Client Stories

A listed Indian Pharma Company (IPC) carried out Contract R & D for its Swiss Subsidiary (SwissSub). Pharma products take many years to develop. So, year-on-year basis, huge R & D cost (Capital Expenditure) would be sitting in the books of the SwissSub, while IPC paid tax on Cost plus Mark-up earned for doing Contract R & D.

To enable IPC to claim Sec. 35 deduction on R & D cost and to save tax on Mark-up earned on Contract R & D, we designed a CCA. Under the CCA, both IPC and SwissSub became Co-Developers and shared the costs and risks of R & D, and became joint owners of the Patents developed through R & D. We ensured that the CCA met the current OECD BEPS recommendations and did not get caught by General Anti Avoidance Rule (GAAR)

‘M’ UK is a company incorporated in UK and is a wholly owned subsidiary of ‘M’ Japan. ‘M’ Japan, through its subsidiary ‘M’ UK, had in past invested in an Indian company (‘P’ India) – ‘M’ UK held 20% stake in ‘P’ India. ‘M’ Japan was proposing to liquidate ‘M’ UK, and sought our advice on a tax efficient manner of transferring the shares of ‘P’ India to ‘M’ Japan.

We explored various feasible Options. On liquidation, the liquidated company (the Transferor) no longer survives and so a question arose: in whose hands will the Capital Gains on distribution of assets by a company in liquidation be taxed, in absence of the Transferor? Answer is provided by Sec. 46 – a special provision for taxation of capital gains in hands of shareholders (not the transferor company) on distribution of assets by a company in liquidation. We took into account Sec. 46. We also looked at the India-UK and India-Japan DTAAs as well as the relevant case law. After a thorough legal research and robust analysis we recommended a tax efficient Option that can be successfully defended before the Tax Authorities and one that also complies with GAAR.

An Indian Telecom Company (ITC) owned certain Passive Infrastructure (PI) Assets. A third party Company (Transferee Company) wished to acquire those assets; ITC was willing to transfer the PI assets to that Company

To avoid the application of GAAR we gave following advice to ITC –

• Transfer the PI Assets to a newly formed Subsidiary at book value – that transfer is exempt from Capital Gains tax by virtue of Sec. 47 (iv).
• Six months after the transfer the Subsidiary may merge or amalgamate with the Transferee Company – amalgamation is a tax free event.
• On merger of the Subsidiary with the Transferee Company, the Taxpayer will receive shares of the Transferee Company worth fair market value of PI assets.
• The Board of Directors of ITC must record in their meeting that the PI Assets were transferred in order to achieve:
  • a commercial purpose of segregating the PI business and the telecommunications service business to enable further growth and maximize value in each of the businesses; improved quality of services to customers by establishing high service standards and delivering services in an environment friendly manner; increase in the speed of roll out of new services; efficiency through sharing of infrastructure; improved network quality and greater coverage; converting the PI assets into revenue generating assets.

Based on the above we can raise and defend the argument that the Main Purpose of the whole arrangement is a commercial purpose, and the arrangement is not a mere device to avoid taxes. Though, the arrangement in question was framed in such a way that the benefit of saving income-tax was obtained by ITC, that was done by the Company in its commercial wisdom. The Taxpayer has a choice to structure its non-tax commercial transactions in a manner which enables it to take benefit of exemptions provided under the Act and, thus, to minimize its taxes.

An Indian Listed Company (ILC) had a wholly owned Indian Subsidiary (IndSub). ILC also had a wholly owned Foreign Subsidiary (ForSub1) in Netherlands; IndSub too had a wholly owned Foreign Subsidiary (ForSub2) in Netherlands. Due to business reasons there was merger of ILC and IndSub. Because of that merger ILC was holding 100% shares of both ForSub1 as well as ForSub2. After that merger, there was also a merger of the two Netherlands Subsidiaries – that merger happened, under the Netherlands Merger Act, by way of absorption. Merger by way of absorption meant that no new shares were issued by ForSub1 to ILC, although the shares of ForSub2 held by IndSub were cancelled. So, ILC did not receive any consideration for extinguishment of investment in ForSub2. After the two mergers only ILC in India and ForSub1 in Netherlands survived.

We did in-depth research and came up with strong arguments to defend ILC’s position that no capital gain arose to ILC as there is no transfer, by way of either relinquishment of shares of ForSub2 or extinguishment of rights in those shares, and also because there was no consideration received by ILC.

