2011 (3) TMI 1439 - HC - Income Tax

TDS u/s 195 - Indirect acquisition of 51% shares in Sesa Goa Ltd. without deduction of tax at source - held that - What is under challenge is only the show cause notice issued as per section 195 of the Act. It is for the petitioner to urge all contentions before the respondent authority pursuant to such show cause notice issued to contend that the purchase of 51% shares does not amount to transfer of capital asset. Though the petitioner contends that the agreement entered into is produced, that itself is not sufficient to know as to the nature of transaction between Finsider International Company Ltd. and Sesa Goa Ltd. which is an Indian Company. - Petitioner to appear before the respondent authority.

Issues:
1. Tax liability on the acquisition of shares in an Indian company by a foreign entity.
2. Obligation to deduct tax at source on the purchase of shares.
3. Interpretation of capital gains in the context of share acquisition.
4. Application of Income-tax Act provisions on international transactions.

Issue 1: Tax liability on the acquisition of shares in an Indian company by a foreign entity

The petitioner, a Cyprus-based company, acquired 60% shares in a UK company, which in turn held 51% shares in an Indian company. The Revenue issued a notice alleging indirect acquisition of shares without tax deduction. The petitioner argued that share acquisition does not constitute acquisition of immovable property or capital gains. The Revenue contended that the share transfer amounted to a capital asset transfer under the Income-tax Act.

Issue 2: Obligation to deduct tax at source on the purchase of shares

The Revenue claimed that as per section 195 of the Act, any payment to a non-resident is subject to tax deduction at source. The petitioner, Richter Holding Ltd., was expected to deduct tax on the purchase of shares in the Indian company. The Revenue relied on a previous case involving a similar non-resident share acquisition scenario to support its position on tax deduction obligations.

Issue 3: Interpretation of capital gains in the context of share acquisition

The petitioner argued that the acquisition of shares does not amount to the transfer of a distinct capital asset. Citing legal precedents, the petitioner contended that controlling interest is not an independent capital asset and the transaction nature should be determined by the contract terms and surrounding circumstances. The Revenue, however, maintained that the share transfer constituted a capital asset transfer under relevant sections of the Income-tax Act.

Issue 4: Application of Income-tax Act provisions on international transactions

The Court emphasized that the petitioner needs to present all contentions before the respondent authority to challenge the show cause notice. It was deemed premature to conclude that there was no tax obligation avoidance, and further investigation was necessary to ascertain the real nature of the transaction. The Court highlighted the importance of lifting the corporate veil to understand the transaction's true essence and determine if there was an indirect transfer of assets and interests in the company.

In conclusion, the Court directed the petitioner to appear before the respondent authority to present their case and receive appropriate orders in accordance with the law, thus disposing of the petition.

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