TaxTMI 
TaxTMI 
2020 (3) TMI 1313
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....r House, the Esplanade, St. Helier, Jersey JE4 9WG. It purchased the whole of the share capital of Amba Investment Services Limited ("AIS"), a private limited company, under the laws of the British Virgin Islands ("BVI"). AIS was converted into a public limited company with effect from July 1, 2013 by making the necessary amendments to the memorandum of association and the articles of association. AIS is the parent company of a multi-national group of companies having operations across Sri Lanka, Cost Rica, Singapore, India, US, UK and Hong Kong, whose structure is provided below : 3. ARI is a subsidiary of AHI. ARI is a private limited company, incorporated under the Indian Companies Act, 1956. The applicant has purchased the entire shareholding of AIS. At annexure-III, to the application of the buyer, it is indicated that it has purchased shares from 10 shareholders. Nine applicant sellers have filed applications before AAR. One Mr. Gilles Raoul Schuddeboom has not filed application before AAR but is mentioned in the application of Copal Partners Limited, Jersey USA and has maximum shareholding during the 12 months preceding the transfer of 0.33 per cent. of AIS shares. AIS had ....
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.... the said persons from the sale of shares in AIS to the applicant ? (iv) Whether the applicant is required to withhold tax under section 195(1) of the Act in respect of the income arising to each of the persons specified in Annexure III upon transfer of shares in AIS to the applicant ? (v) If the answer to question No. 4 is in the affirmative, what is the rate (before applying surcharge and cess) at which the applicant would be required to withhold taxes under section 195(1) of the Act on income arising to- (a) individuals who have held the shares in AIS as short-term capital assets, from transfer of shares in AIS to the applicant ; and (b) individuals and corporates who have held the shares in AIS as long-term capital assets, from transfer of shares in AIS to the applicant ? (vi) Where the answer to question No. 4 is in the affirmative, whether the applicant is required to withhold tax at the higher rate specified under section 206AA(1) of the Act in respect of those per sons who have transferred shares in AIS to the applicant ? (a) Who furnish their Permanent Account Number to the applicant on a date subsequent to the date the shares in AIS were tran....
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....g in view the language as well as the intent of the said Explanation 5, which is further reflected in the clarificatory amendment introduced by Explanation 5, which is further reflected in the clarificatory amendment introduced by Explanation 6 to section 9(1)(i) of the Act and as has been held by the hon'ble Delhi High Court in the case of DIT (International Taxation) v. Copal Research Ltd. [2015] 371 ITR 114 (Delhi) (W. P. No. 2033 of 2013) dated August 14, 2014 and the hon'ble Authority for Advance Rulings in the case of GEA Refrigeration Technologies GmbH, In re [2018] 401 ITR 115 (AAR) ?" 8. Furthermore question No. 2 of seller applicants was modified as under - If the applicant were to be chargeable to tax in India, what is the rate at which the income arising to the applicant upon transfer of shares in AIS would be subject to tax in India ? 9. All original/modified or amended questions can be effectively merged into following relevant questions which will be answered by the authority : "I. Whether clarificatory amendment introduced by Explanation 6 and Explanation 7 to section 9(1)(i) of the Act have retrospective operation ? II. If the answer to question No. 1....
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....al of doubts, it is hereby clarified that an asset or a capital asset being a 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 indirectly, its value substantially from the assets located in India." Under the above deeming provisions, a share in a company incorporated 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. 11. It is submitted that post-introduction of the indirect transfer provisions by the Finance Act, 2012 vide Explanation 5, there were numerous issues regarding the interpretation and applicability of said indirect transfer provisions. In this context, the Government constituted an Expert Committee, under the Chairmanship of Dr. Parthasarathi Shome to provide recommendations for addressing issues pertaining to the indirect transfer provisions. The expert Committee made a number of recommendations to bring in clarity regarding the scope and impact of the indirect transfer provisions. Subseque....
