2014 (5) TMI 631 - AAR - Income Tax

Tax withholding required for purchase of foreign equity shares: AAR ruling clarifies obligations

The Authority for Advance Rulings held that tax withholding under section 195 of the Income-tax Act, 1961 was required for the purchase of equity shares ... Withholding of Tax u/s 195 of the Act – Purchase of equity shares – LTCG arising u/s 112(1) of the Act – Whether the tax is required to be withheld by the Applicant u/s 195 of the Act on purchase of equity shares of Patni Computer Systems Ltd, being listed security, from iSolutions, Inc. USA of the amount of long term capital gains arising to iSolutions, Inc. as per the proviso to section 112(1) of the Act - Held that:- Following Cairn UK Holdings Limited Versus Director of Income-Tax [2013 (10) TMI 430 - DELHI HIGH COURT] - the first proviso to Section 48 ensures that a non-resident, who utilized his foreign currency, is taxed after taking into consideration the fluctuation in exchange rate - if proviso to Section 112(1) is applied, then almost all assessees covered by the first proviso to Section 48 would be liable to pay tax @ 10% only and not @ 20% on long-term capital gains - it is not possible to decipher and clearly elucidate the exact legislative purpose and object behind the proviso to Section 112(1) in a categorical and unambiguous manner - The purpose and object behind the proviso to Section 112(1) itself is somewhat debatable, except that the legislative intention was to tax long-term capital gain on listed shares, bonds and units @ 10%, without benefit of indexation under second proviso to Section 48 of the Act – the applicant will be entitled to benefit of proviso to Section 112(1) of the Act on sale of equity shares – Decided in favour of Assessee. Issues:1) Whether tax is required to be withheld under section 195 of the Income-tax Act, 1961 on the purchase of equity shares of Patni Computer Systems Ltd from iSolutions, Inc. USARs.2) Whether tax is required to be withheld under section 195 of the Income-tax Act, 1961 on the purchase of bonus equity shares issued by Patni from iSolutions, Inc. USARs.Analysis:1. The case involves an application filed by a Mauritius company seeking an advance ruling on tax withholding under section 195 of the Income-tax Act, 1961 for the purchase of equity shares of Patni Computer Systems Ltd from iSolutions, Inc. USA. The applicant, a non-resident company, passed a board resolution proposing the purchase of shares. Patni, an Indian company engaged in IT services, is listed on multiple stock exchanges. iSolutions, a US company, purchased the shares in foreign currency and later proposed to sell them to the applicant, holding the shares for over 12 months. The applicant approached the Authority seeking clarification on tax withholding obligations.2. The Authority considered the relevant provisions of the Income-tax Act, 1961 and referred to a previous judgment involving Cairn UK Holdings Ltd. The judgment highlighted the application of the first proviso to Section 48 concerning the taxation of non-residents who purchased assets in foreign currency. It emphasized the impact of exchange rate fluctuation on determining true gains for non-residents. The judgment differentiated between the first and second provisos to Section 48, noting their distinct purposes and benefits. It discussed the legislative intent behind the proviso to Section 112(1) related to long-term capital gains on listed securities.3. Citing the decision of the jurisdictional High Court in a related case, the Authority answered both questions in the affirmative, indicating that tax withholding under section 195 was required for the purchase of equity shares and bonus shares. The ruling was pronounced on May 9, 2014, in favor of tax withholding obligations as per the Income-tax Act, 1961.This detailed analysis of the judgment provides insights into the legal considerations and interpretations made by the Authority for Advance Rulings regarding tax withholding on the purchase of shares by a non-resident company, emphasizing the application of relevant provisions and precedents in reaching a decision.