2025 (7) TMI 903 - HC - Income Tax

Revision u/s 264 - request of Nil withholding tax certificate u/s 195(2) - AO rejected the said request and issued a certificate directing that the tax be withheld at the rate of 10% of the total consideration - HELD THAT - The only aspects which were required to be considered by the AO for considering the Petitioner s Application for a Nil withholding tax certificate are the value of the shares at which they are proposed to be transacted and whether the same would result in any capital gains. For the purposes of Section 50CA of the Act it may be necessary to examine the FMV of the shares. Revenue submits that since the transaction has not been consummated as yet it would be necessary for the Petitioner to furnish the valuation report in respect of the current FMV of the shares in question. Insofar as the value of the shares on the date of purchase by BII is concerned the same is not required to be examined at this stage as BII had already acquired the shares pursuant to an earlier transaction which is not the subject matter of enquiry in the relevant assessment year. The historical cost of acquisition cannot be re-worked for determining the capital gains that may arise from sale of the subject shares. The question whether the BII had acquired the shares of BIND at the FMV may be relevant for examining the transaction for acquisition of shares during the assessment year relevant to the previous year when they were acquired. However the certificate sought by the petitioner is confined to the sale of the subject shares by BII to the Petitioner. Petitioner submits that there is no difficulty in submitting a fresh valuation report as the FMV of the shares in question would have reduced on account of further losses incurred by BIND. We set aside the impugned order and remand the matter to the learned CIT to consider afresh. The Petitioner shall furnish a fresh valuation report by an approved valuer for the aforesaid purpose within a period of four weeks from today setting out the FMV of the shares in question as on 31.03.2025 which the learned counsel agree would be the relevant proximate date be considered as a valuation date for the purposes of Rule 11UA of the aforesaid Rules.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the Petitioner is entitled to a Nil withholding tax certificate under Section 195(2) of the Income Tax Act, 1961, in respect of the proposed purchase of shares of an Indian company from its affiliate.

- Whether the transaction of purchase and sale of shares would result in capital gains or capital loss, thereby affecting the tax liability and withholding requirements.

- Whether the valuation reports furnished by the Petitioner sufficiently establish the Fair Market Value (FMV) of the shares at the relevant dates for determining capital gains and withholding tax obligations.

- Whether the Assessing Officer (AO) and the Commissioner of Income Tax (CIT) were justified in rejecting the Petitioner's application for Nil withholding tax certificate based on the absence of adequate valuation and financial documentation.

- The extent to which historical cost of acquisition and FMV of shares should be considered in determining withholding tax obligations under Section 195 of the Income Tax Act.

2. ISSUE-WISE DETAILED ANALYSIS

Entitlement to Nil Withholding Tax Certificate under Section 195(2)

The legal framework governing the issuance of a Nil withholding tax certificate under Section 195(2) requires the deductor to seek prior approval from the tax authorities if it believes that no tax is payable on a particular remittance or transaction. The AO is empowered to grant or reject such certificate based on the facts and documents submitted, including valuation reports and financial statements.

The Petitioner, a Singapore tax resident company, sought a Nil withholding tax certificate for the purchase of shares of an Indian company from a US-based affiliate. The Petitioner claimed that the transaction would not result in capital gains but rather a loss, based on the cost of acquisition and sale consideration translated into Indian Rupees and US Dollars respectively.

The AO rejected the application on the ground that the Petitioner had not furnished adequate valuation reports, particularly at the time of acquisition of shares by the US affiliate, and that the proposed sale price was significantly higher than the FMV reported in the valuation report submitted. The AO directed withholding tax at 10% of the transaction value to protect revenue interests.

The CIT, in exercising revisionary powers under Section 264, concurred with the AO's findings, noting the absence of valuation at the acquisition date and the discrepancy between the agreed sale price and the FMV. The CIT observed that the shares were unlisted and that necessary documents to ascertain capital gains were not provided, thereby justifying withholding tax deduction.

The Court observed that the primary considerations for granting a Nil withholding tax certificate are the value of shares at which the transaction is proposed and whether capital gains would arise. The Court clarified that the historical cost of acquisition by the US affiliate was not required to be re-examined at this stage, as that transaction was not under scrutiny. Instead, the focus should be on the FMV of shares as on the date of proposed sale, computed in accordance with Rule 11UA of the Income Tax Rules, 1962.

Valuation Reports and Determination of Fair Market Value

The Petitioner had submitted a valuation report indicating FMV of the shares at Rs. 50.25 per share as on 31.10.2022, whereas the agreed sale price was Rs. 100 per share. The AO and CIT found this discrepancy suspicious and noted the absence of valuation reports for the acquisition date and the financials of both seller and purchaser.

The Court emphasized the necessity of a fresh valuation report by an approved valuer as per Rule 11UA, with the valuation date proximate to the transaction date (agreed as 31.03.2025). The Court held that the valuation report is critical to ascertain whether the transaction would result in capital gains or loss, which directly impacts the withholding tax liability.

Application of Law to Facts and Treatment of Competing Arguments

The Petitioner argued that the transaction would result in a loss in US Dollar terms and thus no tax liability would arise. The Revenue contended that the Petitioner's failure to provide valuation at acquisition and the discrepancy in FMV justified withholding tax deduction.

The Court distinguished between the acquisition cost of shares by the US affiliate and the current transaction, holding that the historical acquisition cost is irrelevant for the current withholding tax certificate application. The Court accepted the Petitioner's willingness to furnish a fresh valuation report reflecting the current FMV, which would be determinative of tax liability.

The Court rejected the Revenue's insistence on valuation at acquisition date for the current application, clarifying that such examination is relevant only for assessment years related to that acquisition, not for the present transaction.

3. SIGNIFICANT HOLDINGS

"The only parameters required to be considered by the learned CIT at this stage are the historical costs at which the subject shares acquired by BII; the consideration at which the said shares are now proposed to be transferred to the Petitioner; and the FMV of the said shares computed in accordance with Rule 11UA of the Income Tax Rules, 1962."

"The historical cost of acquisition cannot be re-worked for determining the capital gains that may arise from sale of the subject shares. The question whether the BII had acquired the shares of BIND at the FMV may be relevant for examining the transaction for acquisition of shares during the assessment year relevant to the previous year when they were acquired. However, the certificate sought by the petitioner is confined to the sale of the subject shares by BII to the Petitioner."

"The Petitioner shall furnish a fresh valuation report by an approved valuer for the aforesaid purpose within a period of four weeks from today setting out the FMV of the shares in question as on 31.03.2025... The concerned authority shall consider the same and shall issue a Nil withholding tax certificate if the proposed transaction does not result in any liability to pay tax."

The Court set aside the impugned order and remanded the matter to the learned CIT for fresh consideration strictly on the basis of the sale consideration, historical acquisition cost, and FMV computed under Rule 11UA, with a fresh valuation report to be furnished by the Petitioner.