| COURT: | |
| CORAM: | |
| SECTION(S): | |
| GENRE: | |
| CATCH WORDS: | |
| COUNSEL: | |
| DATE: | (Date of pronouncement) |
| DATE: | October 11, 2013 (Date of publication) |
| AY: | |
| FILE: | |
| CITATION: | |
| Click here to download the judgement (Cairn_Capital_Gains_112_Proviso.pdf) |
Non-residents are eligible for the benefit of 10% tax rate on long-term capital gains under the Proviso to s. 112. The AAR should avoid giving conflicting rulings
The assessee, a company based in Scotland, sold 4,36,00,000 equity shares of Cairn India Ltd to Petronas International, Malaysia, for consideration of US$ 241 Million. The sale was not through a stock exchange and resulted in long-term capital gain of US$ 85 Million in the hands of the assessee after applying the benefit under first proviso to s. 48. The assessee filed an application for advance ruling in which it claimed that the said capital gains was chargeable to tax at the rate of 10% as per the proviso to s. 112(1). However, the AAR (337 ITR 131), departing from its earlier view in Timken France SAS 294 ITR 513 (AAR), held that the expression “before giving effect to the 2nd proviso to s. 48” in the Proviso to s. 112(1) presupposes the existence of a case where computation of long-term capital gains could be made in accordance with the formula contained in the 2nd proviso in s. 48 (indexation) and that as non-residents were not eligible for indexation, the lower rate of tax specified in the Proviso to s. 112 was not available. On a writ petition by the assessee to challenge the AAR’s ruling, HELD by the High Court reversing the AAR:
It is not possible to decipher the exact legislative purpose behind the proviso to s. 112(1) in a categorical and unambiguous manner. However, if one squarely focuses on the words used in the proviso and interprets them without extracting or subtracting any phrase or word, a non-resident assessee is entitled to benefit of the said provision. The proviso to s. 112(1) does not state that an assessee, who avails benefits of the first proviso to s. 48, is not entitled to benefit of lower rate of tax @ 10%. The said benefit cannot be denied because the second proviso to s. 48 is not applicable. In case the Legislature wanted to deny the said benefit where the assessee had taken benefit of the first proviso to s. 48, it was easy and this would have been specifically stipulated. The fact that by this interpretation, a non-resident becomes entitled to double deductions by way of computation of gains in foreign currency under the first proviso to s. 48 and then the benefit of lower rate of tax under the proviso to s. 112(1) is no reason to interpret the proviso differently. Further, as the AAR had taken a view in Timkin France SAS which was followed in several cases over several years, it ought not to have taken an opposite view and brought about uncertainty in understanding the effect of the proviso to s. 112(1). There should be consistency and uniformity in interpretation of provisions as uncertainties can disable and harm governance of tax laws. The AAR should follow its’ earlier view, unless there are strong grounds and reasons to take a contrary view.
I recall an old joke. A man went to a sweets shop and asked for 1 kg Barfi. After the shopkeeper packed Barfi he sought exchange for Rasgulla and finally took Jalebi. When the shopkeeper asked for payment, this man enquired ‘payment for what? Shopkeeper replied ‘for Jalebi’. Buyer answered ‘I took it in exchange of Rasgulla. Shopkeeper asked for payment of Rasgulla to which he replied to be in exchange of Barfi. This buyer denied payment for Barfi for the obvious reason that he had not purchased Barfi at all.
Second proviso to Section 48 neutralizes inflation effect and first proviso neutralizes forex fluctuation effect. Economically inflation gets reflected in forex fluctuation fully however forex fluctuation may by impacted by other aspects also.
When the Non-Resident purchases Indian Company shares using forex then inflation effect neutralization is only to the extent the inflation is reflected in forex fluctuation – this is done by second proviso. Law has therefore equated the effect of forex fluctuation with inflation effect even if economically they are not equal. This is clear because either first or second proviso to section 48 will only apply to a non-resident. Further section 112 gives an alternate to inflation effect by lower tax rate for quantum of gain computed without giving inflation effect. This lower tax rate (waiver from Barfi payment) of cannot therefore be granted to a non-resident who has got inflation adjustment (Jalebi in lieu of Rasgulla) (under first proviso to section 48) to the extent reflected in forex fluctuation.
The joke may not perfectly fit into the case but is used to convey the message interstigly
In my previous comment I stated that economically inflation gets reflected in forex fluctuation fully however forex fluctuation may by impacted by other aspects also. I also stated that law has equated the two. Let me now give legal backing to these comments-
The fact that law has equated the indexation / inflation with foreign exchange fluctuation benefit is evident from following extract of CBDT circular no 636 of 1992:
“As protection from fluctuation in rupee value in terms of foreign currency ensures protection from inflation, further relief in terms of indexation will not be available to non-residents who will enjoy the concession available under first proviso to section 48”.
Hon’able court,
As per proviso to sec 112…… A non resident will become eligible for the lower rate of tax…….As the proviso not only applies to a resident……But too a non resident ……
Proviso to section 112 explains the following,
1. Tax on Long term capital gains after applying first proviso to sec 48 @ 20%
2. Tax on Long term capital gains after applying first proviso to sec 48 @ 10%
———-Lower of the above……
Hon’able court,
As per proviso to sec 112…… A non resident will become eligible for the lower rate of tax…….As the proviso not only applies to a resident……But too a non resident ……
Proviso to section 112 explains the following,
1. Tax on Long term capital gains after applying first proviso to sec 48 @ 20%
2. Tax on Long term capital gains after applying first proviso to sec 48 @ 10%
……..Lower of the above……