|CORAM:||H. S. Sidhu (JM), Prashant Maharishi (AM)|
|CATCH WORDS:||capital gains|
|COUNSEL:||Aarti Sathe, Percy Pardiwala|
|DATE:||March 9, 2017 (Date of pronouncement)|
|DATE:||March 10, 2017 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 9(1)(i): The capital gains arising on transfer by a foreign company of shares in another foreign company holding assets in India is liable to tax in India. The argument that the transfer is a mere re-organisation of assets within the group and that there is no “real income” is not acceptable. The argument that the India-UK DTAA should be given a “static” interpretation and that the retrospective amendment to s. 9 by the Finance Act 2012 should be ignored is also not acceptable. Where the DTAA provides that the income shall be chargeable to tax in accordance with the provision of the domestic law, the said domestic law has to be the amended law|
The assessee company is a tax resident of United Kingdom which was incorporated on 26th of June 2006. On 30/06/2006, it entered into the share exchange agreement with Cairn energy Plc where the entire issued share capital of 9 wholly owned subsidiary of Cairn energy plc were exchanged by issue of 22,14,44,034 shares of appellant at the face value of GBP 1 each. Thereafter the appellant entered into a share exchange agreement dated 07/08/2016 with another company Cairn India Holdings Ltd which was incorporated on 02/08/2006 in Jersey and appellant exchanged all the shares of those 9 subsidiaries with that company for issue to the appellant of 22,14,44,034 shares of GBP 1 each at par of that co, further for a debt of GBP 297,80,710 of Cairn energy hydrocarbons Ltd to Cairn energy plc was assigned to appellant for a consideration of 297,80,710 ordinary share of GBP 1 each by appellant to Cairn energy plc. It was further assigned by appellant to Cairn India holding Ltd, Jersey for 297,80,710 ordinary shares of GBP 1 each issued by Jersey company to the appellant. Thereby, in nutshell, 297,80,710 shares were acquired by appellant of Cairn India holding Ltd on account of sale/ transfer/ assignment of debt. Therefore by this stage appellant acquired (221444034 + 29780710) 25,12,24,744 of Cairn India holding Ltd. Subsequently the assessee sold all the shares to a newly formed company in India i.e., cairn India Ltd, through subscription and share purchase agreement dated 15/09/2006, and share purchase deed dated 12/10/2006. As per submission of the assessee, consideration for this transfer was settled partly in cash and partly by shares issued in cairn India Ltd in favour of the appellant. It is an undisputed fact that Cairn India holding Ltd is the holding company of 9 subsidiary companies in India who are engaged in the business in oil and gas sector in India. Therefore the transaction entered into by appellant of transferring 25,12,24,744 shares of Cairn India holdings Limited to Cairn India Limited on 12/10/2006 is whether liable to tax in India or not is the precise issue before us. We also examined the other connected issues raised before us arising out of the about transaction as under:-
(i) The 1st contention of the assessee is that lower authorities have erred in holding that capital gains arising to the appellant on account of the sales of shares of Cairn India Holdings Ltd to cairn India Ltd is deemed to accrue or arise in India under section 9 (1) (i) of the act and is therefore, chargeable to tax in India. The argument of the assessee is that retrospective amendment to section 9 (1) (i) of the act by The Finance Act, 2012 is bad in law and ultra vires. In view of the decision of the Hon‘ble Supreme Court in L. Chandra Kumar V Union of India 2002-TIOL-159-SC-CB this is not the right forum to challenge validity of provisions of the Income Tax Act. In view of this contention of the assessee rejected.