An Indian Fertilizer Group needs to migrate its Brand Logo abroad by assigning the Logo to a Mauritius Company belonging to the Group. We need to do Valuation of the Logo and ensure that the transaction is in accordance with the OECD BEPS recommendations on Hard to Value Intangibles. Further, for subsequent inbound Licensing of the Logo to the Indian Entity, we have to benchmark the Royalty on Bloomberg or RoyaltyStat Databases – these are international databases.

We also have to provide a written opinion from the perspective of BEPS Action Points 8 to 10 (Guidance on applying the Arm’s Length Principle) and GAAR, where we will cover :

• what Development, Enhancement, Maintenance, Protection or Exploitation (DEMPE) Functions should be performed by each Group Entity, what Economically Significant Risks should be undertaken by each Group Entity, which Group Entities control the Economically Significant Risks, Indian Transfer Pricing implications of the Logo migration transaction, Transfer Pricing Risks to that transaction in the Post-BEPS scenario, GAAR impact analysis, and how to be GAAR compliant.

An Indian Subsidiary (IndSub) was manufacturing Extrusion Blow Moulding Machines under a license from its Parent Company located in Italy (ItalyParent). Under the ItalyParent-IndSub License Agreement, IndSub was authorized to manufacture the licensed product in any quantity on its own and distribute the licensed product worldwide. Further, ItalyParent (the Licenser) was obliged to provide IndSub (the Licensee) with manufacturing know-how and certain services in consideration of Royalty and Management Fees. The TPO disallowed the Royalty and Management Fees paid by IndSub.
To avoid such Transfer Pricing dispute in future we put in place a Contract Manufacturing Arrangement, reorganising IndSub’s business model from a Licensed Manufacturer to a Contract Manufacturer. We also explored the Toll Manufacturing model but rejected it because the Toll Manufacturing Arrangement could expose ItalyParent (the Principal Manufacturer) to PE risk in India, under the latest OECD BEPS recommendations. Under the Contract Manufacturing Arrangement IndSub will earn Cost plus Mark-up remuneration, instead of huge profits on sale of manufactured products. Also, no dispute on payments of Royalty and Management Fees will arise as these payments will no longer be made under the new Contract Manufacturing Arrangement

An Indian Subsidiary (IndSub) of a US Parent Company provides Contract R & D services to its Parent Company, for remuneration at Cost Plus 15% Mark-up. In view of the latest OECD BEPS recommendations we had to evaluate whether IndSub could be treated as a Co-Developer (instead of a Contract R & D Entity). Further, under the CBDT Circular 6/2013 we had to analyse the Functional Profile (Contract R & D Entity vs Co-Developer) of IndSub to determine whether IndSub ran the risk of being categorised as a Co-Developer. If IndSub could be categorised as a Co-Developer, then there was risk that TPO would apply the Profit Split Method, rejecting the Cost Plus Method of remuneration. Under the Profit Split Method the TPO could allocate substantial amount of combined Group profits to the Indian Entity.
Our in-depth analysis, including site visits, brought out that economically significant functions (conceptualization and design of the product, development of R & D projects, providing strategic direction and framework for R & D, control and management of R & D budget, etc.) were performed by the US Parent Company; IndSub played just a supporting role in the R & D endeavours of its Parent Company. This meant that the US Parent Company was the Entrepreneur Entity, while IndSub was a Contract R & D Service Provider Entity. So, IndSub was not a Co-Developer or Joint-Venturer in the R & D endeavours of its Parent Company.

An Indian Company (SellerCo) wanted to transfer one of its Business Divisions to an Unrelated Company (BuyerCo). To achieve Tax Efficiency without application of GAAR we gave following advice to SellerCo :

The Valuation Report valuing the Division should not allocate separate values to individual assets. Instead there should be a lump-sum value of the division.
The Division should be transferred as a whole along with all assets and liabilities.
The consideration (based on Valuation Report of an Independent Valuer) for transfer should be disbursed by way of allotment of shares of the BuyerCo. That will make it is a case of “exchange” and not a “sale”, and so the provisions of Sec. 50B read with Sec. 2(42C) [taxation of Capital Gains in a Slump Sale] will not apply and the transfer of Business Division will not be taxable as Slump Sale. (There are judicial precedents supporting the view that lump-sum consideration in form of shares is a case of “Exchange” not falling within Slump “Sale” provisions.)
The Board of Directors of SellerCo must pass resolution that the purpose of arranging for consideration in the form of shares (instead of money) is to participate in the future growth of the business and profit of BuyerCo.

SellerCo should not sell the shares of SellerCo, without participating in the future growth of the business of BuyerCo.
Based on the above we can strongly argue that the Main Purpose of the arrangement is a non-tax commercial purpose, and the arrangement is not a colourable device to avoid tax. Such argument will counter the application of GAAR.