TMI Blog2020 (10) TMI 751X X X X Extracts X X X X X X X X Extracts X X X X ..... 84/DEL/2018 - - - Dated:- 15-10-2020 - Shri N.K. Billaiya, Accountant Member, And Shri Amit Shukla, Judicial Member For the Assessee : Shri Kanchan Kaushal, Adv, Shri K.M. Gupta, Adv, Shri Rishab Malhotra For the Revenue : Shri Satpal Gulati, CIT-DR ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, This appeal by the assessee is preferred against the order dated 30.10.2018 pertaining to A.Y 2015-16 framed u/s 143(3) r.w.s 144C(13) of the Income tax Act, 1961 [hereinafter referred to as 'the Act' for short]. 2. The sum and substance of the grievance of the assessee is that the Assessing Officer erred in assessing the total income at ₹ 36,33,15,970/-, as against NIL returned income, thereby denying applicability of provisions of Explanation 7 to Section 9(1)(i) of the Income-tax Act, 1961 [hereinafter referred to as 'The Act'] holding that the applicability of the said Explanation is prospective. 3. Briefly stated, the facts of the case are that the appellant company is in the business of incubation of companies i.e. providing new businesses, with necessary financial support and technical services. During the course of its business, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01.04.2016. If the legislature has intentionally made certain provisions effective from specific date, there should not be any speculation or doubt about its applicability from certain date in the past. If the Parliament has intended to introduce Explanation-7 with retrospective effect it would have made it so as it has done in case of Explanation4 5 of Section- 9(1)(i) of the Act. Therefore, it is clear that provisions of Explanation- 7 are not applicable the assessee's case as these are not applicable to AY 2015-16. 11. Accordingly, the Assessing Officer computed the long term capital gains arising from the transfer of shares of Accelyst as under: Particulars Amount (in INR) Total sale consideration of shares 41,24,35,969 Less: Cost of acquisition 4,91,20,000 Long term capital gain 36,33,15,969 Accordingly, addition of ₹ 36,33,15,969/- was proposed. 12. Aggrieved by the draft assessment order, the appellant filed objections before the DRP and the DRP, vide directions dated 14.09.2018, confirmed the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... continued by stating that the Government of India, in line with the recommendation of the Shome committee vide Finance Act of 2015, introduced Explanation 6 and Explanation 7 to Section 9(1)(i) of the Act with effect from 01-04-2016. 16. It is the say of the ld. counsel for the assessee that Explanation6 and Explanation 7 have to be tagged with Explanation 5 and have to be considered of having retrospective effect. 17. Per contra, the ld. DR strongly supported the assessment order. The ld. DR stated that if the Legislature had the intention to give retrospective effect to Explanations 6 and7, then it would have made it specifically as was done when Explanation 5 was inserted which was specifically given retrospective effect from 01.04.1962. 18. Referring to Explanation 7, the ld. DR stated that it carves out exemption from the applicability of Explanation 5 to small investors holding no right of management or control of such company / entity and holding less than 5% of the total voting power, share capital, interest of the company/entity that directly or indirectly owns the assets situated in India. It is the say of the ld. DR that it is a substantive amendment, as it c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject to tax in India under section 9(1)(i) of the Act, if, (i) in case such company or entity is the immediate holding company, 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. 25. Before the recommendations of the Shome Committee could be accepted by the Government, the Hon'ble High Court of Delhi in the case of Copal Market Research Limited 49 Taxmann.com 125 was seized with similar quarrel wherein the share purchase agreement was dated 03.11.2011 [prior to amendment] and following the question, inter alia, needed to be adjudicated: Whether on facts and in law, the applicant is justified in its view that capital gains arising on the sale of shares of Exevo Inc., US ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 reading of Explanation 5 also indicates that the given reason for its introduction was for removal of any doubts. In other words, the language of the said legislative amendment suggests that it was always the intention of the legislature that an asset which derives its value from assets in India should be considered as one which is situated in India. The clear object of Section 9(1)(i) of the Act is inter alia to cast the net of tax also on income which arises from transfer of assets in India irrespective of the residential status of the recipient of the income. Since the assets are situated in India, the entire income arising from their transfer could be said to arise i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 (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 registered or incorporated outside India shall be deemed to be situated in India, if the share or interest derives, directly or indirectly, its value from the assets located in India being more than 50% of the global assets of such company or entity. This has been explained through the above illustration.' 30. In addition to the above, the 'United Nations Model Double Taxation Convention between Developed and Developing Countries' and the 'OECD Model Tax Convention on Income and on Capital' may also be referred to since the said conventions deal with a regime whereunder the right to tax capital gains can be fairly and reasonably apportio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the aggregate value of all assets owned by the company, partnership, trust or estate.' 