The Delhi high court recently dismissed a writ petition filed by the tax department relating to transfer of shares of an Indian listed company between two non-resident entities.

In this case, US-based GoodyearBSE 0.12 % Tire and Rubber Company transferred its holding of 74% shares in Goodyear IndiaBSE 0.12 % to its Singapore subsidiary without any consideration.

The Authority for Advance Rulings (AAR) had ruled in 2011 that this particular transaction would not be subject to tax in India. The tax department filed a writ petition in the high court challenging the ruling.

Long-term capital gain on the sale of listed shares in the country is exempt from tax in India. Only securities transaction tax is paid on such deals. Capital gain is considered to be long-term if the shares listed in India are sold after a holding period of 12 months.

Given the facts of the case, the AAR had held that even if the 74% shareholding was transferred for a consideration and capital gains had arisen, it would be exempt from tax in India. Goodyear India was listed in India and the shares were a long-term capital asset in the hands of the US company, which was the transferor.

The high court accepted AAR's view. While dismissing the writ petition, the high court emphasized that it was not exercising any appellate jurisdiction. The tax authorities by filing a writ had only invoked the extra-ordinary jurisdiction granted under the Constitution to the high courts.

No illegality was pointed out in the AAR ruling and the high court saw no reason to interfere with it. Both the AAR order and the Delhi high court's ruling should now be read together.

Writ petitions filed by taxpayers are pending with various high courts. Some taxpayers, on the basis of the Goodyear order, fear that high courts may not intervene at all with an earlier order of the AAR. Thus, there will be no practical recourse available against an unfavourable AAR order.

Mukesh Butani, chairman of BMR Advisors, who represented Goodyear, said, "The dismissal of the writ petition in this case should not been seen as the reluctance of the high court to interfere with an earlier order of the AAR. In Goodyear's case, the court saw no necessity or reason to intervene in the order."

In its petition, the tax department had contended that the transaction between the US and Singapore companies involved treaty shopping. If the shares were sold by a US company, then under the India-US tax treaty, the capital gains would be subject to tax both in India and the US.

However, if the shares were sold by the Singapore company, the capital gains would be taxed only in Singapore under the India-Singapore tax treaty.

In view of the fact that India doesn't impose tax on long-term capital gains arising on transfer of listed shares of an Indian company, these arguments of the tax department were held to be inconsequential.