(ii) The 2nd contention raised before us by the assessee is that it is an internal reorganization of the group, as there is no change in controlling interest as a result of these internal or reorganization. The contention of the assessee is that the reason for the internal reorganization was with a view to bring entire Indian business operations of Cairn group under one Indian company. This was followed by listing the shares of this Cairn India Ltd on various Stock exchanges in India. It is further contended that there is no 3rd party involved in the whole transaction except the group itself and there can be no tax, which can be levied on the internal reorganization when there is no increase in the wealth of the appellant. Explanation to section 2 (14) was added by The Finance Act, 2012 with retrospective effect from 1/4/1962 as under:-
“Explanation For the removal of doubts, it is hereby clarified that ―property” includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever;”
Therefore according to the above provisions, right of management and control is a property u/s 2(14) of the act. In the present case the shareholders of 9 companies situated in India which controls the oil and Gas sector in India are having the “property” of the right to manage and control that business by virtue of shareholding and further such rights are “rights in or in relation to an India company”. Therefore any income arising ‘through or from‘ any property In India shall be chargeable to tax as income deemed to accrue or arise in India in terms of the provision of section 9 (1) (i) of the act. The cairn India Holdings Limited is the holding company of those subsidiary companies and appellant is holding company of the Cairn India Holdings Limited. Therefore, it is apparent that appellant is holding rights in control and management of the shares of the 9 Indian subsidiary companies engaged in the business of oil and gas Sector through holding subsidiary structure. Now appellant has transferred this property to Cairn India Limited partly in cash and partly in exchange of shares. Appellant submits that it is a case of business reorganization and there is no increase in wealth of the Group. According to us there are series of transactions entered in to by the group, which culminated in to the Initial Public Offering of 986,39,903 shares @ 160 per share of Cairn India Limited. Part of the purchase price of the share of Rs 6101 crores have been paid out of the proceeds of the public issue by Cairn India Limited to the appellant. In the IPO as per Annexure 1 to the letter submitted before DRP placed at page no 159 of the paper book of the revenue shows that in IPO, cairn India Limited has divested 30.50 % of the stake to the General Public and Institutional investors. The complete financial arrangement of the Group has ended through series of transfer of shares from U K Jurisdictions to Jersey Jurisdiction to India. On divesting 30 % stake in these oil and gas assets located in India and part of IPO proceeds app. Rs 6101/- Crore paid to the appellant in U K. Therefore, we are not convinced that these series of transactions entered in to by the group is merely a business reorganization process in consolidation of its oil and gas business India. Furthermore arguments of the assess also do not have any rational that there is no increase in the wealth of appellant as the value of the holdings of the appellant in Cairn India Limited has been unlocked due to IPO and value is derived by the book building process.
(iii) The third argument of the assessee is that there is no real income accruing to the assessee and only real income can be taxed. Relying on the decision of Honourable Calcutta High court in case CIT V Kusum products Limited  49 taxmann.com 403 (Calcutta) it was submitted that post these internal organization is no real income has accrued to the appellant as al the steps mentioned of internal reorganization all the assets which the appellant was holding in India are now available in different form. Whether assessee has earned any gain or not to arrive at that decision one has to look at the financial statements of the appellant for year ended on 31st December 2006 and 2007 which are placed at page no 254 to 285 of the paper book of the assessee. For the Year ended on 31/12/2006 the note No 13 of the audited accounts shows the transaction with related party. Further reading of note No. 6, which relate to taxation, It is mentioned that no tax has been provided in respect of the disposal of part of the company‘s investment in its subsidiary is the disposal is exempt from tax under schedule 7AC of the Taxation of the chargeable Gains Act 1992.
In view of this, the argument of the assessee that there is no increase in the wealth of the appellant and there is no real income earned by the assessee does not deserve to be accepted. In fact, the assessee has earned substantial gain on sale of the shares and also has gained on account of taxes too as according to the assessee itself such gain is not chargeable to tax. Therefore, the assessee has earned the real income on account of sale of its shares in Cairn India Holdings Ltd to Cairn India Ltd.
