Augustus Capital Pte. Ltd. v. Dy. CIT [ITA No.
8084/Del/2018, dt. 15-10-2020] : 2020 TaxPub(DT) 4312 (Del.-Trib.)
Indirect transfer of shares outside India and taxability of
non-resident in India
Facts:
Assessee a resident of Singapore was a venture capital
investor. They invested in the shares of another Singapore entity Accelyst Pte.
Ltd. in equity and preference shares worth Rs. 4.91 crores. The said shares of
Accelyst was sold to an Indian entity Jasper Infotech Pvt. Ltd. for Rs. 41.24
crores on 27-3-2015 who withheld Rs. 17.84 crores @ 43.26% as TDS on the said
sale consideration. It was the plea of the assessee that the said indirect
transfer of shares outside India of shares of a foreign company was not subject
to capital gains tax in India as section 9(1)(i) Explanations 5/6/7 have to be
read coherently. Revenue contested that the said consideration was taxable as
capital gains in India disregarding Explanation 7 to section 9(1)(i) citing
that explanation 7 ought to be read only prospective with effect from 1-4-2016
and not retrospective as such an intent was not there while the explanation was
introduced by the legislature. The DRP acceded to the tune of assessing
officer. On higher appeal --
Held in favour of the assessee that the indirect transfer of
shares to be taxable has to fit into the conditions of Explanation 5/6 of
section 9(1)(i) and since Explanation 7 was subsequently introduced to bring in
more clarity on the aspect of taxation of indirect transfers happening outside
India it has to be coherently read with Explanations 5/6 and thus the said
indirect transfer of shares were not subject to capital gains tax in India.
Applied: Copal
Market Research Limited 49 taxmann.com 125 (Del-HC)
Read into: Vodafone
International Holdings B.V. (2012) 341 ITR 1 (SC) : 2012 TaxPub(DT) 0370 (SC)
Editorial Note: The
basic premise of the decision is that explanation 7 will need to be also read
retrospectively as it went on to clarify and liberalize the tax imbroglio what
happened after the retrospective tax provisions were ushered into the statute
post Vodafone International Holdings B.V. case to tax indirect transfers
as capital gains. But for the explanation any indirect transfer under the sun
with the remotest nexus to India will become taxable in India. The said
provisions are given as under just to recap.
"Explanation 5.--For the removal of doubts, it
is hereby clarified that an asset or a capital asset being any share or
interest in a company or entity registered or incorporated outside India shall
be deemed to be and shall always be deemed to have been situated in India, if
the share or interest derives, directly or indirectly, its value substantially
from the assets located in India."
"Explanation 6.--For the purposes of this
clause, it is hereby declared that --
(a) the share or interest,
referred to in Explanation 5, shall be deemed to derive its value substantially
from the assets (whether tangible or intangible) located in India, if, on the
specified date, the value of such assets --
(i) exceeds the amount of ten
crore rupees; and
(ii) represents at least fifty
per cent of the value of all the assets owned by the company or entity, as the
case may be;
(b) the value of an asset shall
be the fair market value as on the specified date, of such asset without
reduction of liabilities, if any, in respect of the asset, determined in such
manner as may be prescribed;
(c) "accounting
period" means each period of twelve months ending with the 31st day of
March:
Provided that where a company or an entity, referred to in Explanation 5,
regularly adopts a period of twelve months ending on a day other than the 31st
day of March for the purpose of --
(i) complying with the
provisions of the tax laws of the territory, of which it is a resident, for tax
purposes; or
(ii) reporting to persons
holding the share or interest, then, the period of twelve months ending with
the other day shall be the accounting period of the company or, as the case may
be, the entity:
Provided further that the first accounting period of the company or, as the case may
be, the entity shall begin from the date of its registration or incorporation
and end with the 31st day of March or such other day, as the case may be,
following the date of such registration or incorporation, and the later accounting
period shall be the successive periods of twelve months:
Provided also that if the company or the entity ceases to exist before the end of
accounting period, as aforesaid, then, the accounting period shall end
immediately before the company or, as the case may be, the entity, ceases to
exist;
(d) "specified date"
means the --
(i) date on which the accounting
period of the company or, as the case may be, the entity ends preceding the
date of transfer of a share or an interest; or
(ii) date of transfer, if the
book value of the assets of the company or, as the case may be, the entity on
the date of transfer exceeds the book value of the assets as on the date
referred to in sub-clause (i), by fifteen per cent."
"Explanation 7.--For the purposes of this
clause, --
(a) no income shall be deemed to
accrue or arise to a non-resident from transfer, outside India, of any share
of, or interest in, a company or an entity, registered or incorporated outside
India, referred to in the Explanation 5,--
(i) if such company or entity
directly owns the assets situated in India and the transferor (whether
individually or along with its associated enterprises), at any time in the
twelve months preceding the date of transfer, neither holds the right of
management or control in relation to such company or entity, nor holds voting
power or share capital or interest exceeding five per cent of the total voting
power or total share capital or total interest, as the case may be, of such
company or entity; or
(ii) if such company or entity
indirectly owns the assets situated in India and the transferor (whether
individually or along with its associated enterprises), at any time in the
twelve months preceding the date of transfer, neither holds the right of
management or control in relation to such company or entity, nor holds any
right in, or in relation to, such company or entity which would entitle him to
the right of management or control in the company or entity that directly owns
the assets situated in India, nor holds such percentage of voting power or
share capital or interest in such company or entity which results in holding of
(either individually or along with associated enterprises) a voting power or
share capital or interest exceeding five per cent of the total voting power or
total share capital or total interest, as the case may be, of the company or
entity that directly owns the assets situated in India;
(b) in a case where all the
assets owned, directly or indirectly, by a company or, as the case may be, an entity
referred to in the Explanation 5, are not located in India, the income of the
non-resident transferor, from transfer outside India of a share of, or interest
in, such company or entity, deemed to accrue or arise in India under this
clause, shall be only such part of the income as is reasonably attributable to
assets located in India and determined in such manner as may be prescribed;
(c) "associated
enterprise" shall have the meaning assigned to it in section 92A;"