Long term Capital Gains on Share transfer of Indian Listed Cos. between foreign entities exempt from tax – Goodyear case

Background: In 2011, US based manufacturer Goodyear Tire and Rubber Company had transferred 74% of its holding in Goodyear India to its subsidiary in Singapore without taking any consideration. The Indian Tax claimed that there is a tax implication in this transaction, while the Authority for Advanced Ruling (AAR), ruled that this particular transaction is not subject to tax in India. The tax department challenged the ruling and filed a writ petition in the Delhi High Court, saying that the transfer of shares are of an Indian listed company is subject to taxation.

Petition: The tax department petitioned that the said transaction between the Goodyear US and Singapore entities involves treaty shopping. According to the India-US tax treaty, shares sold by a US based organization, is considered capital gains and hence would be subject to taxation both in India as well as the US.

Facts: According to laws, capital gains are considered to be of long-term in nature, if the shares of a company listed in India, have been sold after an initial holding period of 12 months.  The AAR hence had held, that transfer of shares of an Indian entity between two non-resident entities, even if done for a consideration, will be exempt from taxation in India as long-term capital gains on sale of shares of companies listed in India, is exempt from Indian tax laws. If at all, only a securities transaction tax needs to be paid under the purview of such deals.

In this case, Goodyear USA, had transferred its shares in Goodyear India (being the transferor), which was a long-term capital asset arm for them, to Goodyear Singapore (transferee), and that too without any considerations.

Decision:

In light of these facts i.e. no tax liability on share transfers of Indian listed companies for long-term capital gains, the tax department’s arguments have been held to be of no consequence.

The Hon’ble HC said that no illegality has been pointed out in the ruling by the AAR, and court saw no reason to interfere. The high court has accepted AAR’s view, and emphasized that the HC has in fact not exercised any appellate jurisdiction. Instead they had only invoked an extra-ordinary jurisdiction which has been given / granted to them as per the Constitution.

It was however mentioned that if the shares had been sold by the Singapore entity instead, the capital gains out of the share tranfers, would then be taxed only in Singapore as per the India-Singapore tax treaty.

The Delhi high court has since dismissed the petition relating to this transfer. Both the orders AAR and Delhi HC ruling needs to be read together now.

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