Tax Ruling: Foreign share sale not taxable in India under Income-tax Act

The Authority for Advance Rulings determined that Explanations 6 and 7 to Section 9(1)(i) of the Income-tax Act have retrospective effect. Income from the transfer of shares in AIS, where less than 50% of the value is derived from Indian assets, is not taxable in India. Section 115JB does not apply to the foreign companies involved, and there is no withholding tax liability under Section 195 for the buyer.

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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.

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