TaxTMI 
TaxTMI 
2020 (10) TMI 751
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....e business of incubation of companies i.e. providing new businesses, with necessary financial support and technical services. During the course of its business, the appellant made investments in Accelyst Pte Ltd, being company incorporated in and resident of Singapore. 4. The appellant made investment at total cost of Rs. 4,91,20,000/- in the following manner: * 10,000 equity shares purchased on January 9, 2013 * 13,80,000 preference shares purchased on January 9, 2013 * 394,782 preference shares purchased on March 14, 2014 5. On 27.03.2015, the appellant sold its entire shareholding in Accelyst to an Indian company, namely, Jasper Infotech Private Limited. The sale consideration was Rs. 41,24,35,969/-. The buyer, Jasper Infotech Private Limited, withheld taxes at source amounting to Rs. 17,84,19,800/- being 43.26% on the entire sales consideration. 6. Keeping in view the amended provisions of section 9(1)(i) of the Act, read with Explanations 5, 6 and 7, the assessee was of the firm belief that the transaction involving sale of shares of foreign company, which held investment in India, was not taxable. 7. During the course of assessment proceedings, the Assessing Officer....
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....y holding as under: "4.2 The assessee has made detailed submission to state that the amendments were brought by the Finance Act, 2012 (Explanation 4 & 5 to Section 9(1)(i)) with regard to sale of shares by the foreign company, where the underlying assets are in India. Further, the Explanation 6 and 7 were introduced by the Finance Act, 2015 would have retrospective effect from FY 2012-13, when the Explanation when the Explanation 4 & 5 were introduced with w.r.e.f 01-04-1962. 4.2.2 The AO has considered the detailed submission in this regard and has referred (in para 14 of the Draft order) to the CBDT Circular no 19 /2015 dated 27-11-2015, explaining the provision of Finance Act, 2015 and the amendments introduced by the Finance Act, 2015, which clearly brings of the fact that the amendments shall take effect from 01-04-2016 and will accordingly apply in relation to the AY 2016-17 and subsequent assessment years. 4.3 Having considered the submission of the assessee we are of the view that this Explanation is not applicable to the cases of assessment years prior to AY 6 2016-17 as it is made effective only from 01-04-2016. If the legislature has intentionally made certain prov....
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.... ambit of taxation on account of indirect transfer of property. 19. The ld. DR further stated that it is not a declaratory/clarificatory provision, but it is providing new set of exemption to small taxpayers for their benefit and therefore, it cannot be stated that it is not a case of any omission or error or vague term in the existing provision which has been clarified vide Explanation 7. 20. We have carefully considered the orders of the authorities below qua the relevant provisions in dispute. Explanation 5 to section 9(1)(i) of the Act was introduced by Finance Act of 2012 with retrospective effect from 01-04-1962. At this point, it would be pertinent to mention that provisions of section 9(1)(i) of the Act were amended to obviate the decision of Supreme Court in the case of Vodafone International Holdings B.V. 341 ITR 1 (SC). 21. Explanation 5 reads as under: "Explanation 5.-For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or ....
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.... the applicant would not be chargeable to tax in India in the hands of CMRL?" 26. As mentioned elsewhere, when the decision of the Hon'ble High Court of Delhi [supra] came, only recommendations were made by Shome Committee and the Act was amended. The Hon'ble High Court held as under: "26. It is apparent from the above that only a fraction of the value of shares of Copal-Jersey was derived indirectly from the value of the shares of CRIL and Exevo-India. The question, thus, arises is whether the sale of shares of an overseas company which derives only a minor part of its value from the assets located in India could be deemed to be situated in India by virtue of Explanation 5 to Section 9(1)(i) of 399 of 691 the Act. This question can be answered by reference to the express language of Section 9(1)(i) of the Act as well as by applying the principle that income sought to be taxed under the Act must have a territorial nexus with India. By virtue of Section 9(1)(i) of the Act all income arising from transfer of a capital asset situated in India would be deemed to accrue or arise in India and would thus be exigible to tax under the Act. A share of a company incorporated outsid....
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....rpose of imputing that assets which substantially derive their value from assets situated in India would also be deemed to be situated in India. 28. It is trite law that a legal fiction must be restricted to the purpose for which it was enacted. The object of Explanation 5 was not to extend the scope of Section 9(1)(i) of the Act to income, which had no territorial nexus with India, but to tax income that had a nexus with India, irrespective of whether the same was reflected in a sale of an asset situated outside India. Viewed from this standpoint there would be no justification to read Explanation 5 to provide recourse to section 9(1)(i) for taxing income which arises from transfer of assets overseas and which do not derive bulk of their value from assets in India. In this view, the expression "substantially" occurring in Explanation 5 would necessarily have to be read as synonymous to " principally", "mainly" or at least "majority". Explanation 5 having been stated to be clarificatory must be read restrictively and at best to cover situations where in substance the assets in India are transacted by transacting in shares of overseas holding companies and not to transactions wher....
