Excessive Court docket Denies Tax Exemption on Company Reward

High Court Denies Tax Exemption on Corporate Gift


  • Inter-company switch of shares with out consideration held to not be exempt absent assembly standards of legitimate “present”; held topic to capital beneficial properties tax.

  • Reward of shares to subsidiary held to not be legitimate present as parts of ‘voluntariness’ and ‘absence of consideration’ weren’t supported by factual findings from board resolutions and share switch deeds.

  • Held that courts are entitled to elevate the company veil to decipher the true intention behind a transaction, to conclude on the validity of a present.

  • Devise of present held to be made for particular objective of avoiding tax in India.

In a current determination,1 the Madras Excessive Court docket (“Madras HC” or “Court docket”) held that an inter-company present of shares made as a part of a company restructuring train was not a legitimate present and ought to be topic to capital beneficial properties tax underneath the Revenue-tax Act, 1961 (“ITA”). The Court docket held the transaction to be a round transaction, undertaken to keep away from tax by shifting income exterior India.


Redington (India) Ltd. (“RI” or “Assessee”), an organization integrated in India, carried out operations within the Center East and Africa by its wholly owned subsidiary: Redington Gulf FZE (“RG”). In 2008, a personal fairness agency (“PE agency”) evinced curiosity in investing within the Assessee’s Center East and Africa operations. Pursuant thereto, the next steps have been undertaken:

  1. Incorporation of Redington Worldwide Mauritius Restricted (“RM”), Mauritius, in 2008 with an preliminary funding of USD 25,000 completely held by Assessee

  2. RM thereafter integrated Redington Worldwide (Holdings) Restricted within the Cayman Islands (“RC”)

  3. On November 13, 2008, Assessee gifted its whole shareholding in RG to RC (“Transaction”) pursuant to which RG grew to become a step-down subsidiary of RM

  4. The PE agency invested USD 65 million in RC for a 27.14% fairness stake, valuing RC at USD 239 million.

The Transaction is depicted under:

The Assessee’s case was chosen for scrutiny and was referred to the Switch Pricing Officer (“TPO”). The TPO handed a draft evaluation order proposing inter-alia an addition for long-term capital achieve (“LTCG”) arising on switch of shares of RG to RC. The Dispute Decision Panel upheld the LTCG addition, that was then confirmed within the last evaluation order. On attraction, the Revenue-tax Appellate Tribunal (“ITAT”) held the switch of shares with out consideration to be a legitimate present exempt from capital beneficial properties tax underneath part 47(iii) of the ITA. The Income most well-liked an attraction to the Madras HC towards the ITAT’s order on the basic query:2 whether or not the ITAT was right in holding that the switch of shares by the Assessee to its subsidiary was to be thought of a ‘present’.

Madras HC Ruling

  • The Madras HC held that an organization is able to executing a present, foundation part 5 of the Switch of Property Act, 1882 (“TOPA”), which considers an organization a ‘residing particular person’ able to conveying property.

  • On the validity of a present, the Court docket famous the important parts of a present per part 122 of the TOPA: (i) the absence of consideration; (ii) an individual being the donor; (iii) one other particular person being the donee; (iv) the existence of voluntariness; (v) the subject material of the present; (vi) the switch; and (vii) the acceptance. It noticed that whereas there was no dispute concerning the final proposition as to what constitutes a legitimate present, with out contemplating the factual place it couldn’t determine whether or not there was a legitimate present underneath part 122 of the TOPA. It held that the tax authorities, in addition to courts and tribunals, have been entitled to elevate the company veil to look at the true intention of events in effecting transactions, as a way to conclude whether or not the items have been real.

  • The Madras HC delved into the factual conclusions drawn by the TPO: that neither within the board resolutions, nor within the deeds of share switch, was there’s any point out of the phrase ‘present’ or some other phrases to point that the events meant for the switch to be a ‘present’. It was noticed that the board decision in actual fact acknowledged that the switch of shares in the direction of re-structuring was to happen ‘with or with out consideration’. It additionally famous the sworn assertion of the Assessee’s Chief Monetary Officer (admitting to re-structuring as the one rationale behind the present). This indicated, as per the Court docket, that on the time when the board of administrators of the Assessee took a call to switch its whole holdings in RG to RC, it didn’t take into account the switch to be a gratuitous switch, and therefore there was no factor of voluntariness.

  • The Court docket additionally discovered that together with the requisite factor of ‘voluntariness’, the factor of ‘absence of consideration’ was additionally lacking because the Transaction was structured to accommodate the third-party investor, who had positioned sure situations even previous to effecting the switch. The funding by the PE agency, it was held, constituted consideration and therefore the switch couldn’t be a present.

