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TMI Blog2020 (10) TMI 751X X X X Extracts X X X X X X X X Extracts X X X X ..... able for the year under consideration and delete the impugned addition. - Shri N.K. Billaiya, Accountant Member, And Shri Amit Shukla, Judicial Member For the Assessee : Shri Kanchan Kaushal, Adv, Shri K.M. Gupta, Adv, Shri Rishab Malhotra For the Revenue : Shri Satpal Gulati, CIT-DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, This appeal by the assessee is preferred against the order dated 30.10.2018 pertaining to A.Y 2015-16 framed u/s 143(3) r.w.s 144C(13) of the Income tax Act, 1961 [hereinafter referred to as 'the Act' for short]. 2. The sum and substance of the grievance of the assessee is that the Assessing Officer erred in assessing the total income at ₹ 36,33,15,970/-, as against NIL returned income, thereby denying applicability of provisions of Explanation 7 to Section 9(1)(i) of the Income-tax Act, 1961 [hereinafter referred to as 'The Act'] holding that the applicability of the said Explanation is prospective. 3. Briefly stated, the facts of the case are that the appellant company is in the business of incubation of companies i.e. providing new businesses, with necessary financial support and technical services. During the course of its business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tentionally made certain provisions effective from specific date, there should not be any speculation or doubt about its applicability from certain date in the past. If the Parliament has intended to introduce Explanation-7 with retrospective effect it would have made it so as it has done in case of Explanation4 5 of Section- 9(1)(i) of the Act. Therefore, it is clear that provisions of Explanation- 7 are not applicable the assessee's case as these are not applicable to AY 2015-16. 11. Accordingly, the Assessing Officer computed the long term capital gains arising from the transfer of shares of Accelyst as under: Particulars Amount (in INR) Total sale consideration of shares 41,24,35,969 Less: Cost of acquisition 4,91,20,000 Long term capital gain 36,33,15,969 Accordingly, addition of ₹ 36,33,15,969/- was proposed. 12. Aggrieved by the draft assessment order, the appellant filed objections before the DRP and the DRP, vide directions dated 14.09.2018, confirmed the order of the Assessing Officer by holding as under: 4.2 The assessee has made detailed submission to state that the amendments were brought by the Finance Act, 2012 (Explanation 4 5 to Section 9(1)(i)) with rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is the say of the ld. counsel for the assessee that Explanation6 and Explanation 7 have to be tagged with Explanation 5 and have to be considered of having retrospective effect. 17. Per contra, the ld. DR strongly supported the assessment order. The ld. DR stated that if the Legislature had the intention to give retrospective effect to Explanations 6 and7, then it would have made it specifically as was done when Explanation 5 was inserted which was specifically given retrospective effect from 01.04.1962. 18. Referring to Explanation 7, the ld. DR stated that it carves out exemption from the applicability of Explanation 5 to small investors holding no right of management or control of such company / entity and holding less than 5% of the total voting power, share capital, interest of the company/entity that directly or indirectly owns the assets situated in India. It is the say of the ld. DR that it is a substantive amendment, as it carves out certain class of taxpayers from the ambit of taxation on account of indirect transfer of property. 19. The ld. DR further stated that it is not a declaratory/clarificatory provision, but it is providing new set of exemption to small taxpaye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer or share capital of the company or entity during the preceding 12 months; or (ii) in other cases, the voting power or share capital of the transferor in such company or entity along with its associated enterprises during the preceding 12 months does not exceed such percentage which results in 26% of total voting power or share capital of the immediate holding company having underlying assets in India. 25. Before the recommendations of the Shome Committee could be accepted by the Government, the Hon'ble High Court of Delhi in the case of Copal Market Research Limited 49 Taxmann.com 125 was seized with similar quarrel wherein the share purchase agreement was dated 03.11.2011 [prior to amendment] and following the question, inter alia, needed to be adjudicated: Whether on facts and in law, the applicant is justified in its view that capital gains arising on the sale of shares of Exevo Inc., US ('Exevo Inc') by Copal Market Research Ltd. ( CMRL ) to the applicant would not be chargeable to tax in India in the hands of CMRL? 26. As mentioned elsewhere, when the decision of the Hon'ble High Court of Delhi [supra] came, only recommendations were made by Shome Committee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectly, its value substantially from the assets located in India;' 27. The notes to clauses explained the introduction of the Explanations 4 and 5 to Section 9(1)(i) of the Act as being clarificatory. A plain reading of Explanation 5 also indicates that the given reason for its introduction was for removal of any doubts. In other words, the language of the said legislative amendment suggests that it was always the intention of the legislature that an asset which derives its value from assets in India should be considered as one which is situated in India. The clear object of Section 9(1)(i) of the Act is inter alia to cast the net of tax also on income which arises from transfer of assets in India irrespective of the residential status of the recipient of the income. Since the assets are situated in India, the entire income arising from their transfer could be said to arise in India. Explanation 5 introduced a legal fiction for the limited purpose of imputing that assets which substantially derive their value from assets situated in India would also be deemed to be situated in India. 