TaxTMI 
TaxTMI 
2020 (3) TMI 1313
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....f Jersey with its registered office at Ogier 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 trans....
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.... Whether the applicant can be treated as a representative asses see as contemplated under section 160(1)(i) read with section 163 of the Act of the persons specified in Annexure II in respect of income arising to 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 un....
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....bstituted by the following question : Modified question No. 1 "Whether the understanding of applicant is correct that in order to attract Explanation 5 to section 9(1)(i) of the Act, the threshold for determining value derived "substantially from the assets located in India" is 50 per cent. or more keeping 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 o....
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....f shares in AIS to the buyer applicant and if yes at higher rates in appropriate cases ?" Applicant's contentions 10. The learned authorised representative has stated that the Finance Act, 2012 inserted a deeming provision by way of Explanation 5 to section 9(1)(i) of the Act (hereinafter referred to as "indirect transfer provisions"), which reads as follows : "For the removal 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 ....
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....Explanation 6 to section 9(1)(i) of the Act is applicable to the said transfer of shares in AIS the applicant has not asked for a ruling on the valuation of assets attributable to India operations, although in the application, a valuation report obtained from an independent valuer is enclosed as per which the value of shares of AIS derived directly or indirectly from assets located in India is 26.38 per cent. 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 for....
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....hat the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if- (i) the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not 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 establishmen....
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.... the above comparison of the DCF report furnished by the applicant based on the valuation, and with the actual revenue growth, as per the return of income filed by Moody's Analytics Knowledge Services (India) Private Limited (formerly known as Amba Research India Private Limited), it is clear that the valuation methodology adopted by the applicant over valuation of the enterprise, is to project a lesser value to the Indian entity. As seen from the above, it is clear that the revenue and revenue growth as adopted 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 loc....
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....ully considered the contentions of the learned authorised representative, the report of the Revenue and the arguments of the learned special counsel. The only germane issue is whether Explanation 6 and Explanation 7 inserted by the Finance Act, 2015 to section 9(1)(i) of the Income-tax Act are retrospective or prospective in nature. 33. It is a fact that during 2012 to 2016, the word "substantially" appearing in Explanation 5 was not defined in the Act and it was subject matter of scrutiny of the courts in a number of cases, i. 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 ....
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....y. Similarly, Explanation 7 inserted to address the genuine concerns of small shareholders would also apply retrospectively to give meaning in true sense and to render indirect transfer provisions contained in Explanation 5 to section 9(1)(i) of the Income-tax Act workable. 36. The learned authorised representative has indicated that as per the valuation report obtained from the independent valuer the value of shares of AIS derived directly or indirectly from assets located in India is 26.38 per cent., i. e., less than 50 per cent. In view 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....