  • The Court docket rejected the Assessee’s competition that within the absence of any consideration, capital beneficial properties tax couldn’t be levied on account of failure of computation mechanism. It distinguished the info in Sunil Siddharthbhai v. CIT3 and CIT v. B.C. Srinivasa Shetty4 – circumstances relied on by the Assessee – on the idea that these selections have been rendered in ultimate reality conditions involving no allegations of tax avoidance towards the assessee, whereas the case earlier than them concerned doubtful transactions made as a way to escape tax legal responsibility in India.

  • On the query of tax avoidance, the Court docket affirmed the findings of the TPO holding that RC and RM have been integrated solely to function conduit corporations for the aim of avoiding tax in India. It relied closely on the TPO’s evaluation as to how the construction enabled a loss in income for India brought on by the shifting of income exterior the nation, together with calculations demonstrating how any dividends declared by RG would accrue to entities integrated in low tax jurisdictions, to conclude that the transaction was round in nature and arrange solely to keep away from Indian taxes.


That is one more in a line of current selections the place courts and tax authorities have regarded by buildings from a pre-GAAR interval, more and more following a ‘substance over kind’ strategy.

The Madras HC right here has fastidiously analyzed the whole chain of occasions concerned within the company restructuring to reach at its narrative of tax avoidance. The Court docket has thought of the steps concerned, their timing, and the aim of every entity concerned, together with documentary proof within the type of board resolutions, texts of share switch deeds, and statements from firm officers, to piece collectively a wholistic image to set the context for the present of shares. This train of the Court docket is paying homage to the train undertaken by the Authority for Advance Rulings (“AAR”) in Bid Companies Division5 the place profit underneath the India-Mauritius tax treaty was denied to the assessee, primarily based on a evaluation of the aim of the Mauritius-based taxpayer and the timelines concerned in its creation, that led the AAR to conclude that the entity had been arrange solely to avail of the Mauritius treaty advantages and didn’t possess the requisite substance.

Whereas Excessive Courts don’t sometimes delve into factual analyses in appeals earlier than them, the Madras HC on this case has positioned heavy reliance on the factual evaluation undertaken by the decrease authorities (particularly the TPO), and has commented on the ITAT’s silence on these factual points. Notably, the Madras HC didn’t merely remand the matter to the ITAT to look into the info afresh. For multi-stepped company reorganizations, it’s now extra vital than ever to judge the existence of business substance towards not solely statutory but additionally judicially developed anti-avoidance doctrine because the legislation retains evolving, and to fastidiously evaluation documentation with a detailed lens.

On the legislation on company items, this determination of the Madras HC provides extra dimension to the talk. In a current determination the Bombay Excessive Court docket in Asian Satellite tv for pc Broadcast v. ITO,6 counting on a call of the Gujarat Excessive Court docket in Prakriya Pharmacem v. ITO,7 held unequivocally that by operation of part 47(iii) of the ITA, any switch of a capital asset underneath a present couldn’t be taxed as capital achieve. The Madras HC has distinguished these Excessive Court docket selections on the idea that the principle query in Asian Satellite tv for pc (supra) was the validity of a reopening discover on the allegation that the company present was a colorable system, when the present had initially been accepted as such by the assessing officer in the course of the authentic assessments. These circumstances, the Madras HC held, don’t contain reality patterns the place the present has been made in a context that clearly indicated avoidance. It highlighted the findings of the AAR in Orient Inexperienced Energy Pte. Ltd.,8 which noticed {that a} present by a company to a different company, although a subsidiary or an affiliate enterprise which is all the time claimed to be unbiased for tax functions, is inherently a wierd transaction. To postulate the concept a company can provide away its belongings, freed from value or with no consideration, to a different entity, even orally, factors in the direction of the potential for doubtful makes an attempt at avoidance of tax payable.

Whereas the Madras HC’s blanket cynicism concerning company items could also be critiqued as being too simplistic, its in-depth factual evaluation drawn from the conduct of the entities inquiring into the substance of the transaction is the important thing takeaway. This line of jurisprudence, inquiring into points with a lens of tax avoidance and revenue shifting, has been on the rise because the OECD’s Base Erosion and Revenue Shifting measures and allied home legislation adjustments; and it will be cheap to imagine that courts and tribunals are more likely to proceed trying by buildings, as a way to assess their substance, most often involving a declare of exemption or a concessional tax therapy.

1 T.C.A Nos. 590 & 591 of 2019 dated December 10, 2020.

2 Different questions have been raised earlier than the Madras HC arising out of the ITAT’s order with regard to trademark charge and financial institution/company ensures.

3 (1985) 156 ITR 509 (SC)

4 (1981) 128 ITR 294 (SC)

5 In Re: Bid Companies Division (Mauritius) Ltd., AAR No. 1270/2011, determination dated 10.02.2020.

[2020] 428 ITR 327 (Bombay)

7 [2016] 238 Taxman 185 (Gujarat)

8 (2012) 346 ITR 557

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