Shares Transferred By Redington India To Its Step Down Subsidiary Not Eligible For Tax Exemption: Madras High Court

The Madras High Court has held that transfer of shares by Redington India to its step down subsidiary cannot be categorized as valid gift and is not eligible for tax exemption.

The court observed that the incorporation of the company in Mauritius and Cayman Island just before the transfer of shares is undoubtedly a means to avoid taxation in India and the said two companies have been used as conduits to avoid income tax. 

Redington India (RI) had set up a new wholly owned subsidiary in Mauritius in July, 2008, viz., RM with an initial investment of USD 25,000 (Rs.10.78 Lakhs). RM, thereafter set up a wholly owned subsidiary RC in Cayman Island, which started its operation from 14.07.2008. The assessee (RI) transferred without consideration its entire shareholding in Redington Gulf FZE (RG) to RC on 13.11.2008 pursuant to which, RG become a step down subsidiary of RM. The assessing officer held that the voluntary transfer of shares of RG by the assessee without consideration to RC, Cayman Islands was held to be not valid gift and not covered under Section 47(iii) of the Income Tax Act, 1961.

The Income Tax Appellate Tribunal, in appeal by the assessee held that the transfer of shares made by the assessee to its step down subsidiary Redington International (Holdings) Limited, Cayman (RC) is gift eligible for exemption under Section 47(iii) of the Act and no capital gain tax is imputable to the said transfer of shares. Assailing this order, the revenue contended that the transaction having been done only as a measure of restructuring of the assessee, it is not a gift and the concept of gift was never in the mind of the assessee when the Board took a decision or when the deed of share transfer was executed.

One of the substantial questions of law discussed in this case was whether the ITAT was right in applying the General provision Law ignoring the specific provisions of sub Section 47(iv) and holding that the transfer of shares by the assessee to its wholly owned subsidiary is to be considered as a Gift. Redington's contention was that transfer of shares by the assessee (RI) to RC is without consideration, it is covered by Section 47(iii) and not 47(iv) of the Act, as the said provision covers transaction between a parent and its wholly owned subsidiary and RC is not a wholly owned subsidiary of the assessee.

The bench comprising Justices TS Sivagnanam and V Bhavani Subbaroyan observed the manner in which the transfer was effected and ultimately the investment landing in a tax haven will clearly show that it is a sham transaction devised to avoid tax in India. The court said:

"Thus, the asset owned by the assessee viz., the shares in RG, which were hither to within the network of the Indian tax laws, stood shifted to Cayman Island which is a tax haven. Therefore, it is evidently clear that the entire transaction was so structured to accommodate the third party investor, who has put certain conditions even prior to effecting the transfer and this has been spelt out by the CFO of the assessee in his sworn statement wherein, he would candidly admit that as per the request of the third party investor, they had incorporated RC and, RG's shares were transferred to RC. Thus, the factual matrix clearly demolishes the case of the assessee, as there is absolutely no voluntary element, it was executed for consideration and therefore, it fails to satisfy the test laid down in Section 122 of the TP Act to qualify as a valid gift. If such is the factual position, the transfer would attract Section 45 of the Act and would be chargeable to income tax under the head "capital gains"."

The other two issues were: 1) Whether the order of the ITAT upholding the decision of the Dispute Resolution Panel in granting10% risk adjustment allowance is not perverse? 2) Whether the order of the ITAT in allowing the claim of Trade Mark Fee and deleting the addition on account of Corporate and Bank Guarantee are not perverse?. These questions were also answered in favour of revenue by allowing its Tax Appeals.

Case: Principal Commissioner of Income Tax 5, vs. M/s.Redington (India) Limited [T.C.A.Nos.590 & 591 of 2019]

Coram: Justices TS Sivagnanam and V Bhavani Subbaroyan 

Counsel: Standing Counsel R.Hemalatha,T.Ravi Kumar and Sr. Adv Percy Pardiwalla

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