2020 (10) TMI 751 - AT - Income Tax

Income accrued in India - transaction involving sale of shares of foreign company held investment - AO asked the assessee to explain as to why capital gains arising from sale of shares from Accelyst to Jasper Infotech Private Limited should not be brought to tax in India u/s 9(1)(i)? - Scope of amendment to section 9(1)(i) - HELD THAT - Explanations 6 and 7 have to be read with Explanation 5 to understand the provisions of Section 9(1)(i) of the Act. Since Explanation 5 has been given retrospective effect and Explanations 6 and 7 have been inserted in furtherance of the object of insertion of Explanation 5, these two explanations cannot be read in isolation, but have to be tagged alongwith Explanation 5 so that both the Explanations have to be given a retrospective effect, keeping in mind the decision of the Hon'ble High Court of Delhi in the case of Copal 2014 (8) TMI 606 - DELHI HIGH COURT Direct the Assessing Officer to read Explanation 7 as applicable for the year under consideration and delete the impugned addition.

Summary

Issues Involved:

1. Applicability of Explanation 7 to Section 9(1)(i) of the Income-tax Act, 1961.
2. Determination of taxability of capital gains from the sale of shares of a foreign company.

Issue-wise Detailed Analysis:

1. Applicability of Explanation 7 to Section 9(1)(i) of the Income-tax Act, 1961:

The core issue revolves around whether Explanation 7 to Section 9(1)(i) of the Income-tax Act, 1961, should be applied retrospectively or prospectively. The appellant contended that Explanation 7, introduced by the Finance Act, 2015, should be read with Explanation 5, which was introduced by the Finance Act, 2012, with retrospective effect from 01-04-1962. The appellant argued that Explanation 7 should also have a retrospective effect. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) held that Explanation 7 is prospective, effective from 01-04-2016, and thus not applicable to the assessment year 2015-16.

2. Determination of Taxability of Capital Gains from the Sale of Shares of a Foreign Company:

The appellant, engaged in the business of incubation of companies, invested in Accelyst Pte Ltd, a Singaporean company. The shares of Accelyst were sold to Jasper Infotech Private Limited, an Indian company, for ?41,24,35,969/-. The buyer withheld taxes at source amounting to ?17,84,19,800/-. The appellant believed the transaction was not taxable in India under the amended provisions of Section 9(1)(i), read with Explanations 5, 6, and 7. The AO disagreed, stating that Explanation 7, being prospective, did not apply to the assessment year 2015-16. Consequently, the AO assessed a long-term capital gain of ?36,33,15,969/-.

Judgment Analysis:

Applicability of Explanation 7:

The Tribunal examined the legislative intent and the context of the amendments. Explanation 5 was introduced to clarify that shares or interests in a foreign company deriving substantial value from assets located in India would be deemed situated in India. This was to counter the Supreme Court's decision in Vodafone International Holdings B.V. The Shome Committee was constituted to address ambiguities, leading to the introduction of Explanations 6 and 7 by the Finance Act, 2015. The Tribunal noted that both Explanations 6 and 7 start with "For the purposes of this clause," indicating they should be read with Explanation 5. Since Explanation 5 was retrospective, Explanations 6 and 7, introduced to clarify and further the objectives of Explanation 5, should also be read as retrospective.

Taxability of Capital Gains:

The Tribunal considered the recommendations of the Shome Committee and the decision of the Delhi High Court in Copal Market Research Limited, which emphasized that income must have a territorial nexus with India to be taxable. The Tribunal noted that Explanations 6 and 7 were introduced to provide clarity and exemptions for small investors and should be read in conjunction with Explanation 5. The Tribunal held that the AO erred in not applying Explanation 7 retrospectively for the assessment year 2015-16. Consequently, the impugned addition of ?36,33,15,969/- was deleted.

Conclusion:

The Tribunal allowed the appeal, directing the AO to apply Explanation 7 retrospectively and delete the addition. The judgment emphasized the need to read Explanations 6 and 7 with Explanation 5 to understand the provisions of Section 9(1)(i) comprehensively. The order was pronounced in the open court on 15.10.2020.