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....ent. Thus, it is submitted that the hon'ble Authority for Advance Rulings may pass the appropriate orders on the principles involved alone, since the Department would have the opportunity to examine the valuation report produced by the applicant during assessment proceedings. 16. It is also indicated that irrespective of whether the shares of AIS derive, directly or indirectly its value "substantially" from the assets located in India, Explanation 7(a) to section 9(1)(i) of the Act should be applicable, which provides that where the transferor who along with his/her/its associated enterprises, has not held any voting power, share capital or interest in the foreign company whose shares are transferred in excess of 5 per cent. nor any right of management or control in such foreign company during the twelve months preceding the date of transfer, the income from transfer of shares of such foreign company for such transferors would not be taxable in India. 17. To substantiate that the eight sellers (except Michael Joseph Morierty, USA) satisfy the conditions prescribed in Explanation 7(a), vide submission dated December 27, 2019, a copy of the confirmation from the sellers (or the....
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....have a permanent establishment in India in accordance with the provisions of such agreement ; or (ii) the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies." (emphasis supplied). 21. The above Explanation makes it clear that section 115JB of the Act is not applicable to foreign companies satisfying conditions prescribed in clauses (i) and (ii) of Explanation 4 to section 115JB to the Act. 22. It is highlighted that : (a) Both Pacific Ace Development Limited and Seowyan Investments are foreign companies and do not have any permanent establishment or business connection in India. (b) During the financial year 2013-14 (year covering the date of transfer), both Pacific Ace Development Limited and Seowyan Investments did not have any presence or place of business in India. (c) During the financial year 2013-14 (year covering the date of transfer), both Pacific Ace Development Limited and Seowyan Investments were not required to seek registration under the Companies Act, 2013, Companies ....
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....in valuation report are in contrast with that as per ITR. Further there is no detailed explanation for such projection adopted in valuation report. This finding alters the basic assumptions/projections made in respect of the ARI and thus its enterprise value cannot be accepted as determined in the said report. On the same basis, it cannot be concluded that the enterprise value of the ARI vis-a-vis AIS is less than 50 per cent. or is not substantial. In this case as the value of asset located in India is considerably high as compared to other global subsidiaries, it is very much clear that AIS shares derive their value directly or indirectly substantially from assets located in India and the receipt would therefore be taxable in India. 27. Further, it is emphasised by the learned special counsel that Explanation 6 and Explanation 7 inserted by the Finance Act, 2015 are applicable prospectively that is from April 1, 2016 and thus are not applicable to the applicants. 28. Referring to Explanation 7 to section 9(1)(i) of the Act it is stated that the applicant has not submitted any document to the effect that the shareholding of any of the non-resident along with its associated enter....
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.... e., DIT (International) v. Copal Research Limited (supra), GEA Refrigeration Technologies GmbH (supra) and Banca Sella S. P. A., In re [2016] 387 ITR 358 (AAR) and it was uniformly held that "substantially" will mean at least 50 per cent. This position was also clarified by Explanation 6 which was brought into statute after recommendation of Expert Committee under Dr. Shome on this issue was accepted by Government and Circular No. 19 of 2015, dated November 11, 2015 affirmed this position. 34. Further the language of Explanation 6 begins with words "for the purposes of this clause it is hereby declared. . . "in Justice G. P. Singh's (Sixth Edition 1996) "Principles of Statutory Interpretation" under the heading "declaratory statutes", the learned author has summed up as under : "Declaratory statutes : The presumption against retrospective operation is not applicable to declaratory statutes. As stated in Craies and approved by the Supreme Court : 'For modern purposes a declaratory Act may be defined as an Act to remove doubts existing as to the common law, or the meaning or effect of any statute. Such Acts are usually held to be retrospective. The usual reason for passin....
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....thereof the income from transfer of shares in the hands of transferors is not subject to tax in India. 37. It is noticed that the applicants and Seowyan Investments are based in Cayman Islands with whom India does not have comprehensive DTAA. Also, in the case of Pacific Ace Development Limited, a resident of Hong Kong with whom the comprehensive DTAA came into force in respect of income derived in India with effect from April 1, 2019. Learned authorised representative had asserted that during the financial year 2013-14 both the foreign companies are not required to seek registration under the Companies Act, 2013, Companies Act, 1956 or any other law for the time being in force relating to companies in India. In view of the said averments by learned authorised representative and also considering the provisions of section 115JB of the Income-tax Act, the conditions laid down in section 115JB are satisfied and there is no applicability of section 115 to the above referred foreign companies. Consequently, there is no liability, the buyer applicant is not required to withhold taxes in respect to the payment made to transferor of shares. 38. Considering that the Revenue had questioned....