32. The 'OECD Model Tax Convention on Income and on Capital' provides a means of settling on a uniform basis the most common problems that arise in the field of international juridical double taxation. Article 13 of the said Convention deals with the taxes on capital gains. Article 13(1) provides that the gains derived by a resident of a Contracting State from the alienation of immovable property situated in another Contracting State may be taxed in that other State. Article 13(4) of the said Convention provides that the 'gains derived by a resident of a Contracting State from the alienation of shares or comparable interests deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.' 33. In view of the above, gains arising from sale of a share of a company incorporated overseas, which derives less than 50% of its value from assets situated in India would certainly not be taxable under section 9(1)(i) of the Act read with Explanation 5 thereto. 34. Thus, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be, the entity: Provided further that the first accounting period of the company or, as the case may be, the entity shall begin from the date of its registration or incorporation and end with the 31st day of March or such other day, as the case may be, following the date of such registration or incorporation, and the later accounting period shall be the successive periods of twelve months: Provided also that if the company or the entity ceases to exist before the end of accounting period, as aforesaid, then, the accounting period shall end immediately before the company or, as the case may be, the entity, ceases to exist; (d) specified date means the- (i) date on which the accounting period of the company or, as the case may be, the entity ends preceding the date of transfer of a share or an interest; or (ii) date of transfer, if the book value of the assets of the company or, as the case may be, the entity on the date of transfer exceeds the book value of the assets as on the date referred to in sub-clause (i), by fifteen per cent. 11 Explanation 7.- For the purposes of this clause,- (a) no income shall be deemed to accrue or arise to a no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 companies to their shareholders will be addressed by the Central Board of Direct Taxes through a clarificatory circular. These changes would eliminate the scope for discretionary exercise of power and provide a hassle free structure to the taxpayers. I reiterate what I had said in the last Budget that ordinarily retrospective tax provisions adversely impact the stability and predictability of the taxation regime and resort to such provisions shall be avoided. 30. The CBDT came out with Circular No. 41 of 2016 for giving clarifications on Indirect Transfer Provisions under I.T. Act. Explanatory Notes to the provisions of Finance Act 2015 has further brought clarity relating to Indirect Transfer Provisions and the same read as as under: 8. Clarity relating to Indirect transfer provisions 8.1 The provisions of section 9 of the Income-tax Act deal with cases of income which are deemed to accrue or arise in India. Sub-section(1) of the said section creates a legal fiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the accounting period of the company or entity, as the case may be, ends preceding the date of transfer. (iv) however, if the book value of the assets of the company on the date of transfer exceeds by at least 15% of the book value of the assets as on the last balance sheet date preceding the date of transfer, then instead of the date mentioned in (iii) above, the date of transfer shall be the specified date of valuation. (v) the manner of determination of fair market value of the Indian assets vis-a vis global assets of the foreign company shall be prescribed in the rules. (vi) the taxation of gains arising on transfer of a share or interest deriving, directly or indirectly, its value substantially from assets located in India will be on proportional basis. The method for determination of proportionality shall be prescribed in the rules. (vii) the exemption shall be available to a non-resident from transfer, outside India, of a share of, or interest in, a foreign company or entity if such foreign company or entity directly owns the assets situated in India and the transferor along with its associated enterprises, at any time in twelve months preceding the date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailure has taken place if such transaction had the effect of directly or indirectly transferring the right of management or control in relation to the Indian concern; and (b) a sum of five lakh rupees in any other case. 31. To recapitulate our discussion hereinabove, Section 9(1)(i) of the Act was amended and Explanation 5 was inserted by the Finance Act, 2012 giving retrospective effect from 01.04.1962 because of apprehensions and ambiguities in the said Explanation Shome Committee was constituted and on the recommendations of Shome Committee, Explanations 6 and 7 were inserted by the Finance Act, 2015. 32. Both the Explanations 6 and 7 start with For the purposes of this clause . In our understanding, the reference to this clause is to Section 9(1)(i) of the Act and Explanation 5 starts with For removal of doubts . In our understanding of the law, Explanations 6 and 7 have to be read with Explanation 5 to understand the provisions of Section 9(1)(i) of the Act. Since Explanation 5 has been given retrospective effect and Explanations 6 and 7 have been inserted in furtherance of the object of insertion of Explanation 5, these two explanations cannot be read in isolation, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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