2020 (3) TMI 1313 - AAR - Income Tax

Income accrues or arises in India - contention of the assessee is that the sum would not be taxable since the shares of AIS do not derive their value substantially from asset located in India - share in a company incorporated outside India shall be deemed to be situated in India if the share or interest derives directly or indirectly its value substantially from the assets located in India - As the shares of AIS directly and indirectly derive less that 50 per cent. of their value from assets located in India whether the income arising to the persons specified in Annexure III from the trans fer of shares in AIS to the applicant would be subject to tax in India ? - whether foreign companies cannot be assessed to tax under section 115JB of the Act? - whether Explanation 6 and Explanation 7 inserted by the Finance Act 2015 to section 9(1)(i) of the Income-tax Act are retrospective or prospective in nature? - As the shares of AIS directly and indirectly derive less that 50 per cent. of their value from assets located in India whether the income arising to the persons specified in Annexure III from the trans for of shares in AIS to the applicant would be subject to tax in India ? - HELD THAT - In agreement with the view of learned authorised representative that Explanation 6 is clarificatory in nature and would apply retrospectively. Similarly Explanation 7 inserted to address the genuine concerns of small shareholders would also apply retrospectively to give meaning in true sense and to render indirect transfer provisions contained in Explanation 5 to section 9(1)(i) of the Income-tax Act workable. AR has indicated that as per the valuation report obtained from the independent valuer the value of shares of AIS derived directly or indirectly from assets located in India is 26.38 per cent. i. e. less than 50 per cent. In view thereof the income from transfer of shares in the hands of transferors is not subject to tax in India. Applicants and Seowyan Investments are based in Cayman Islands with whom India does not have comprehensive DTAA. Also in the case of Pacific Ace Development Limited a resident of Hong Kong with whom the comprehensive DTAA came into force in respect of income derived in India with effect from April 1 2019. AR had asserted that during the financial year 2013-14 both the foreign companies are not required to seek registration under the Companies Act 2013 Companies Act 1956 or any other law for the time being in force relating to companies in India. In view of the said averments by learned authorised representative and also considering the provisions of section 115JB of the Income-tax Act the conditions laid down in section 115JB are satisfied and there is no applicability of section 115 to the above referred foreign companies. Consequently there is no liability the buyer applicant is not required to withhold taxes in respect to the payment made to transferor of shares. Revenue had questioned the valuation methodology the Revenue may verify the computation furnished by the applicant as per rule 11UB and rule 11UC. It is reiterated that the ruling is given on matter of principle i. e. retrospective/prospective application of Explanations 6 and 7 and based on the figures presented before us by learned authorised representative. If subsequently it is found that the figures are at variance and the actual percentage exceeds 50 per cent. the ruling would not apply and the Revenue would not be bound by such ruling. If it is found that the actual percentage is more than 50 per cent. then the Revenue may also ascertain the shareholding of each of the seller applicants at any time in 12 months preceding the date of transfer and/or the right of management or control in relation to AIS and thereafter if need be ascertain the income reasonably attributable to non-resident transferors in terms of Explanation 7(a) and 7(b) to section 9(1)(i) of the Income-tax Act. Further if it is discovered later on that the conditions laid down in 115JB are not satisfied the transferor foreign companies would be subject to section 115JB. Ruling - - Questions Nos. I and II - Explanations 6 and 7 to section 9(1)(i) of the Income-tax Act are clarificatory in nature and would apply retrospectively and therefore the incomes from transfer of shares in the hands of transferors are not subject to tax in India. - Questions Nos. III to V - Does not arise in view of reply to I and II above - Question No. VI - Section 115JB is not applicable to Seowyan Investments and Pacific Ace Development Limited. - Questions No. VII - There is no liability under section 195 of the Income-tax Act of the Moody s Analytics Knowledge Services (Jersey) Limited to withhold taxes in respect to the payment made to transferor of shares.

Summary

Issues Involved:

1. Retrospective applicability of Explanations 6 and 7 to Section 9(1)(i) of the Income-tax Act.
2. Taxability of income arising from the transfer of shares in AIS in India.
3. Rate of tax applicable if income is taxable.
4. Applicability of Explanation 7(a) to Section 9(1)(i) concerning voting power, share capital, or management control.
5. Attribution of income to assets located in India under Explanation 7(b) to Section 9(1)(i).
6. Applicability of Section 115JB to foreign companies Pacific Ace Development Limited and Seowyan Investments.
7. Withholding tax liability under Section 195 of the Income-tax Act.

Detailed Analysis:

I. Retrospective Applicability of Explanations 6 and 7 to Section 9(1)(i):

The Authority for Advance Rulings (AAR) concluded that Explanations 6 and 7 to Section 9(1)(i) of the Income-tax Act are clarificatory in nature and have retrospective effect. Explanation 6 defines "substantially" as 50% or more, aligning with judicial interpretations and the recommendations of an Expert Committee. Explanation 7 addresses concerns of small shareholders and is also deemed retrospective to render the indirect transfer provisions workable.

II. Taxability of Income from Transfer of Shares in AIS:

Given that the value of shares in AIS derived directly or indirectly from assets in India is less than 50% (26.38% as per the independent valuation report), the income from the transfer of shares is not subject to tax in India. The AAR emphasized that the ruling is based on the principle of retrospective application and the figures provided. If the actual percentage exceeds 50%, the ruling would not apply, and the Revenue would not be bound by it.

III. Rate of Tax if Income is Taxable:

Since the income from the transfer of shares is not subject to tax in India due to the less than 50% value derived from Indian assets, the question of the applicable tax rate does not arise.

IV. Applicability of Explanation 7(a) to Section 9(1)(i):

Explanation 7(a) states that income from the transfer of shares would not be taxable in India if the transferor, along with associated enterprises, did not hold voting power, share capital, or management control exceeding 5% during the 12 months preceding the transfer. The AAR noted that the eight sellers, except Michael Joseph Morierty, satisfied these conditions, thus the income from the transfer of shares would not be taxable in their hands.

V. Attribution of Income to Assets Located in India under Explanation 7(b):

Explanation 7(b) clarifies that only the portion of income attributable to assets located in India would be taxable. The AAR agreed with the applicant's contention that this should apply retrospectively, ensuring only the income reasonably attributable to Indian assets is taxed.

VI. Applicability of Section 115JB to Foreign Companies:

Section 115JB does not apply to Pacific Ace Development Limited and Seowyan Investments as they do not have a permanent establishment or business connection in India and were not required to seek registration under Indian company laws during the financial year 2013-14. Therefore, the income arising to these foreign companies cannot be assessed under Section 115JB.

VII. Withholding Tax Liability under Section 195:

There is no liability for Moody's Analytics Knowledge Services (Jersey) Limited to withhold taxes under Section 195 in respect to the payment made to the transferors of shares, as the income from the transfer of shares is not taxable in India.

Conclusion:

- Explanations 6 and 7 to Section 9(1)(i) are retrospective, and income from the transfer of shares is not taxable in India as the value derived from Indian assets is less than 50%.
- Section 115JB does not apply to the foreign companies involved.
- There is no withholding tax liability under Section 195 for the buyer.