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.... is generally accepted in respect of indirect transfers, the same, although not binding on Indian authorities, would certainly have a persuasive value in interpreting the expression 'substantially' in a reasonable manner and in its contextual perspective. The 'United Nations Model Double Taxation Convention between Developed and Developing Countries' and the 'OECD Model Tax Convention on Income and on Capital' provide that the taxation rights in case of sale of shares are ceded to the country where the underlying assets are situated only if more than 50% of the value of such shares is derived from such property. 31. Paragraph (4) of Article 13 of the United Nations Model Double Taxation Convention between Developed and Developing Countries provides that a Contracting State is allowed to tax a gain on alienation of shares of a company or on alienation of interests in other entities the property of which consists principally of immovable property situated in that State. For this purpose, the term 'principally' in relation to the ownership of an immovable property means the value of such immovable property exceeding 50 per cent of the aggregate value ....
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....suggested on behalf of the Revenue, the gains arising to the shareholders of Copal-Jersey from sale of their shares in Copal-Jersey to Moody UK would not be taxable under Section 9(1)(i) of the Act, as their value could not be stated to be derived substantially from assets in India. In this view, the contention of the Revenue that the entire transaction of sale of Copal-Jersey shares has been structured in a manner so as to include the sale of shares in CRIL and Exevo-US by the Mauritian companies only to avoid the incidence of tax and take benefit of the DTAA is ex facie flawed." 27. Pursuant to this decision of the Hon'ble High Court, the Act was amended and Explanations 6 and 7 were inserted wherein 5% has been mentioned whereas the Hon'ble High Court of Delhi [supra] has considered a case where shares derived less than 50% of its value from assets situated in India would certainly not be taxable u/s 9(1)(i) of the Act read with Explanation 5. 28. Explanations 6 and 7 read as under: "Explanation 6.-For the purposes of this clause, it is hereby declared that- (a) the share or interest, referred to in Explanation 5, shall be deemed to derive its value substantially f....
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....ide India, referred to in the Explanation 5,- (i) if such company or entity directly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither holds the right of management or control in relation to such company or entity, nor holds voting power or share capital or interest exceeding five per cent of the total voting power or total share capital or total interest, as the case may be, of such company or entity; or (ii) if such company or entity indirectly owns the assets situated in India and the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, neither holds the right of management or control in relation to such company or entity, nor holds any right in, or in relation to, such company or entity which would entitle him to the right of management or control in the company or entity that directly owns the assets situated in India, nor holds such percentage of voting power or share capital or interest in such company or entity which results in holding of (eithe....
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....e accruing or arising, directly or indirectly, is taxable in India. The said clause provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India shall be deemed to accrue or arise in India. 8.2 The Finance Act, 2012 had inserted certain clarificatory amendments in the provisions of section 9. The amendments, inter alia, included insertion of Explanation 5 in section 9(1)(i) w.r.e.f. 1.04.1962. The Explanation 5 clarified that an asset or capital asset, being any share or interest in a company or entity registered or incorporated 256 of 691 outside India shall be deemed to be situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. 8.3 Considering the concerns raised by various stakeholders regarding the scope and impact of these amendments, an Expert Committee under the Chairmanship of Dr.Parthasarathi Shome was constituted by the Government to go into the various aspects relati....
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....est exceeding five per cent. of the total voting power or total share capital or total interest, in the foreign company or entity . (viii) in case the transfer is of shares or interest in a foreign company or entity which holds the Indian assets indirectly, then the exemption shall be available to the transferor if he along with its associated enterprises, at any time in 12 months preceding the date of transfer,- (a) neither holds the right of management or control in relation to such company or the entity, (b) nor holds any right in, or in relation to, such company or entity which would entitle him to the right of control or management of the direct holding company or entity, nor holds such percentage of voting power, or share capital or interest in such company or entity which entitles him to the voting power, or share capital or interest exceeding five percent. in the direct holding company or entity. (ix) exemption shall be available in respect of any transfer, subject to certain conditions ,in a scheme of amalgamation, of a capital asset, being a share of a foreign company which derives, directly or indirectly, its value substantially from the share or shares of an Ind....