TMI Blog2023 (12) TMI 104X X X X Extracts X X X X X X X X Extracts X X X X ..... res was dependent on assets which were situated in India. It is to cure this gap in the legislation, Explanations 4 and 5 were introduced via FA 2012, which were given effect from 01.04.1962. Explanations 4 and 5 presented difficulties in that the expressions share and interest and substantially found in the explanations were vague, resulting in undue hardship for transferors/assessees where the percentage of share or interest transferred was insignificant. 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. The legislature took a curative step regarding the vague expressions used in Explanation 5, i.e., share/interest and substantially . The argument advanced on behalf of the appellant/revenue, shorn of gloss, boils down to the fact that the insertion of Explanations 6 and 7 via FA 2015 was to take effect from 01.04.2016 and could only be treated as a prospective amendment. The argument advanced in support of this plea was that Explana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the existing law. Also decided in Copal Research Limited, Moody s Group Limited, Moody s Analytics, USA [ 2014 (8) TMI 606 - DELHI HIGH COURT ] even before the amendment was brought about by FA 2015, has taken the view that Explanation 5 had to be construed narrowly. 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. 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 fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 The details of the investments made (which includes the percentage of ordinary and preference share capital held by the respondent/assessee in APL) are set forth hereafter: Date of Purchase Nature of Shares Number of Shares Purchased Value of purchase in INR Percentage Interest held by Augustus in APE 09.01.2013 Ordinary Shares 10,000 Rs. 220855.8/- 0.05% 09.01.2013 14.03.2014 Preference Shares 13,80,000 3,94,782 Rs. 30,479,144.2/- Rs. 18,420,000/- 2.93% Total 1,784,782 Rs. 4,91,20,000/- 2.98% 4.4 On 27.03.2015, the respondent/assessee sold its investment in APL to an Indian company, Jasper Infotech Pvt. Ltd., for Rs. 41,24,35,969/-. 4.5 The Return of Income (ROI) for the AY in issue, i.e., AY 2015-16, was filed by the respondent/assessee on 31.10.2015. Via the said ROI, the respondent/assessee declared its income as nil and claimed a refund of Rs. 17,84,19,800/-. 4.6 The record shows that the respondent/assessee was served with a notice under Section 143(2), followed by a notice under Section 142(1) of the Act on 05.04.2016 and 01.07.2016 respectively, by the Assessing Officer (AO). 4.7 The record also discloses that queries were raised during the assessment proceedings, which l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerning tax that the law to be applied is the one which is in force in the AY in issue unless provided otherwise, either expressly or by necessary implication. [ See Reliance Jute Industries Ltd. v CIT (1979) 120 ITR 921 (SC)] (ii) The law enacted by Parliament must have regard to the language used in the provision and construed in the background of the scheme and the object of both the statute and the provision in issue. Therefore, if Parliament chooses to confer a benefit through an amendment, it does not necessarily imply that it should be given retrospective effect, even without a legislative declaration. [See Commissioner of Wealth Tax v. Vardharaja Theaters (P.) Ltd, (2009) 250 ITR 523 (Madras)]. This principle is also applicable where Parliament seeks to remove hardship through amendment. [ See Commissioner of Wealth Tax v Atma Ram Properties (P.) Ltd (2017) 399 ITR 380 (Delhi)] (iii) An Explanation, which is clarificatory, must be read into the main provision, with effect from the date when the main provision came into force. However, if the clarificatory explanation brings about a change in law, it cannot be presumed that it would have a retrospective effect. [ See Sed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Shome committee by the Government of India. The recommendations of the Shome Committee led to amendments being brought about via FA 2015. Via Explanation 6, it was clarified what would be deemed as an acquisition of assets of substantial value located in India upon the transfer of shares and interest in a company or entity registered or incorporated outside India. Furthermore, via Explanation 7, a de minimis clause was introduced which, in effect, excluded transactions where neither the transfer of shares or interest exceeded 5% of the total voting power or total share capital or total interest of the company whose share or interest was being transferred, nor did the transferor have the right of management or control qua such company in the 12 months preceding the date of transfer. (iii) Therefore, all that Explanations 6 and 7 did was to cure the unintended consequences flowing from Explanation 5, which was introduced via FA 2012. Given this context, Explanations 6 and 7 should be made applicable retrospectively from when Explanation 5 became operational. Otherwise, the mischief sought to be cured would persist for the period preceding 01.04.2016, when FA 2015 was brought int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax, (1997) 3 SCC 472; Commissioner of Income Tax vs. Alom Extrusions Ltd., (2008) 319 ITR 306 (SC); Commissioner of Income Tax, Kolkata XII vs. Calcutta Exports Company, (2018) 16 SCC 686; Commissioner of Income Tax I, Ahmedabad vs. Gold Coin Health Food Private Ltd., (2008) 9 SCC 622; Sree Sankaracharya University of Sanskrit Ors. vs. Dr. Manu Anr., 2023 SCC OnLine SC 640; Commissioner of Income Tax v. Naresh Kumar, (2014) 362 ITR 256 (Delhi); Ghanashyam Mishra Sons Private Limited vs. Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657] (vii) There is no impediment in law in Courts relying upon speeches made by the concerned Minister while introducing legislation [ See Ghanshyam Mishra Sons Private Limited vs Edelweiss Asset Reconstruction Co. Ltd., (2021) 9 SCC 657]. Reasons and Analysis 13. Having heard the learned counsel for the parties, as indicated right at the outset, the only aspect that arises for consideration is whether Explanations 6 and 7 are clarificatory and curative and, therefore, should be given retrospective effect. 14. In this context, it is required to be emphasised that Section 9(1)(i) of the Act inter alia seeks to impose tax albeit via a dee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest transferred was insignificant. 17. Thus, based on representations received in this behalf, GOI referred this matter to the Shome Committee. The relevant parts of the record of the Shome Committee are extracted hereafter: (2) Section 9(1)(i) of the Act is a general source rule for a non-resident. It provides, inter alia, that any income accruing or arising, directly or indirectly, through transfer of a capital asset situated in India shall be deemed to accrue and arise in India and consequently be taxable. The words used in the clause, namely, through , transfer , capital asset and situated in India have been assigned additional meaning through insertion of Explanations vide Finance Act, 2012. As discussed in the Report, these Explanations need further clarifications as under (i) The phrase, the share or interest in a company or entity registered or incorporated outside India, in Explanation 5 to Section 9(1)(i) of the Act should mean and include only such share or interest which results in participation in ownership, capital, control or management. Therefore, all other types including mere economic interest should not be contemplated within the ambit of Explanation 5. (ii) T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship to small shareholders, it is recommended that, where shares or interest in a foreign company or entity derive, directly or indirectly, its value substantially from assets located in India, then the transfer of shares or interest in such company or entity outside India would not be subject to tax in India under section 9(1)(i) of the Act, if, (a) in case such company or entity is the immediate holding company of the assets situated in India, the voting power or share capital of the transferor along with its associated enterprises in such company or entity is less than 26%3 of total voting power or share capital of the company or entity during the preceding 12 months; or (b) 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 of the assets situated in India. xxx xxx xxx Recommendations 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 oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and resort to such provisions shall be avoided. 19. Therefore, in our opinion, the legislature took a curative step regarding the vague expressions used in Explanation 5, i.e., share/interest and substantially . 20. The argument advanced on behalf of the appellant/revenue, shorn of gloss, boils down to the fact that the insertion of Explanations 6 and 7 via FA 2015 was to take effect from 01.04.2016 and could only be treated as a prospective amendment. The argument advanced in support of this plea was that Explanations 6 and 7 brought about a substantive amendment in Section 9(1)(i) of the Act. In our view, this submission is misconceived because Explanations 6 and 7 alone would have no meaning if they were not read along with Explanation 5. Therefore, if Explanations 6 and 7 have to be read along with Explanation 5, which concededly operates from 01.04.1962, they would have to be construed as clarificatory and curative. 21. The legislature took recourse to the mischief rule to clarify Explanation 5, which otherwise was in danger of being struck down as vague and arbitrary. If Explanations 6 and 7 are not read along with Explanation 5, no legislative guidance would be available to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons claimed merely by making a book entry based on mercantile system of accounting. At the same time, Section 43-B (main section) made it mandatory for the Department to grant deduction in computing the income under Section 28 in the year in which tax, duty, cess, etc. is actually paid. However, Parliament took cognisance of the fact that accounting year of a company did not always tally with the due dates under the Provident Fund Act, the Municipal Corporation Act (octroi) and other tax laws. Therefore, by way of first proviso, an incentive/relaxation was sought to be given in respect of tax, duty, cess or fee by explicitly stating that if such tax, duty, cess or fee is paid before the date of filing of the return under the Income Tax Act (due date), the assessee(s) then would be entitled to deduction. However, this relaxation/incentive was restricted only to tax, duty, cess and fee. It did not apply to contributions to labour welfare funds. The reason appears to be that the employer(s) should not sit on the collected contributions and deprive the workmen of the rightful benefits under social welfare legislations by delaying payment of contributions to the welfare funds. 18. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to give the section a reasonable interpretation, it could be read retrospective in operation, particularly to give effect to the section as a whole. Accordingly, this Court, in Allied Motors (P) Ltd. [(1997) 3 SCC 472 : (1997) 224 ITR 677], held that the first proviso was curative in nature, hence, retrospective in operation with effect from 1-4-1988. 