28. It is trite law that a legal fiction must be restricted to the purpose for which it was ena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplanation 5 should be defined as a threshold of 50 per cent of the total value derived from assets of the company or entity. In other words, a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India, if the share or interest derives, directly or indirectly, its value from the assets located in India being more than 50% of the global assets of such company or entity. This has been explained through the above illustration.' 30. In addition to the above, the 'United Nations Model Double Taxation Convention between Developed and Developing Countries' and the 'OECD Model Tax Convention on Income and on Capital' may also be referred to since the said conventions deal with a regime whereunder the right to tax capital gains can be fairly and reasonably apportioned between contracting States. Since the models propose a regime which is generally accepted in respect of indirect transfers, the same, although not binding on Indian authorities, would certainly have a persuasive value in interpreting the expression 'substantially' in a reasonable manner and in its contextual pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion deals with the taxes on capital gains. Article 13(1) provides that the gains derived by a resident of a Contracting State from the alienation of immovable property situated in another Contracting State may be taxed in that other State. Article 13(4) of the said Convention provides that the 'gains derived by a resident of a Contracting State from the alienation of shares or comparable interests deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.' 33. In view of the above, gains arising from sale of a share of a company incorporated overseas, which derives less than 50% of its value from assets situated in India would certainly not be taxable under section 9(1)(i) of the Act read with Explanation 5 thereto. 34. Thus, in the present case, even if the transaction had been structured in the manner as suggested on behalf of the Revenue, the gains arising to the shareholders of Copal-Jersey from sale of their shares in Copal-Jersey to Moody UK would not be taxable under Section 9(1)(i) of the Act, as their value could not be stated to be derived substantially fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided 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. 11 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iterate what I had said in the last Budget that ordinarily retrospective tax provisions adversely impact the stability and predictability of the taxation regime and resort to such provisions shall be avoided. 30. The CBDT came out with Circular No. 41 of 2016 for giving clarifications on Indirect Transfer Provisions under I.T. Act. Explanatory Notes to the provisions of Finance Act 2015 has further brought clarity relating to Indirect Transfer Provisions and the same read as as under: 8. Clarity relating to Indirect transfer provisions 8.1 The provisions of section 9 of the Income-tax Act deal with cases of income which are deemed to accrue or arise in India. Sub-section(1) of the said section creates a legal fiction that certain incomes shall be deemed to accrue or arise in India. Clause(i) of said sub-section (1) provides a set of circumstances in which income accruing or arising, directly or indirectly, is taxable in India. The said clause provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assets vis-a vis global assets of the foreign company shall be prescribed in the rules. (vi) the taxation of gains arising on transfer of a share or interest deriving, directly or indirectly, its value substantially from assets located in India will be on proportional basis. The method for determination of proportionality shall be prescribed in the rules. (vii) the exemption shall be available to a non-resident from transfer, outside India, of a share of, or interest in, a foreign company or entity if such foreign company or entity directly owns the assets situated in India and the transferor along with its associated enterprises, at any time in twelve months preceding the date of transfer, (a) neither holds the right of control or management in relation to such company or entity, (b) 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, in the foreign company or entity . (viii) in case the transfer is of shares or interest in a foreign company or entity which holds the Indian assets indirectly, then the exemption shall be available to the transferor if he along with its associated enterpris ..... X X X X Extracts X X X X X X X X Extracts X X X X
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