Praful Chandaria vs. ADIT (ITAT Mumbai)

DATE: August 26, 2016 (Date of pronouncement)
DATE: September 20, 2016 (Date of publication)
AY: 2002-03
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Entire law on whether consideration for alienation of rights under a "Call Option agreement" for shares is taxable as "capital gains" or as "income from other sources" in the context of the India-Singapore DTAA explained

(i) The subject matter of dispute is whether the sum of US $2,450,000 which in terms of INR is 11,71,00,000/- can be held to be taxable in hands of the assessee in India. Admittedly, the assessee is tax resident of Singapore and is non-resident Indian. In case of non-resident, while taxing any income accrued or arising in India has to be seen from the perspective of the Treaty, which here in this case India-Singapore DTAA and if any benefit is provided in the DTAA, then same has to be seen. As culled out in our earlier part of the order, the assessee is having more than 99% of shareholding in an Indian company, PHIL which in turn holds 25% of shares in another Indian Company called ING Barring India (BI). One Mauritius based company namely; ING Barring Mauritius (BM) holds 75% of shares in ING Barring India. Both assessee as well as PHIL vide separate “call option agreement” entered with Barring Mauritius granted an option to BM to call upon the PHIL shareholders to sell their entire shareholding in PHIL. The strike price or the call option was agreed for US $ 1 and the consideration mentioned was US $ 2,450,000 and such a call option spread into period of 150 years. In common parlance, a call option is reckoned as a contract in which the holder (buyer) has the right (but not an obligation) to buy a specified quantity of a security/shares at a specified price (strike price) within a fixed period of time. For the writer (seller) of a call option, it represents an obligation to sell the underlying security at the strike price if the option is exercised. The call option writer is paid a premium for taking on the risk associated with the obligation. Here in the present case, there is very peculiar agreement/ arrangement, where the strike price has been mentioned as US $ 1 and the fixed period of time for exercising the call option has been fixed for 150 years. This factum itself means that the call option in the shares have been given for perpetuity. Not only that, an irrevocable power of attorney has also been executed in favour of the ING Bank in respect of all the shares in PHIL confirming that, assessee will not at any time purport to revoke the same, which inter-alia shows that assessee has alienated a substantive and valuable rights as an owner of the shares in perpetuity, albeit without dejure alienating the shares itself. This aspect of the matter has also been highlighted by the Ld. AO in his order. From the perusal and analysis of the material on record he has concluded that “it is evident that assessee had effectively alienated his shares in PHIL by way of irrevocable undertaking and power of attorney for which consideration was already received”. Even the Ld. CIT(A) in his order has reconfirmed the same thing. Thus, here in this case if one goes by the ‘call option agreement’ and other materials facts on record, it is ostensibly clear that the a valuable and substantive right in the shares of PHIL, namely giving of right to sell shares at a determined price, has been alienated by the assessee and hence it cannot be held merely as a call option agreement simplicitor.

(ii) Now, the core issue/ question left to be decided is, as to how the amount is to be taxed and whether such an amount would be taxable in the hands of the assessee in India or not and under which head. The revenue’s case is that, it is taxable as “income from other sources” and has been brought to tax in India by invoking the deeming provisions of section 9(1)(i). However, the departmental authorities concede the position that the shares have not been transferred and that is why the gain has been assessed as income from other sources and not as “capital gains”. But while holding so, the revenue has not made out a case as to how the “income from other sources” would be brought to tax under the clauses/articles of DTAA between India–Singapore. Here on the facts of the present case, though, there may not be any actual alienation of shares in terms of the ‘call option agreement’ which is evident from the various recitals and articles which have been incorporated and discussed above, but clearly a valuable and substantive right in the shares of an Indian company have been given to a non-resident company, that is Barring Mauritius. Under normal circumstances, no right in the shares is given away by way of ‘call option’, albeit only right to buy the shares at a strike price within a stipulated time period is given which may not be termed as “capital asset” under section 2(14), because, without exercising the option no actual asset is created. Here in the present case as discussed in our earlier part of our finding, the right in the shares has been given for an incredibly large period of 150 years. Not only that, the rights which are enjoyed by the assessee as shareholder have been exercised by the power of attorney holders to participate in the affairs of the company and it has been further provided that, assessee shall not at any time purport to revoke the same. Such a bundle of substantive rights are generally not given under normal “call-option agreements”. In the peculiar facts of the present case, such an option right in the shares has to be reckoned as transfer/alienation of a valuable and substantive right, which would be a class of asset in itself, separate from shares which though continue to stand in the name of the assessee. Such a valuable rights/ interest in shares would certainly be a ‘capital asset’. Parting with any substantive interest in the asset or creating any substantive interest in any asset or extinguishment of a right/s in an asset, directly or indirectly would surely be reckoned as a ‘transfer’ of an asset / property even under the domestic law, that is, u/s 2(47).

(iii) Hence the consideration received has to be taxed under the head “capital gain” as there is a transfer of an asset/property. The taxability of a capital gain under India- Singapore DTAA has been given in Article 13, So far as conditions and factors mentioned in paragraphs 1, 2 & 3 of Article 13, surely same would not be applicable here in this case. As regards the alienation of shares as mentioned in para 4 and 5, the same again will not be applicable because here no actual shares which has been transferred or alienated albeit a substantive and valuable right has been given in the shares, which has to reckoned as capital asset or property as per our discussion herein above. Hence, it is gains from the alienation of an asset or property and any gain from alienation of such kind of “property” will fall within the scope of Para 6 of Article 13, whereby, the taxing right has been given to the resident state, that is, the state of the alienator, which here in this case is Singapore. The allocation of taxing right under Article 13(6) cannot be attributed to India but to the resident state.

(iv) Thus, on the facts and circumstances of the case as discussed above, we hold that, firstly, the consideration received by the assessee is arising from the assignment of substantive and valuable rights in the shares of an Indian company which is assessable under the head “capital gain”; and secondly¸ such a capital gain cannot be held to be taxable in India in terms of para 6 of para 13 of India-Singapore-DTAA. With these observation, the addition made by the AO and as confirmed by the CIT(A) is directed to be deleted.

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