(iv)The next argument of the assessee is that while computation of the capital gain in the hands of the appellant is made, the cost of acquisition should be stepped up to the fair value of the shares of cairn India holding Ltd on the date of acquisition. Claim of the assessee is that share exchange agreement dated 08/06/2006, share exchange agreement dated 07/08/2006 are both transaction of exchange of share for the shares. Further, the assignment of debt was also with respect to exchange of the shares in lieu of debt. In the last impugned transaction, which is, subject matter of dispute is also share purchase agreement dated 15/09/2006 and share purchase deed dated 12/10/2006. By this agreement shareholding in Cairn India holding Ltd was transferred by appellant to Cairn India Ltd in for trenches for a consideration of Rs. 2266,81,87,10,140/– which was paid partly in cash by Cairn India Ltd and partly by issue of equity shares in Cairn India Ltd., Therefore, it is submitted that 1st and 2nd transfer is by way of exchange and 3rd transfer is by way of sale. The main thrust of the argument of the assessee is that when any asset is transferred in lieu of another asset and no specific amount for consideration is agreed between the parties that is a case of transfer by way of exchange. For this, ld AR tried to substantiate it that in none of the agreements no specific amount for consideration is mentioned. Therefore according to the assessee while computing capital gains in such cases fair market value of the asset received in consideration for the assets transferred should be considered as full value of consideration. The Ld. authorized representative of the assessee has heavily relied upon the decision of the Hon‘ble Supreme Court in the case of CIT versus Gillander Arbuthnot and company (1973) 87 ITR 407 (SC) and CIT versus George Henderson and company limited (1967) 66 ITR 622 (SC). The Ld. authorized representative also relied on the decision of Hon‘ble Supreme Court in the case of CIT versus R.R. Ramakrishna Pillai (1967) 66 ITR 725 (SC) wherein it has been held that when a person carrying on the business transfers the assets to accompany in consideration for allotment of shares it would be case of exchange and not of sale. Therefore it was submitted that in the case of the appellant for the above transfer the capital gain should be computed in accordance with those principle stating that where transfer of assets is in lieu of another asset the full value of the consideration shall be the fair market value of the assets received by the transferor. Further assessee has submitted that the 1st and 2nd transfer of share as per the stand of revenue is also chargeable to capital gain. Therefore, it was submitted that
1. capital gain in the hands of Cairn energy plc who exchange the shares in the 1st transaction receiving a sum of Rs. 266818710140/- will have the cost of acquisition of Rs. 21783697552/-and may be liable to capital gain tax in the hands of that cairn Energy PLC of Rs. 245035012588/–.
2. Similarly, in the case of 2nd transfer of shares on 7th of August 2006 when shares of 9 subsidiaries were transferred by appellant to Cairn India holding Ltd should be computed taking the full value of consideration of Rs. 266818710140/-and the cost of acquisition shall be taken at the same value being the full value of consideration in the hands of Cairn energy plc and therefore Nil capital gain shall be chargeable. In the 2nd trench of transaction full value of consideration is taken as the fair value of the shares of 9 subsidiaries company when the shares of Cairn India holding Ltd were transferred by the agreement dated 15/09/2006 and 12/10/2006, since there is insignificant timing difference between the two transfers the valuation of the shares which is received on transfer of shares of Cairn India holding Ltd is considered for the purpose of fair value of the shares by the assessee.
3. Further, the 3rd transfer of shares where the shares of Cairn India holding Ltd were transferred by appellant to Cairn India Ltd, the computation of the capital gain should be by taking the full value of consideration of Rs. 266818710140/-and the cost of acquisition should also be taken at the same value in absence of any timing difference between acquitsion and disposal and therefore the capital gain chargeable to tax in the hands of the appellant is Nil.
