Lower withholding tax on sale of unlisted Indian company shares by non-resident using s.112 concessional LTCG rate upheld

Whether a non-resident recipient of consideration for transfer of shares of an unlisted Indian company was entitled to lower withholding by applying the concessional long-term capital gains rate under s.112(1)(c)(iii) was the dominant issue. The Tribunal held that the first and second provisos to s.48 prescribe the computation mechanism (foreign-currency conversion/reconversion and indexation substitution) and do not displace the substantive concessional rate under s.112(1)(c)(iii) applicable to eligible non-residents; the AO erred in ignoring the statutory conditions while challenging the rate. The CIT(A)'s direction to apply the effective TDS rate consistent with s.112(1)(c)(iii) and to verify remaining remittances accordingly was upheld, and the Revenue's appeal was dismissed.

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ISSUES PRESENTED AND CONSIDERED

1) Whether, on remittances to non-resident individual shareholders towards consideration for transfer of shares of Indian companies, the payer could apply tax deduction at source by adopting the rate aligned to section 112(1)(c)(iii) (resulting in 11.54% in the payer's working), rather than applying a higher rate under section 195 read with section 206AA as treated by the Assessing Officer for multiple remittances.

2) Whether the Assessing Officer was justified in treating the payer as an assessee-in-default under section 201(1) and levying interest under section 201(1A), when the appellate authority directed verification and recomputation of the demands by applying the rate accepted as governing under section 112(1)(c)(iii).

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Applicability of the lower rate under section 112(1)(c)(iii) for TDS on payments to non-resident individual shareholders

Legal framework (as discussed by the Court): The Court examined section 112(1)(c)(iii) as governing the applicable rate, and also examined the first and second provisos to section 48 in the context of computation for non-residents transferring shares of an Indian company (foreign currency conversion/reconversion and the relationship with indexing as referred in the reasoning). The Court treated these aspects as relevant to the rate approach adopted by the payer for deduction.

Interpretation and reasoning: The Court noted the Assessing Officer's objection that for the statutory 10% rate under section 112(1)(c)(iii), the first and second provisos to section 48 should not be considered, and that therefore the payer's effective rate (11.54%) was unjustified for multiple remittances. The Court rejected this approach, reasoning that section 48 (including its provisos) concerns the mode of computation of capital gains for non-residents on transfer of shares of an Indian company, and that the Assessing Officer "totally ignored the conditions of section 48 prescribed." The Court held that the payer's adopted TDS rate of 11.54% was in consonance with the rate prescribed under section 112(1)(c)(iii) and that section 48 was considered by the authorities in the manner relevant for such deduction. The Court further treated section 112(1)(c)(iii) as the governing provision for adopting the relevant rate for such transactions (as applied by the payer), and upheld the appellate direction for verification and recomputation accordingly.

Conclusions: The Court upheld the finding that the non-resident assessee category covered by section 112(1)(c)(iii) was entitled to the lower rate as applied, and sustained the direction that remittances should be verified and recomputed applying the rate consistent with section 112(1)(c)(iii) (reflected as 11.54% in the payer's deduction working). No interference was warranted with the appellate order/corrigendum on this point.

Issue 2: Validity of treating the payer as assessee-in-default under section 201(1) and charging interest under section 201(1A) in light of appellate directions

Legal framework (as discussed by the Court): The Court considered the Assessing Officer's action under section 201(1) (default determination) and section 201(1A) (interest), and the appellate authority's direction to the Assessing Officer to verify remittances and recompute demands by applying the accepted governing rate under section 112(1)(c)(iii).

Interpretation and reasoning: The Court acknowledged that the Assessing Officer computed default and interest by treating the payer's applied rate for multiple remittances as unjustified. However, once the Court accepted that the governing rate approach adopted by the payer was aligned with section 112(1)(c)(iii) and that the Assessing Officer's rejection was not justified in view of section 48 conditions, the foundation for sustaining the higher-demand computation under section 201(1) and interest under section 201(1A) did not survive as framed by the Assessing Officer. The Court found the appellate authority's direction-verification in accordance with law followed by recomputation at the rate consistent with section 112(1)(c)(iii)-to be correct and legally consonant.

Conclusions: The Court sustained the appellate directions for verification and recomputation of the TDS demands rather than the Assessing Officer's computation based on the higher rate approach, and accordingly dismissed the appeal challenging those directions.

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