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Tax Publishers 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;"

Tax Publishers

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;

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;