In the above case, the Madras High Court was confronted with a scenario wherein Redington, a Listed Indian Company, transferred its whole shareholding in a foreign subsidiary to another step down foreign subsidiary without consideration and stated that this same transfer of shares was not subjected to capital gains tax under the exemption provisions of Section 47(iii) of the Income-tax Act, 1961. The department, on the other hand, stated that the Act includes Section 47(iv), a special clause concerned with a company's transfer of shares to its subsidiary, and does not exclude a transfer of shares to a foreign subsidiary and that the special provision would take precedence over the general provision.

Furthermore, since the trade was international, the terms of Transfer Pricing were applied. Although holding that a corporation can give a legitimate gift to another company under Sections 5 and 122 of the Transfer of Property Act, the court noted that the sale in the present case wasn't really voluntary and that the document was insufficient and there was no indication in the records, Board resolutions, or other documents showing that there was any intention of making a gift.

A determined intention to divest the holding to the other venture capital firm also prompted the move. Following McDowell's ruling, the Court granted the department's appeal, upholding the inclusion of more than Rs 600 crores. The above decision goes into great detail on the components of a legal donation, the need for adequate paperwork before making the gift, and any tax planning.


The key point of contention, in this case, is the company's right to an exception under section 47(iii) for a gift of shares to its step-down subsidiary for the fiscal year 2009-10. Redington Gulf FZE (RGF), the assessee's owned and operated affiliate was primarily focused on activities in the Middle East and Africa. The assessee later formed a wholly-owned subsidiary in Mauritius in July 2008 named RIML. In exchange, RIML formed a wholly-owned subsidiary (RIHL Cayman) in the Cayman Islands. The assessee's entire holding was passed. On the 13th of November, 2008, RGF Gulf made a gift to RIHL Cayman.

RGF Gulf had become a step-down subsidiary of RIML and the assessee as a result of this gift of shares. RGF Gulf had become a step-down division of RIML and the assessee group as a result of this gift of shares. A week later, a private equity firm invested USD 65 million in the step-down affiliate RIHL Cayman, acquiring a 27.17 percent stake. The Transfer Pricing Officer (TPO) added to the net revenue in the assessment process, claiming that such contributions had a valuation on the date of gift that was not excluded under the Income Tax Act and that since these securities were given to another subsidiary, the exchange had to be treated as a sale.

As a result, the TPO estimated the assessee's long-term capital gains to be Rs 610.16 Cr by ascribing the value to the gifted shares. As a result, the TPO estimated long-term capital returns in the assessee's hands to be Rs 610.16 Cr, based on the valuation of the gifted shares. The ITAT decided to exclude this addition. The case was taken to the High Court by the Income Tax Authorities.


The shares were only exchanged as part of the restructuring of the assessee's RGF investments, and they were not given as a gift. The term "gift" was not included in the share transfer forms or the records of the Board Meeting, implying that the whole deal is a restructuring. The restructuring will come under Section 47(iv) or Section 47(v) exemptions, but only if the clauses' requirements are met, and because the conditions are not met throughout this situation, this exception isn't really applicable.

Section 92B (transfer pricing provisions), which had been modified by a retrospective definition expanding the context of "international transaction" to include corporate restructuring or reorganization undertaken by a corporation with its affiliate entity, cover these transactions (law enacted by the Finance Act 2012 with retrospective effect from 1-04-2002). In addition, the sale does not meet the meaning of a gift under section 122 of the Transfer of Property Act (TP Act). According to the company's CFO, this cross-border trade provided economic advantages to the company, and therefore this is not a gift. The retros have not been challenged by the assessee. The assessee hasn't really contested the law's retroactive suitability, so the term added in 2012 is squarely applicable. Since the deal was tax evasive, it cannot be accepted.


The transactions were conducted in accordance with local laws of the countries in which these firms were formed, and a corporation was formed in the Cayman Islands because the new owner only wished to invest in the Middle East and South Africa activities. Also, the resulting PE investment is fraught with several requirements that have to be met by the PE investor at the time of exit, such as re-acquiring at a value that guarantees him a certain proportion of the return on the investment. The ITAT also accepted that the transaction is a gift and that there were no capital gains therefore there is no consideration.

Multiple court rulings exist, including the Supreme Court's judgment in Siemens Communications Network Private Limited, which ruled that a loss refunded by the original German company to the Indian subsidiary was not taxable in the possession of the Indian company, demonstrating that any economic advantage gained cannot be used against the assessee. The department has re-characterized the purchase, which is prohibited under the statute due to the enactment of GAAR regulations because the department has re-characterized a gift transaction as a sale transaction. The transaction cannot be classified as a hoax, and it cannot be taxable because no income has been accumulated in the pockets of the assessee.