Against this, the Ld. departmental representative submitted that it is not transaction of exchange, but it is a transaction of sale. He referred to the sale purchase deed and subscription and share purchase agreement according to which the appellant sold the 100 % investment in Cairn India Holdings Ltd, of 25122474 for shares of cairne India holding Ltd, to cairn India Ltd for Rs. 266818710140/-and consideration is partly in cash and partly by issue of shares of Cairn India Ltd to appellant. He further submitted that appellant has acquired 221444034 shares in exchange of the shares of 9 subsidiary companies and 29780710 shares in view of the debt transferred to Cairn India Holdings Limited. Therefore he submitted that the capital gain is required to be computed as per section 48 of the Income Tax Act. According to which the full value of the consideration received is Rs. 266818710140/- and from this, the actual cost of acquisition is required to be deducted. He submitted that there is no dispute on this figure between the revenue as well as the assessee. However, the cost of acquisition stated by the assessee of the identical value is under dispute. He further submitted that earlier two transactions have not at all been taxed. Therefore, assessee cannot say that earlier transactions also have been charged to tax. Regarding cost of acquisition the claim of the revenue is that shares of Cairn India holding Ltd was acquired by appellant into trenches , i.e. 221444034 shares @ GBP 1 per share and 29780710 shares by selling debt of GBP 2978,07,80,710. Therefore actual cost of acquisition is GBP 251,24,744 which is converted by applying exchange rate of Rs 86.71 per GBP is Rs. 2178,36,97,552/- only. On careful consideration on the argument of the both the parties, it is noted that there is no difference between the full value of the consideration determined by the both the parties received accruing to the assessee as a result of the transfer of the capital asset. Both have taken the same at Rs. 26681,87,10,410/-only. As there is no difference between the full value of consideration taken by revenue as well as the assessee, we do not find any reason to go in to the controversy whether the transaction is of exchange or sale. Further merely because the consideration is not stated in monetary terms in the various agreements and deed, it cannot be said that sales consideration as well as the cost cannot be determined of the transfer of the property for working capital gain. In the present case the price of the shares in each of the agreement is identified and the amount of acquisition recorded in the books of accounts also proves that what the cost is paid for acquisition of the shares. The dispute is with respect to the cost of acquisition of the above property. Revenue has determined it at Rs. 2178,36,97,552/-whereas the assessee has stated it should be taken at Rs. 26681,87,10,410/-only. According to the provisions of the Income Tax Act, the Capital gain is required to be computed as per method provided under section 48 wherein it is to be computed by deducting from the full value of consideration received accruing as a result of the transfer of the capital asset by the cost of acquisition of the assets and cost of improvement thereto. Section 55 (2) and (3) provides that for the purpose of section 48 and section 49, what the cost of acquisition with respect to certain transactions as is under
The property on transfer of which capital Gain is required to be computed are the shares of Cairn India Holdings Ltd, which is incorporated in Jersey and therefore shares transferred are not of an Indian company but Jerseey Company. On conjoint reading of provisions of section 48, 49 and 55 of the Act it is apparently clear that property held by the assessee and its mode of acquisition do not fall in any of the clauses which provides for taking the cost of acquisition in the hands of the assessee in these transaction being cost to the previous owner. No such provision has also been cited before us. We also do not agree with the contention of the assesee that as there is no timing difference between the acquisition and disposal of shares, the full value of consideration and the cost of acquits ion is same. Provision of section 48, 49 and 55(2) of the act does not allow such treatment. Therefore the computation of capital gain in the hands of the assessee is required to be made by deducting from the full value of consideration cost of acquisition incurred by the assessee for acquisition of the property. We do not find any infirmity in the order of the ld AO in taking the cost of acquisition, which is derived by issues of shares as well as by sale of debt. In the result we confirm the order of the Ld AO in working out capital Gain on sale of shares of Cairn India Holding limited in the hands of appellant of Rs. 24503,50,12,588/-.
v. The ground No. 3.12 has been raised as an additional ground of the appeal, which has been admitted, and therefore requires to be adjudicated. This ground states that according to Article 14 of Indian United Kingdom except as provided in Article 8 and 9 each contracting state may tax capital gain in accordance with the provisions of its domestic law. This Double Taxation Avoidance Agreement was notified on 11.02.1994. The contention of the assessee is that for the purpose of taxability of capital gain the domestic law should be seen as it was in existence on the date on which India UK DTAA was notified. Precisely the argument of the assessee is that on 11.02.1994 the retrospective amendment to section 9 made by the Finance Act 2012 was not in existence and therefore, if the assessee is eligible for the benefit of DTAA then the domestic tax law is required to be read ignoring the retrospective amendment made by The Finance Act, 2012. To advance his argument Shri Percy Pardiwala relying upon the decision of the Hon’ble Delhi High Court in case of New Sky Satellite BV (2016) 68 Taxmann.com 8 (Del) has specifically referred to Para No. 36 to 40 of that judgment. In response to this ld Departmental Representative submitted that the contention raised by the ld Authorized Representative is not correct. He stated that the India UK Treaty specifically Article 40 has simply provided that capital gain are required to be dealt with in accordance with the domestic tax law. He submitted that transaction has taken place of sale of share by the appellant to Cairn India Ltd in 2006 then how the domestic law prevailing for chargeability of capital gain as on 1994 can be applied to that transaction. With respect to the decision of Hon’ble Delhi High Court in case of DIT Vs. New Sky Satellite BV (supra) he submitted that the law laid down by that decision with respect to chargeability of fees for technical services with respect to definition in DTAA as well as in the domestic state law. There Hon’ble Delhi High Court has held that
unless there is an amendment in the treaty the amended definition of royalty and fees for technical services in Finance Act by The Finance Act, 2012 cannot be applied where the assessee is eligible for DTAA. We have carefully considered the rival contentions and we reject the argument of assessee for the reason that
(i) provision in the Double Taxation Avoidance Agreement cannot make the domestic law static with respect to taxability of a particular income when unequivocally both sates have left it to the domestic laws of the countries.
