(By Mr.A Sinha) This application has been filed by M/s Vanenburg Group B.V. [for short the applicant] under section 245Q(1) of the Income-tax Act 1961 [for short the Act]. The applicant has stated that it is an investment company incorporated in the Netherlands, which invests in software products, development and other related activities and carries on its operations through various subsidiaries across the globe. The applicant has a wholly owned subsidiary company, namely Cordys - 1 - Holding B.V. [for short the Cordys] which is also incorporated in the Netherlands. The Cordys is also the holding company for a number of other information technology related group companies. The applicant has another wholly owned subsidiary company, namely Cordys R&D (India) Private Limited [for short the Cordys India] which is incorporated under the Companies Act, 1956. The applicant proposes to reorganize its holding pattern in its group companies. In the process of reorganization, the applicant would transfer its entire share holding in the Cordys India to the Cordys. As a result of this, the Cordys India would come under the direct control of the Cordys. In the aforementioned factual background, the applicant has sought advance ruling on the following questions :

i) On the facts and in the circumstances of the case, whether the capital gain arising to the Applicant in the course of corporate reorganization at group level, from the proposed transfer of shares held in the Cordys R&D (India) Pvt. Ltd., an Indian Subsidiary of Vanenburg Group B.V. to Cordys Holding B.V., another 100% subsidiary of Vanenburg Group B.V., is liable to tax in India having regard to the provisions of the Income- tax Act, 1961 (the Act) and the Double Taxation Avoidance Agreement between India and the Netherlands (the DTAA)? ii) On the facts and circumstances of the case, whether Cordys Holding B.V., the transferee company, is required to withhold tax in accordance with the provisions of Section 195 of the Act? iii) On the facts and circumstances of the case, if the capital gain is not taxable in India, then, whether the Vanenburg Group B.V., the applicant, is required to file any return of income under section 139 of the Act? iv) On the facts and circumstances of the case, whether the proposed transfer of shares by the applicant to Cordys Holding B.V.attracts the transfer pricing provisions of Section 92 to 92F of the Act? - 2 -

2. The applicant has stated that the proposed transfer would take place outside India. The transfer deed would be executed in the Netherlands and the consideration for assignment would also arise there. Nevertheless, since the transaction would involve transfer of shares of an Indian company, namely the Cordys India, the resulting income shall be deemed to accrue or arise in India by virtue of section 9(1)(i) of the Act. Hence, the same would be taxable as capital gains in India. But the transaction would also attract the provisions of the Double Taxation Avoidance Agreement [for short the DTAA] between India and the Netherlands. As per clause (5) of article 13 of the DTAA, if capital gains are realised in the course of a corporate organization/reorganization, amalgamation, division, etc., such gains shall be taxable only in the State in which the alienator is resident. In the present case, the proposed transaction would take place in pursuance of a corporate reorganization and the transferor would be a resident of the Netherlands. As per Sub-section (2) of section 90 of the Act, in relation to the assessee to whom an agreement entered into under sub-section (1) applies, the provisions of the Act shall apply to the extent they are more beneficial to assessee. As such, capital gains tax should be payable in the Netherlands. The applicant has further stated that as the capital gains arising out of the proposed transaction would not be chargeable to tax in India, the transferee would not be required to withhold any tax under section 195 of the Act. For the same reason, the applicant would also not be required to file any tax return in India under section

139 of the Act. According to the applicant, the provisions of sections 92 to 92F of the Act would also not be attracted in this case.

3. The Commissioner of Income-tax-II, Hyderabad who is the jurisdictional Commissioner in this case (for short the commissioner), has furnished comments vide his letter dated 11.08.2006. He has stated that though the transaction would be taxable as per the provisions of the Act, no tax would actually be payable in India because of clause (5) of article 13 of dtaa, as the share transfer would be taking place in pursuance of reorganization of the group - 3 - companies. So far as the section 195 is concerned, deduction of tax at source should be made if any sum chargeable under the provisions of the Act is paid or credited to the account of the payee. The DTAA does not contain any specific provision with regard to this aspect, in the absence of which tax should be required to be deducted at source. The commissioner has further stated that, in case, it is decided that the income is not taxable and TDS is not required to be made, there would be no need to file Income-tax return. As regards applicability of section 92 to 92F, it would depend on the decision taken in respect of question no.1 of the application. In case, this question is decided in favour of the applicant, determining the arms length price for the shares under sections 92 to 92F would not be required.

