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2023 (12) TMI 104
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....ly and, in reaching this conclusion, has applied the mischief rule and taken into account the legislative history which propelled the insertion of two interconnected Explanations, i.e., Explanation 4 and 5, via the Finance Act 2012 [in short, FA 2012"]. Concededly, Explanations 4 and 5 were given a retrospective effect by the legislature by stating in no uncertain terms that they would apply from 01.04.1962. 3. Thus, the moot question that arose before the Tribunal, and now before us, is whether Explanations 6 and 7 are clarificatory or amendatory. Prefatory Facts 4. To adjudicate this issue, the following broad facts are required to be noticed. 4.1 The respondent/assessee is a company incorporated under the laws of Singapore on 22.11.2011. 4.2 Between January 2013 and March 2014, the respondent/assessee invested in equity and preference shares of Accelyst Pte Ltd [in short, "APL"], a company incorporated in and resident of Singapore. The total value of the investments the respondent/assessee made in APL was Rs. 4,91,20,000/-. 4.3 The details of the investments made (which includes the percentage of ordinary and preference share capital held by the respondent/asse....
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....ssee asserted that Explanations 6 and 7 clarified Explanation 5, which was introduced via FA 2012. 6. The DRP, however, was not persuaded by the arguments put forth by the respondent/assessee and, accordingly, rejected the objections it preferred via an order dated 14.09.2018. 7. As per the order of the DRP, the AO framed the final assessment order on 30.10.2018 under the provisions of Section 143(3) read with 144C of the Act. Consequentially, the respondent/assessee's taxable income was pegged at Rs.36,33,15,970/-. 8. This impelled the respondent/assessee to file an appeal with the Tribunal. As noticed right at the beginning, the Tribunal ruled in favour of the respondent/assessee and thus directed the deletion of the impugned addition. 9. Against this backdrop, the appellant/revenue has lodged the instant appeal. Submissions of Counsel 10. Arguments on behalf of the appellant/revenue were advanced by Mr Aseem Chawla, learned Senior Standing Counsel, while Mr Mayank Nagi made submissions on behalf of the respondent/assessee. 11. Mr Chawla's submissions can be broadly paraphrased as follows: (i) It is a cardinal principle of a statute concerning ta....
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.... Explanation 5, which was inserted by FA 2012. 12. In rebuttal, Mr Nagi, while relying upon the order passed by the Tribunal, emphasised the following aspects of the matter: (i) Explanation 5 was introduced by FA 2012, with effect from 01.04.1962, to get over the impact of the judgment rendered by the Supreme Court in Vodafone International Holdings BV v Union of India 341 ITR (1) SC. Via the amendment, the legislature inserted a legal fiction by imputing situs to the share/interest transferred outside the country by correlating it with the underlying assets in India. However, Explanation 5 was both ambiguous and arbitrary since it neither defined the expression "share or interest" nor "substantially", which had the effect of bringing a transaction executed outside India within the ambit of Section 9(1)(i) of the Act. (ii) Thus, dehors Explanation 7, even the transfer of a single share of a company incorporated outside India, which derived its value substantially from assets located in India, would have resulted in taxable gain in India, entailing undue hardship to small investors. Furthermore, the expression "substantially" conferred uncanalised power on the A....
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....2014) taxmann.com 125 (Delhi), which was rendered before the insertion of Explanations 6 and 7 via FA 2015, opined that Explanation 5 had to be construed restrictively and that the tax net on gains or income arising from transfer of shares outside India, where the bulk value of the assets of the companies whose shares are being transferred are located outside India, should not be enlarged by taking recourse to Section 9(1)(i) of the Act. (vi) In concluding one way or the other as to whether a particular amendment is clarificatory or curative, it is vital to bear in mind the history of the amendment made, the circumstances in which it was passed and the mischief it sought to overcome. Furthermore, it is well-established that the presumption against retrospectivity does not apply to curative amendments. The absence of a provision that expressly states that the amendment is retrospective is necessarily not a determinative factor. Likewise, merely because a date is provided from which an amendment is made operative does not conclusively indicate that it is not a clarificatory or curative amendment. [See Chettian Veetil Ammad & Anr. vs. Taluk Land Board & Ors., (1980) 1 SCC 499....