(ii) suppose if there is an exemption provided with retrospective effect under the domestic law can Non-resident assessee be also denied the benefit as it was also not the law at the time of notification of Double Taxation Avoidance argument, the answer is in negative
(iii) DTAA are mechanism of avoiding multiplicity of taxation globally of an assessee. Therefore, if in the country of residence taxes are chargeable then the assessee must not suffer the tax burden in the country of source of income. We have referred to the balance sheet of Cairn UK Holding Ltd which is at page No. 261 of the paper Book submitted by the assessee wherein note NO. 6 itself suggests that the appellant has not provided for any tax in respect of disposal of the part of the company‘s investment in its subsidiaries as the disposal is exempt from tax under Schedule 7AC of the Taxation of changeable gain Act 1992 of United Kingdom.
(iv) Coming to the decision of the Hon’ble Delhi High Court in case of DIT Vs. New Skies Satellite BV wherein the Hon’ble High court has held that in relation to applicability of Article 3(2) of the relevant DTAAs, that it can apply only to terms not defined in the DTAA. Since the relevant DTAAs in the case before them defined ‘royalty’, Article 3(2) could not be applied. For terms which are defined under the DTAA, there is no need to refer to the laws in force in the Contracting States, especially to deduce the meaning of the definition under the DTAA. Further, the court has held that neither act of parliament supply or alter the boundaries of DTAA or supply redundancy to any part of its. Similarly, according to us, the provisions of DTAA where it simply provides that particular income would be chargeable to tax in accordance with the provisions of domestic laws, such article in DTAA also cannot the limit the boundaries of domestic tax laws. In view of this, we do not find any force in the argument of the assessee and dismiss ground No. 3.12 of the appeal.
Assessment should have been quashed on the basis of 151. Stakes involved must have influenced the decision. Addl. DIT is not at an authority for 151 approval. Period.
TENTATIVE (own thoughts shared on a limited aspect):
1. Among the several contentions raised and argued on behalf of the appellants, eminently so, those pertaining to the ‘fair value’ of the shares to be taken into account for computing and charging real income (under the head of ‘capital gains’ ?!) , even if any so chargeable, call for a special /conscious noting.
2. Pending a careful and close study, it appears that, the referred line of reasoning adopted and urged might be of every relevance, and require to be addressed, in all such disputes; in particular, in cases expected to come up if and when the provisions of the newly introduced CHAPTER X-A (sections 95 to 102 – GAAR) – to be precise, the concept of ‘indirect transfer’ have come into effect and are sought to be invoked.
Open to EDIT / More to share
Anyone duly equipped and inspired, may Cross Refer, apart from the Experts’ commentary and cited case law, in the Text Book of Kanga and Palkhivala, TENTH EDITION, Volume I, (on sec 9 (1)…say pg.343 to 347), the Previous Articles and Posts in public domain on the fanciful concept of, – ‘Indirect Transfer’ . For makig an analytical study of the provisions of relevance herein, for help in getting a firm grip of the core issues involved, may mindfully look through :
For a somewhat detailed / comprehensive feedback, on issues /propositions of relevance (to assist an independent study by eminent tax experts in field practice), look through: