset by the applicant is admitted to be an international transaction by

virtue of section 92B(1) of the Act, it goes without saying that transfer

pricing provisions would be applicable for computation of income

having regard to the arms length price. It is further submitted that

there is scope for manipulation of consideration in the transfer of

shares and accordingly the value of the consideration has to be

determined in accordance with the transfer pricing provisions.

9.1 This contention of Revenue is liable to be rejected in view of the

recent ruling of this Authority in Dana Corporation *** wherein the

application of S.92-B has been ruled out in a case where the income is

not chargeable to tax at all. We would like to quote the relevant

passages in that ruling:

*** 227 CTR 441/ 186 Taxman 187

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If no consideration had passed from or on behalf of thetransferee Companies to the transferor company and the chargeunder Section 45 fails to operate for want of consideration ordeterminable consideration, obviously, the provisions in Section 92etc. do not come to the aid of the Revenue. It must be noted thatSection 92 is not an independent charging provision. As the Sectionheading itself shows, it is a provision dealing with Computation ofincome from international transactions. The opening part of Section92 says that any income arising from an international transactionshall be computed having regard to the arms length price. Theexpression income arising postulates that the income has arisenunder the substantive charging provisions of the Act. In other words,the income referred to in Section 92 is nothing but the incomecaptured by one or the other charging provisions of the Act. In sucha case, the computation aspect is taken care of by Section 92 andother related provisions in Chapter X. It must be noted that theincome chargeable under the Act is divided into various heads underSection 14. The heads of income specified in that Section are..

The income in the present case, if at all, is traceable to Capital

gains which is one of the heads of income. If by application of the provisions of Section 45 read with Section 48 which are integrallyconnected with each other, the income cannot be said to arise,Section 92 of the Act does not come to the aid of Revenue, eventhough it is an international transaction. The expression income inSection 92 is not used in a sense wider than or different from itsscope and connotation elsewhere in the Act. Section 92 obviously isnot intended to bring in a new head of income or to charge the tax onincome which is not otherwise chargeable under the Act. Theinterpretation sought to be placed by Revenue would amount toreading words into S.92. I have, therefore no hesitation in rejectingthe Revenues contention.

In the case of Vanenburg Group B.V., In re ^^^, this Authority while

referring to the provisions in Chapter X, observed: These are againmachinery provisions which would not apply in the absence ofliability to pay tax.

Referring to the ruling of this Authority in Canoro Resources on

which reliance has been placed in the present case as well, it was

observed thus:

The learned counsel for the Revenue has relied on a recentdecision of this Authority in the case of Canoro Resources Limited,wherein it was held that the transfer pricing provisions contained inChapter X of the Act will override the computational provision in sub-section (3) of Section 45 in the case of an international transaction. Ido not think that the ruling in Canoro Resources runs counter to theview expressed by AAR as regards the applicability of Section 92 ofthe Act. The fact situation in Canoro Resources case is materiallydifferent and the real question which fell for consideration in thatcase is discernible from the following lines in para 10.1. It is thecommon stand of both - the applicant and the Revenue, that the

^^^ 289 ITR Pg 464 at 472

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nature of income arising from the transfer of the applicants participating interest in Amguri block to the proposed partnershipfirm, shall be capital gains. Where they differ is regarding the modeof computation of that income.

9.2 Therefore, we are of the view that the transfer pricing provisions

in Chapter X are not attracted.

Question No.3

10. In view of the answers to the Question 1 and 2, ACHL is not

obliged to withhold tax under S.195 of I.T.Act. When the income is not

chargeable to tax as per the findings recorded above, the question of

withholding the tax does not arise.

11. In the result, all the three questions raised are answered in the

negative.

Accordingly, ruling is pronounced on this the 23rd day of

February 2010.

Sd/- Sd/-(J.Khosla) (P.V.Reddi)Member Chairman

F.No. AAR/817/2009 dated the __ Februry, 2010

This copy is certified to be a true copy of the Ruling and is sent to:

1. The applicant.

2. The Director of Income-tax (International Taxation), Mumbai.

(Batsala Jha Yadav)Addl. Commissioner of Income-tax, AAR

Vodafone Judgment 2010

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Transcript of Vodafone Judgment 2010