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.... 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 indirectly, its value substantially from the assets located in India: [Provided that nothing contained in this Explanation shall apply to an asset or capital asset, which is held by a non-resident by way of investment, directly or indirectly, in a Foreign Institutional Investor as referred to in clause (a) of the Explanation to section 115AD for an assessment year commencing on or after the 1st day of April, 2012 but before the 1st day of April, 2015:] [Provided further that nothing contained in this Explanation shall apply to an asset or capital asset, which is held by a non-resident by way of investment, directly or indirectly, in Category-I or Category-II foreign portfolio investor under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992).]" 16. Explanations 4 and 5 presented difficulties in that the ex....
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....ained based on net assets after taking into account liabilities as well; (c) for determination of value, both tangible assets as well as intangible assets are to be considered; and (d) the value is to be determined at the time of the last balance sheet date of the foreign company with appropriate adjustments made for significant disposal/acquisition, if any, between the last balance sheet date and the date of transfer. (v) The phrase "an asset or" juxtaposed on the phrase "capital assets" in Explanation 5 to section 9(1)(i) of the Act appears to be an insertion to buttress the concept of capital assets. Since the objective is taxation of the transfer of capital assets alone, the phrase "an asset or" may be omitted. Indeed, it may lead to unintended consequences such as taxation of dividends paid by a foreign company. (vi) As the provisions of section 9(1)(i) read with Explanation 5 of the Act specifically deals with transfer of shares of a foreign company having underlying assets in India, the general provisions of section 2(47) relating to transfer should not be applied on a stand alone basis. (vii) The taxation of capital gains on indi....
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....mpany, the voting power or share capital of the transferor along with its associated enterprises in such company or entity does not exceed 26% of total voting power or share capital of the company or entity during the preceding 12 months; or (ii) in other cases, the voting power or share capital of the transferor in such company or entity along with its associated enterprises during the preceding 12 months does not exceed such percentage which results in 26% of total voting power or share capital of the immediate holding company having underlying assets in India." 18. As evident upon perusal of Explanations 6 and 7, some recommendations were accepted. The Finance Minister's Speech while introducing the amendments via FA 2015 is revelatory since a dim view was taken of the retrospective amendment brought about by Explanations 4 and 5, effective from 01.04.1962. "114. The provision relating to indirect transfers in the Income-tax Act which is a legacy from the previous government contains several ambiguities. This provision is being suitably cleaned up. Further, concerns regarding applicability of indirect transfer provisions to dividends paid by foreign comp....
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.... of deduction of tax, duty, cess and fee on the one hand with contributions to the Employees' Provident Fund, superannuation fund and other welfare funds on the other. However, the Finance Act, 2003, bringing about this uniformity came into force with effect from 1-4-2004. Therefore, the argument of the assessee(s) is that the Finance Act, 2003, was curative in nature, it was not amendatory and, therefore, it applied retrospectively from 1-4-1988, whereas the argument of the Department was that the Finance Act, 2003, was amendatory and it applied prospectively, particularly when Parliament had expressly made the Finance Act, 2003 applicable only with effect from 1-4-2004. 16. It was also argued on behalf of the Department that even between 1-4-1988 and 1-4-2004, Parliament had maintained a clear dichotomy between payment of tax, duty, cess or fee on one hand and payment of contributions to the welfare funds on the other. According to the Department, that dichotomy continued up to 1-4-2004, hence, looking to this aspect, Parliament consciously kept that dichotomy alive up to 1-4-2004, by making the Finance Act, 2003 come into force only with effect from 1-4-2004. Hence,....