4. Dr. Anita Sumanth, the learned counsel appearing for the applicant, laid great emphasis on the provisions of section 90, more particularly, sub-section (2) thereof. She argued that sub-section (1) of this section empowered the central government to enter into an agreement with a foreign country for avoidance of double taxation and for granting tax relief. As per sub-section (2), where such an agreement existed, the provisions of the Act would apply to the extent these were more beneficial to the assessee. In the present case the provision of article 13(5) of the DTAA was more beneficial to the assessee than the provisions of the Act. Therefore, the proposed transaction should not be taxed in India. As the applicant would have no liability to pay tax in India, there was no question of deduction of any tax at source. She placed reliance for this proposition on the ruling dated 21 August 2006 of this Authority in the case of M/S Honeywell Technologies SARL. According to her, for the same reason, the applicant would not be required to file any tax return in India, and the provisions relating to determination of arms length price would not be attracted. She further argued that if tax at source were to be deducted and the applicant were to file tax return in India, it would make the provision of Sub-section (2) of section 90 otiose.

5. None appeared for the department of revenue. - 4 -

6. The main issue that needs to be determined first in this case is, as to whether the proposed transaction would be taxable under the Act. If the answer is in the affirmative, then the next question would be how far such liability would be affected by the provisions of the DTAA. It would be useful at this stage to refer to the relevant provisions of the Act. As per section 4(1), income-tax shall be charged in accordance with and subject to the provisions of the Act on the total income of the previous year. The scope of total income has been given in section

5. sub-section (1) of this section specifies the scope of total income and makes it subject to the provisions of the Act. As per sub-section (2), the total income of a non-resident includes all income from whatever source derived which accrues or arises; deemed to accrue or arise in India. Further, section 9(1)(i) reads as follows 9(1) The following incomes shall be deemed to accrue or arise in India :

(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. ** ** ** ** ** ** ** ** ** The applicant is a non-resident. It proposes to transfer its capital assets in India. The resulting income, therefore, would be deemed to accrue or arise to it in India in terms of section 9(1)(i) of the Act. As such, this income should have been included in its total income, and should have been chargeable to income-tax in India, but for the provisions of the DTAA. - 5 -

7. The Central Government has entered into the DTAA with the Govt. of the Kingdom of the Netherlands under sub-section (1) of section 90 of the Act. Article

13 of this agreement deals with capital gains. Clause (5) of this article which is most relevant for the present consideration, is extracted below : Gains from the alienation of any property other than that referred to in paragraphs 1,2,3 and 4, shall be taxable only in the State of which the alienator is a resident. However, gains from the alienation of shares issued by a company resident in the other State which shares form part of at least a 10 per cent interest in the capital stock of that company, may be taxed in that other State if the alienation takes place to a resident of that other State. However, such gains shall remain taxable only in the State of which the alienator is a resident if such gains are realized in the course of a corporate organization, reorganization, amalgamation, division or similar transaction, and the buyer or the seller owns at least 10 per cent of the capital of the other. It is seen from the above that in the case of transfer of shares of a company in pursuance of a corporate reorganization, where the buyer or the seller owns at least 10 per cent of the capital of the other, the resulting capital gains shall be taxed only in the State of which the transferor is a resident. In the case before us, the transferor, i.e., the applicant, is a resident of the Netherlands; it holds the entire share capital of the transferee company, namely the Cordys; and it is transferring 100 % of its shares held in Cordys India to the Cordys. As such, in terms of the above provision of the DTAA, the resulting capital gains would be taxable in the Netherlands. Sub-section (2) of section 90 addresses this type of situation where the provisions of the Act and those of a DTAA are at variance. It states that to the assessee to whom a DTAA applies, the provisions of the Act shall apply to the extent these are more beneficial to it. It would be apt here to - 6 - refer to the decision of the Supreme Court in U.O.I vs Azadi Bachao Andolan(1), in which the apex court has held as follows : The provisions of sections 4 and 5 of the Act are expressly made subject to the provisions of this Act, which would include section 90 of the Act. As to what would happen in the event of a conflict between the provision of the Income-tax Act and a notification issued under section 90, is no longer res integra. If it was not the intention of the Legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections subject to the provisions of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income-tax Act in the matter of ascertainment of chargeability to income-tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC. The Supreme Court subsequently reiterated the above views in Commissioner of Income-tax vs P.V.A.L Kulandagan Chettiar(2) case. In view of the well settled legal position on the subject, we have no hesitation in holding that the resulting capital gains, if any, shall be taxable in the Netherlands.