22. It is important to note once again that, by the Finance Act, 2003, not only is the second proviso deleted but even the first proviso is sought to be amended by bringing about a uniformity in tax, duty, cess and fee on the one hand vis- -vis contributions to welfare funds of employee(s) on the other. This is one more reason why we hold that the Finance Act, 2003 is retrospective in operation. Moreover, the judgment in Allied Motors (P) Ltd. [(1997) 3 SCC 472 : (1997) 224 ITR 677] was delivered by a Bench of three learned Judges, which is binding on us. Accordingly, we hold that the Finance Act, 2003 will operate retrospectively with effect from 1-4-1988 (when the first proviso stood inserted). 23. Lastly, we may point out the hardship and the invidious discrimination which would be caused to the assessee(s) if the contention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive and it would operate with effect from 1-4-1988 (when the first proviso came to be inserted). For the above reasons, we find no merit in this batch of civil appeals filed by the Department which are hereby dismissed with no order as to costs. [Emphasis is ours] Gold Coin Health Food Private Ltd. 8. It would be of some relevance to take note of what this Court said in Virtual case [(2007) 9 SCC 665]. Pointing out one of the important tests at para 51 it was observed that even if the statute does contain a statement to the effect that the amendment is clarificatory or declaratory, that is not the end of the matter. The Court has to analyse the nature of the amendment to come to a conclusion whether it is in reality a clarificatory or declaratory provision. Therefore, the date from which the amendment is made operative does not conclusively decide the question. The Court has to examine the scheme of the statute prior to the amendment and subsequent to the amendment to determine whether amendment is clarificatory or substantive. xxx xxx xxx 18. As noted by this Court in CIT v. Podar Cement (P) Ltd. [(1997) 5 SCC 482] the circumstances under which the amendment was brought in existe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amending Act also will be part of the existing law. [Emphasis is ours] 24. Furthermore, as correctly pointed out on behalf of the respondent/assessee, a coordinate bench of this Court in Copal, even before the amendment was brought about by FA 2015, has taken the view that Explanation 5 had to be construed narrowly. The following observations made therein being apposite, are extracted hereafter: 26. It is apparent from the above that only a fraction of the value of shares of Copal-Jersey was derived indirectly from the value of the shares of CRIL and Exevo-India. The question, thus, arises is whether the sale of shares of an overseas company which derives only a minor part of its value from the assets located in India could be deemed to be situated in India by virtue of Explanation 5 to Section 9(1)(i) of the Act. This question can be answered by reference to the express language of Section 9(1)(i) of the Act as well as by applying the principle that income sought to be taxed under the Act must have a territorial nexus with India. By virtue of Section 9(1)(i) of the Act all income arising from transfer of a capital asset situated in India would be deemed to accrue or arise in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntroduced a legal fiction for the limited purpose of imputing that assets which substantially derive their value from assets situated in India would also be deemed to be situated in India. 28. It is trite law that a legal fiction must be restricted to the purpose for which it was enacted. The object of Explanation 5 was not to extend the scope of Section 9(1)(i) of the Act to income, which had no territorial nexus with India, but to tax income that had a nexus with India, irrespective of whether the same was reflected in a sale of an asset situated outside India. Viewed from this standpoint there would be no justification to read Explanation 5 to provide recourse to section 9(1)(i) for taxing income which arises from transfer of assets overseas and which do not derive bulk of their value from assets in India. In this view, the expression substantially occurring in Explanation 5 would necessarily have to be read as synonymous to principally , mainly or at least majority . Explanation 5 having been stated to be clarificatory must be read restrictively and at best to cover situations where in substance the assets in India are transacted by transacting in shares of overseas holding com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of indirect transfers, the same, although not binding on Indian authorities, would certainly have a persuasive value in interpreting the expression substantially in a reasonable manner and in its contextual perspective. The United Nations Model Double Taxation Convention between Developed and Developing Countries and the OECD Model Tax Convention on Income and on Capital provide that the taxation rights in case of sale of shares are ceded to the country where the underlying assets are situated only if more than 50% of the value of such shares is derived from such property 31. Paragraph (4) of Article 13 of the United Nations Model Double Taxation Convention between Developed and Developing Countries provides that a Contracting State is allowed to tax a gain on alienation of shares of a company or on alienation of interests in other entities the property of which consists principally of immovable property situated in that State. For this purpose, the term principally in relation to the ownership of an immovable property means the value of such immovable property exceeding 50 per cent of the aggregate value of all assets owned by such company, partnership, trust or estate. It is al ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
