2011 (7) TMI 60 - HC - Income Tax

Court Rules Capital Gains Taxable in India for Share Sale by NCWS

The court held that the capital gains arising from the sale of shares of Idea Cellular Limited accrued to NCWS and were taxable in India. Indian Rayon was ... Relief - International taxation - Capital gain - on transfer of shares of Idea Cellular Limited in favour of Indian Rayon under Sale and Purchase Agreement dated 28th September, 2005 - in the present case genuineness of the transaction were considered in detail by the Reserve Bank of India and it is only after the genuineness of the transaction was established, TIL was permitted to make remittances to the shareholders of AT&T Mauritius, viz. NCWS and MMMH - It was further contended that Reserve Bank of India has allotted the identification number to TIL to set up / acquire AT&T Mauritius i.e. the Wholly Owned Subsidiary (WOS) in Mauritius subject to the condition that the WOS would not make any further investment in India without prior permission of Reserve Bank of India and, accordingly, no investments have been made in India - In the present case, TIL in exercise of its right of first refusal contained in the Shareholders Agreement had agreed to purchase 37,17,80,740 equity shares of ICL from NCWS for US$ 150 million - primafacie the ICL shares held by AT&T Mauritius belonged to NCWS and the value of the ICL shares remaining with AT&T Mauritius (after selling shares to Indian Rayon) was US$ 150 million, then the question to be considered is, whether TIL paid US$ 150 million for the shares of ICL or for the shares of AT&T Mauritius which had no assets other than ICL shares - primafacie case is made out by the Revenue for initiating proceedings under Section 148 as also under Section 148 read with Section 163 of the Act. The assessing officer is directed to complete the assessment proceedings as expeditiously as possible - Petiiton is disposed of Issues Involved:1. Taxability of capital gains arising from the transfer of shares of Idea Cellular Limited (ICL).2. Whether Indian Rayon can be treated as an agent of NCWS and MMMH under Section 160(1)(i) read with Sections 9(1) and 5(2) of the Income Tax Act.3. Applicability of exemption under Section 10(23G) of the Income Tax Act.4. The impact of the certificate issued under Section 195(2) of the Income Tax Act.5. Whether assessment proceedings can be initiated simultaneously against the resident and the non-resident.6. Validity of notices issued under Section 148 of the Income Tax Act.7. Validity of orders passed under Section 201(1) / 201(1A) and Section 163 of the Income Tax Act.Detailed Analysis:1. Taxability of Capital Gains:The core issue was whether the capital gains accrued to AT&T Mauritius or NCWS from the sale of ICL shares. The court found that AT&T Mauritius held the shares as a 'permitted transferee' of AT&T USA, and all rights, including the right to sell, vested in AT&T USA (now NCWS). Therefore, the capital gains were deemed to have accrued to NCWS and were taxable in India.2. Agent of NCWS and MMMH:The court held that Indian Rayon could be treated as an agent of NCWS and MMMH under Section 160(1)(i) read with Sections 9(1) and 5(2) of the Income Tax Act. The court referred to the Supreme Court's decision in Eli Lilly & Co. (India) P. Limited, which clarified that income accruing or arising in India to a non-resident from the transfer of a capital asset situated in India could be taxed in the hands of the agent of the non-resident.3. Exemption under Section 10(23G):The court did not delve into the merits of the exemption under Section 10(23G) as the Assessing Officer had not adjudicated on this issue. It was left open for Indian Rayon to agitate this in the assessment proceedings.4. Impact of Section 195(2) Certificate:The court found that the certificate under Section 195(2) was obtained by Indian Rayon by making incorrect representations. Therefore, the certificate did not preclude the Revenue from initiating proceedings under Section 163. The court held that the proceedings under Sections 163 and 195 operate in different fields and initiation of proceedings under Section 163 was justified.5. Simultaneous Assessment Proceedings:The court held that ordinarily, the Assessing Officer must not proceed against the representative assessee once the assessment proceedings are initiated against the non-resident. However, in exceptional cases involving complex issues, the Assessing Officer could continue with the assessment proceedings against both the representative assessee and the non-resident until deciding to assess either of them.6. Validity of Notices under Section 148:The court upheld the validity of the notices issued under Section 148 to NCWS and MMMH. It was found that the transactions under the Sale and Purchase Agreements were essentially for transferring the entire right, title, and interest in ICL by NCWS to Indian Rayon and TIL. The court directed the Assessing Officer to complete the assessment proceedings expeditiously.7. Orders under Section 201(1) / 201(1A) and Section 163:The court upheld the orders passed under Section 201(1) / 201(1A) and Section 163 against TIL, holding that the transaction between TIL and NCWS/MMMH was essentially for the sale of ICL shares. The court found merit in the Revenue's contention that the transaction was a colourable device to avoid tax.Conclusion:- Writ Petition No. 730 of 2009 (Indian Rayon): Dismissed.- Writ Petition No. 345 of 2010 (Indian Rayon): Partly allowed by setting aside the notice dated 12th February 2010 issued under Section 148 as time-barred.- Writ Petition No. 1837 of 2009 (NCWS): Dismissed.- Writ Petition No. 38 of 2010 (TIL): Dismissed.All petitions were disposed of with no order as to costs, and interim reliefs were continued for six weeks.