Ruling: Capital gain from STC shares transfer not taxable in India under Section 9(1)(i)

The Authority for Advance Rulings concluded that the capital gain arising from the transfer of Symphony Teleca Corporation (STC) shares is not taxable in India under Section 9(1)(i) as the value of Indian assets is less than 50% of the global assets. Therefore, the buyer is not required to withhold tax under Section 195 on the acquisition of shares of STC from STG.

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Issues Involved:
1. Applicability of Section 9(1)(i) of the Income-tax Act, 1961.
2. Determination of whether the transfer of shares of Symphony Teleca Corporation (STC) constitutes an indirect transfer of shares under Section 9(1)(i).
3. Obligation of the buyer to withhold tax under Section 195 of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Applicability of Section 9(1)(i) of the Income-tax Act, 1961:
The applicant contended that Section 9(1)(i) of the Income-tax Act, 1961, amended retrospectively by the Finance Act, 2012, and further clarified by Explanation 5, deems a share of a foreign company as an asset situated in India if it derives substantial value from assets located in India. The applicant argued that the retrospective amendment is not applicable as there was no mechanism in the Act or Rules to compute the fair market value of the Indian assets at the time of the transaction, rendering the provisions of Section 9(1)(i) impractical. The applicant cited Supreme Court decisions (CIT v. B. C. Srinivasa Setty, PNB Finance Ltd. v. CIT, and CIT v. H. H. Lokendra Singh) to support the argument that if the computation provision is absent, the case should not fall within the charging section. However, the applicant did not press this argument further after the notification of rules 11UB and 11UC.

2. Determination of whether the transfer of shares of STC constitutes an indirect transfer of shares under Section 9(1)(i):
The applicant argued that even if Explanation 5 to Section 9(1)(i) is applicable, the value of the Indian assets is only 29.3% to 31% of the total assets, which is less than the 50% threshold required for the transaction to be taxable in India. The applicant relied on the case law (CIT v. Amrutanjan Ltd. and DIT (International Tax) v. Copal Research Ltd.) to assert that "substantial interest" means at least 51% of the voting power. The applicant also referenced the ruling in GEA Refrigeration Technologies GmbH, where the Authority for Advance Rulings held that a share transfer did not give rise to a capital gain taxable in India as the value of Indian assets was less than 50% of the global assets. The Revenue, however, questioned the valuation report's assumptions and requested the liberty to take action if discrepancies were found later.

3. Obligation of the buyer to withhold tax under Section 195 of the Income-tax Act:
The applicant contended that if the transfer of shares is not taxable in India, the provisions of Section 195 would not apply, and the buyer should not be required to withhold any taxes. The Revenue argued that the Finance Act, 2012, introduced provisions to tax indirect transfers of Indian assets, deeming shares or interests in foreign companies as situated in India if they derive substantial value from Indian assets. The Revenue highlighted that the valuation report did not provide the basis for assumptions, making it inconclusive whether the value of Indian assets was less than 50%.

Judgment:
The Authority for Advance Rulings concluded that the capital gain arising from the transfer of STC shares is not taxable in India under Section 9(1)(i) as the value of Indian assets is less than 50% of the global assets. The ruling is based on the facts and figures presented, and if subsequent verification reveals that the actual percentage exceeds 50%, the ruling would not apply, and the Revenue would not be bound by it. Consequently, the buyer is not required to withhold tax under Section 195 on the acquisition of shares of STC from STG.

Summary of Answers to Questions:
1. Not pressed.
2. The transfer of shares of STC by STG is not chargeable to tax in India under Section 9(1)(i).
3. The buyer is not required to withhold tax under Section 195 on the acquisition of shares of STC from STG.

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