8. We may now turn to the question of deduction of tax at source. Sub-section (2) of section 4 reads as under : (2) In respect of income chargeable under sub-section(1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act. (1) 263 ITR 706 (2) 267 ITR 654 - 7 - Further, section 195, inter alia, states that a person responsible for paying to a foreign company any interest or any other sum chargeable under the provisions of this Act shall deduct income-tax at the rates in force. This section is a part of Chapter XVII of the Act which deals with collection and recovery of tax. The purpose of the provisions of this chapter, as contained in section 190, is that prior to regular assessment being made, the tax on income shall be payable by deduction or collection at source or by advance payment, etc.. Tax at source is to be deducted under this chapter only if the income is taxable under the Act. In Cooper Engineering Ltd. Case(3), the question was deduction of tax on payment of interest to a non-resident under the erstwhile provisions of section 18(3B) of the Act. The Bombay High Court held as follows : Therefore the position upon the statute is this that unless any payment of interest is such that that interest is chargeable under the Act, the liability upon the person responsible for paying it to deduct the tax at source is not there. In the present case, upon the facts found we have already shown that the amount of interest payable to M/s Tata Ltd., London was not an amount chargeable under the Act. Therefore, there was no obligation upon the assessee to deduct the amount of interest at source. The Authority has also dealt with this question in a number of previous cases and consistently held the view that chargeability to tax is a condition precedent to deduction of tax at source. In Al Nisr case(4), the question was whether the advertisement revenue remitted out of India by the agents of the non- resident applicant, was subject to deduction at source under section 195 of the Act. This Authority considered the issue in the light of the DTAA between India and UAE and the provisions of the Act. It came to the conclusion that the agent had an independent status within the meaning of article 5 of the DTAA, and the non-resident applicant had no permanent establishment in India within the (3) 68 ITR 457 (4) 239 ITR 879 - 8 - meaning of article 7 of the DTAA. On the basis of this, the Authority determined that the commission received in India was not taxable in the hands of the applicant. Therefore, there was no obligation to deduct tax at source from its remittance. In Honeywell Technologies SARL(5), the Authority was considering the tax liability of a non-resident company in respect of an assignment proposed to be made by it to its Indian subsidiary, of a contract of supply of certain equipments to an Indian company. One of the questions put before the Authority was whether in the event of the transaction not been taxable in India, the assignee company will still be liable to withhold tax under section 195. The Authority held that as the consideration payable under the deed of assignment was not chargeable to tax under the provisions of the Act, section 195 would not be attracted. In the light of the foregoing discussion, we are of the view that no taxes need be deducted at source in this case, since the capital gains in question would not be liable to tax under the provisions of the Act read with the aforementioned provision of the DTAA.

9. So far as filing of income-tax return is concerned, it may be mentioned that the liability to pay tax is founded upon sections 4 and 5 of the Act, which are the charging sections. Section 139 and other sections are merely machinery sections to determine the amount of tax. There would be no occasion to call a machinery section in aid where there is no liability at all. Reference in this connection may be made to Chatturam vs CIT(6). We are, therefore, of the view that the applicant will not be required in this case to file any tax returns.

10. Coming to the question of transfer pricing, it is seen that sections 92 to 92F are contained in Chapter X of the Act under the heading Special Provisions Relating to Avoidance of Tax. These provisions are aimed at preventing avoidance of tax by certain well known devices, determination of arms length price, computation of income in certain cases, etc., in relation to international (5) AAR No.667 of 2005 (6) 15 ITR 302 - 9 - transactions. These are again machinery provisions which would not apply in the absence of liability to pay tax.

11. In the light of the above discussion, we rule on the questions raised by the applicant as follows :

i) In view of the provisions of the Act read with the provisions of the DTAA, no taxable capital gains would arise in India. ii) As no tax will be payable in India, no tax will be required to be deducted under section 195 of the Act. iii) In view of what we have held above, the applicant will not be required to file any return under section 139 of the Act in respect of the transaction in question. iv) The provisions of sections 92 to 92F will also not be attracted. Pronounced in the open Court of the Authority on this 31st day of January, 2007. Sd/- (JUSTICE S.S.M. QUADRI) CHAIRMAN Sd/- (A. SINHA) MEMBER - 10 -