Transfer of shares between two non-resident entities abroad

Latest Advance Ruling - Transfer of shares between two non-resident entities abroad Latest Advance Ruling – Transfer of shares between two non-resident entities abroad Latest Advance Ruling may impact billion-dollar Vodafone takeover case; Capital gains - Transfer of shares between two non-resident entities abroad - Since situs of income is located here, it is taxable in India. TAXING capital gains has always been a tricky subject for the Revenue. If it ever involved two non-resident entities, it always proved to be a much trickier and harder nut to crack. Then came the insertion of the most crucial clause in the statute - the situs of the capital asset, a step to iron out the hiatus in the relevant provisions of the Income Tax Act. This was designed to take care of the transactions between two non-residents over the capital assets situated in India. And this is what can be seen as the decider in the latest case decided by the Authority for Advance Ruling. A ruling was sought by a non-resident purchaser of the shares sold by another non-resident share-holder in a JV located in India. And what the Authority has held is going to be of far-reaching consequences for many high-value cases like the Vodafone. It said that since the situs of the capital assets, the shares in the Indian JV, happen to be India, no matter where does the deal take place, the profits and gains arising out of the deal will come within the ambit of Sec 9(1)(i), and will be assessable under the head 'capital gains' u/s 45(1). The Brief facts of the case : The applicant is a non-resident USA-based company. It buys shares in a JV located in India from a non-resident shareholder in the USA. Now it wants to know whether the capital gains arising out of the deal would be taxable in India, and if so, who would be treated as the representative assessee? Having studiously analysed the Sec 9(1)(i) of the Act, the Authority observed that, ++ the relevant clause is designed to catch any capital gains that a non-resident may make by transfer of any capital asset situated in India. Further, the expression `capital asset' is defined in section 2(14) of the Act and the phraseology `transfer' is defined in section 2(47) of the Act. In the generality of cases, the sale price is paid outside India and accordingly, any capital gains will escape charge on `receipt basis'. Nevertheless, as per the existing provision of the Act, the capital gains becomes chargeable on an alternative basis viz. accrual or arisal basis in India, as the capital asset is or happens to be situated in India; ++ the situs of the capital asset being in India, has been ushered in the statute to take care of the situations like transactions between two non-residents taking place outside India; ++ the inescapable inference is that the income under the head Capital Gains is deemed to have accrued or arisen in the hands of the non-resident transferor; ++ the income in the hands of the applicant is a sequel to the transfer of a capital asset situated in India, and, this alone is sufficient enough to bring it within the ambit of section of 9(1) of the Act, paving the way of chargeability to capital gains under section 45(1) of the Act. In other words, the situs of the capital asset being in India is a vital factor; ++ no doubt, DTAA prevails over Sec 9 of the Act, but the Article 13 of the DTAA between India and the USA reads as : "Except as provided in Article 8 (Shipping and Air transport) to this convention, each contracting state may tax capital gains in accordance with the provisions of its domestic law.'' This makes it amply clear that even the DTAA cannot bail out the transferee from the chargeability of the capital gains u/s 9(1)(i) read with Sec 45(1) of the Act. Now the full-bench of the Authority takes up the second question: Who will be treated as the representative assessee / agent u/s 163(1) of the Act? After studying the extract of the Sec 163 it notes that as per the 'inclusive clause' of this Section, where the income is capital gains arising to the non-resident by reason of his having transferred a capital asset situated in India, the transferee (the applicant) may be assessed as a representative assessee of the transferor; he (the `transferee') is a person who has purchased the asset and has also paid the sale-consideration. Such transferee, as the inclusive provision of the section 163 of the Act stipulates, may either be a resident or a non-resident. Further, the Parliament has devised the method of deeming the capital gains as having accrued or arisen in India so that on the basis of such deeming provision, the operation of section 160(1)(i) read with section 163(1) would enable the authorities to levy tax on the transferee (purchaser), as a representative assessee, and the tax be realized from him. Accordingly, the applicant is held to be an agent/representative of the non-resident individual. The authority also said that in view of the conclusions arrived at, the applicant has to keep in view the provisions of section 195 of the Act relating to tax deduction at source. Thus concludes a landmark ruling which is going to be providing the guiding lamp for resolving many more high-revenue cases pending at various appellate forums.