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...., the scheme of Section 43-B of the Act came to be examined. In that case, the question which arose for determination was, whether sales tax collected by the assessee and paid after the end of the relevant previous year but within the time allowed under the relevant sales tax law should be disallowed under Section 43-B of the Act while computing the business income of the previous year? That was a case which related to Assessment Year 19841985. The relevant accounting period ended on 30-6-1983. The Income Tax Officer disallowed the deduction claimed by the assessee which was on account of sales tax collected by the assessee for the last quarter of the relevant accounting year. The deduction was disallowed under Section 43-B which, as stated above, was inserted with effect from 1-4-1984. 20. It is also relevant to note that the first proviso which came into force with effect from 1-4-1988 was not on the statute book when the assessments were made in Allied Motors (P) Ltd. [(1997) 3 SCC 472 : (1997) 224 ITR 677] However, the assessee contended that even though the first proviso came to be inserted with effect from 1-4-1988, it was entitled to the benefit of that proviso beca....
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....ction even in the year of account in which they pay the contributions to the welfare funds, whereas a defaulter, who fails to pay the contribution to the welfare fund right up to 1-4-2004, and who pays the contribution after 1-4-2004, would get the benefit of deduction under Section 43-B of the Act. 24. In our view, therefore, the Finance Act, 2003, to the extent indicated above, should be read as retrospective. It would, therefore, operate from 1-4-1988, when the first proviso was introduced. It is true that Parliament has explicitly stated that the Finance Act, 2003, will operate with effect from 1-4-2004. However, the matter before us involves the principle of construction to be placed on the provisions of the Finance Act, 2003. 25. Before concluding, we extract hereinbelow the relevant observations of this Court in CIT v. J.H. Gotla [(1985) 4 SCC 343 : (1985) 156 ITR 323] which reads as under: (SCC p. 360, para 47) "47. ... we should find out the intention from the language used by the legislature and if strict literal construction leads to an absurd result i.e. result not intended to be subserved by the object of the legislation found in the manner i....
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....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 passing a declaratory Act is to set aside what Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of statutes. Usually, if not invariably, such an Act contains a preamble, and also the word "declared" as well as the word "enacted".' But the use of the words 'it is declared' is not conclusive that the Act is declaratory for these words may, at times, be used to introduce new rules of law and the Act in the latter case will only be amending the law and will not necessarily be retrospective. In determining, therefore, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is 'to explain' an earlier Act, it would be without object unless construed retrospective. An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retr....
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....tional Holdings BV v. Union of India and Anr.: (2012) 6 SCC 613 and the Supreme Court held that the transaction of sale and purchase of a share of an overseas company between two non-residents would fall outside the ambit of Section 9(1)(i) of the Act. Subsequently, Section 9(1) was amended by virtue of Finance Act, 2012 by introduction of Explanations 4 & 5 to Section 9(1)(i) of the Act, which read as under:- "Explanation 4.-For the removal of doubts, it is hereby clarified that the expression "through" shall mean and include and shall be deemed to have always meant and included "by means of", "in consequence of" or "by reason of". 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 indirectly, its value substantially from the assets located in India;" 27. The notes to clauses explained the introduction of the Explanations 4 and 5 to Section 9(1)(i) of the Act as being clarificatory. A plain re....
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....submitted by the expert committee appointed by the Prime Minister in 2012 to report on the retrospective amendment relating to indirect transfer of assets (Shome Committee). The said Committee had, in its draft report, considered the import of the expression 'substantially' as used in Explanation 5 to Section 9(1)(i) of the Act. The Committee considered the submissions of stakeholders that the expression 'substantially' did not have any fixed meaning and was vague. After analysis, the Committee noted that it was necessary to pin down a definition of the said expression and for that purpose, there were no reason to depart from the Direct Tax Code Bill, 2010 (DTC) that had been put in the public domain. Under the DTC, gains from the sale of assets situated overseas, which derived more than 50% of their value from assets situated in India, were liable to be taxed in India. The Shome Committee in its draft report recommended as under:- "The word "substantially" used in Explanation 5 should be defined as a threshold of 50 per cent of the total value derived from assets of the company or entity. In other words, a capital asset being any share or interest in a company or entity r....