A living person includes a corporate body under Section 5 of the TP Act, so a company can deliver a donation under Section 5 of the TP Act. Under the TP Act, a donation must have the following characteristics: (a) no consideration (b) the donor (c) the donee (d) to be voluntary (e) the subject matter (f) transfer (g) acceptance. It is undeniable that there have been transactions that do not count as gifts under Section 122 of the TP Act but do classify as gifts for the purposes of levying tax under the Gift Tax Act. In deciding if the Gift is voluntary, the Indian Contract Act pertaining to free consent will be used.

Because the transfer of shares is for restructuring, the donor's unconditional approval is absent in this situation, as shown by the board resolution, because the actual act of confirming the transfer of shares and execution of the deed of share transfer may correspond with the mental act—that is, the desire to render the gift. The assessee's sole goal was to restructure in order to allow a third-party investor to invest in the Cayman Islands Business. As a result, voluntariness in this share conversion is ruled out. The way in which the sale was carried out, as well as the fact that the investment ended up in a tax haven, would plainly demonstrate that this was a sham deal. As a result, the transaction will not count as a legal Gift under Section 122 of the TP Act. As a result, the transaction will be subjected to Tax under the heading "capital gains" under Section 45 of the Act. In response to the assessee's reference of the Supreme Court judgments in Sunil Siddharthabhai & B. C Srinivasa Setty, the court held that "these decisions were rendered on an idealistic factual basis without any claims against the assessee who had made questionable transactions to avoid the tax net from the Indian continents."

The reason that no dividend has been announced by Cayman Islands Company to date cannot be used to decide if the assessee's gift hypothesis is legitimate and permanent. The actual dividends announced by the Gulf company that accumulated to the Cayman Islands company and the dividends reported by the Cayman Island company to the Mauritius company in the FY 2010-11 & 2011-12 demonstrated that profits have been shifted outside the country due to the above restructuring, and even if the Gulf entity is disposed of in the prospect, the benefit will accrue to the Cayman Island Company and not with the Mauritius Company. Many of the assessee's rulings quoted in favor of the claims were also dismissed by the HC.

The decision resolved a number of legal issues, including whether Redington's trademark registration fee paid to one of its companies for a licensed label it already possessed should be deducted from its tax bill. The Income Tax Appellate Tribunal (ITAT) had heard Redington's argument against the Income Tax Department's judgment that benefits gained on the transfer of shares in its foreign affiliates were taxable. The ITAT decided in the company's favor. The high court reversed the ITAT ruling and directed Redington to pay over 1.4 billion dollars in taxes (US$19.13 million). The court ruled that the transfer of shares to affiliates would not be a gift, as the corporation said, and therefore did not qualify for tax exemption.

The respondent got no consideration when certain branches were established in Mauritius and the Cayman Islands just before the transaction. This would be a means for the parent organization to stop paying taxes in India, and the companies have been used as gateways. About the fact that the respondent was the owner of the trademark Redington, the parent company in India demanded a tax exemption on the trademark license charge it paid to its affiliate in Singapore. The transfer pricing officer challenged this subject (TPO). Redington disputed their right to do so, claiming the tax calculation was not under their purview.

A parent business cannot reasonably pay a premium to a subsidiary company for using a name used by the parent company, according to the TPO. The corporation has not given any documentation that the trademark was held by the Singapore subsidiary or that it was registered in Singapore. The TPO ruled that the trademark and license fees should not be deducted from taxes. The ITAT agreed with Redington's submission and permitted the corporation to demand a tax advantage without the transaction being scrutinized.

The commissioner testified in front of the high court that the parent firm had been using the Redington name since 1993, had filed for trademark protection in 2000, and had received the certificate of registration in 2009. The Singapore entity was founded in 2005, several years after the Indian entity started using the trademark. In 2006, the parent company and the affiliate reached an agreement for the name to be used in Singapore. The commissioner said that the ITAT made a mistake because the transaction was absurd. The TPO had no right to challenge this, according to Redington, since it was a business transaction.

The corporation said that the Singapore firm owned the trademark and that it existed from an Indian branch until 1987. That year, the Indian company was renamed Redington and acquired the Singapore-based Redington. The trademark registration document also stated that the logo has been in use since 1986. The respondents did not have any evidence in favor of their claims. The court dismissed the claim that the Singapore entity was the legal owner of the mark due to a lack of supporting documentation. It was determined that the Indian corporation was the parent company and that the label has been in use since 1993.

A parent company paying a trademark licensing fee to its subsidiary company was absurd, particularly as the mark was licensed under the parent company's name and a license agreement for the respondent to use the mark had only been signed in 2006. The TPO was correct in questioning the exchange as insane, and the ITAT's conclusions were bizarre. The use of a company's logo is often licensed.

However, for fair commercial purposes and good consideration, this is normally accomplished by written consent. In this situation, the tax avoidance demonstrated by illogical spending would have gone unnoticed if a warning TPO had not challenged the act of a parent corporation paying its subsidiary a license fee for the right to use the logo that it possessed. The reality of intellectual property rights and similar deals must be closely scrutinized at all times.