Capital gains from transfer of shares held in an intermediary company, by a non-resident not having tax presence in India to another non-resident, not taxable in India - Supreme Court
21st January, 2012
The Hon’ble Supreme Court set aside the order of the Bombay High Court in the ‘Vodafone’ case and held that that the sale of shares of CGP Investments (Holdings) Ltd., by Hutchison Telecommunications International Ltd. (HTIL) to Vodafone would not amount to transfer of a capital asset situated in India within the meaning of Section 2(14) of the Indian Income Tax Act, 1961.
The Bench held that an investment made with a view to participate in business can be distinguished from a pre-ordained transaction entered into for tax avoidance. The intermediary company in the present case was an investment vehicle to enable smooth transition of business and therefore it did exist for a genuine commercial purpose. As per the court, to find out evidence of a pre-ordained transaction, duration of time during which holding structure / parent-subsidiary relation was in existence, timing of exit of the entity and continuity of business of the entity after exit are relevant considerations. Applying the above, it was observed that Hutchison was established in 1994 and was not a fly-by-night operator.
As regards obligation under Section 195 of the IT Act, the Apex Court held that there is no obligation on a non-resident to deduct tax at source. Section 195 would apply if payments are made from a resident to another non-resident and not between two non-residents situated outside India. It noted – “A literal construction of the words “any person responsible for paying” as including non-residents would lead to absurd consequences”. The court stated that the principle of ‘separate legal entity’ is not to be disregarded and that courts have evolved principles of ‘lifting the corporate veil’ and ‘looking through the transactions’ only to find out shams and colourable devices aimed at tax evasion. However, in this process, genuine and strategic tax planning is not ruled out. There is no ‘look through’ concept in Section 9 of the Income tax Act and the relevant principle is ‘look at’ principle.
Underlining the role of policy, the Supreme Court observed “tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner”.
It remains to be seen how the government responds to the fall out of this judgement. Reports suggest that legislative amendments may be brought to plug potential revenue leakage through this route.
21st January, 2012
The Hon’ble Supreme Court set aside the order of the Bombay High Court in the ‘Vodafone’ case and held that that the sale of shares of CGP Investments (Holdings) Ltd., by Hutchison Telecommunications International Ltd. (HTIL) to Vodafone would not amount to transfer of a capital asset situated in India within the meaning of Section 2(14) of the Indian Income Tax Act, 1961.
The Bench held that an investment made with a view to participate in business can be distinguished from a pre-ordained transaction entered into for tax avoidance. The intermediary company in the present case was an investment vehicle to enable smooth transition of business and therefore it did exist for a genuine commercial purpose. As per the court, to find out evidence of a pre-ordained transaction, duration of time during which holding structure / parent-subsidiary relation was in existence, timing of exit of the entity and continuity of business of the entity after exit are relevant considerations. Applying the above, it was observed that Hutchison was established in 1994 and was not a fly-by-night operator.
As regards obligation under Section 195 of the IT Act, the Apex Court held that there is no obligation on a non-resident to deduct tax at source. Section 195 would apply if payments are made from a resident to another non-resident and not between two non-residents situated outside India. It noted – “A literal construction of the words “any person responsible for paying” as including non-residents would lead to absurd consequences”. The court stated that the principle of ‘separate legal entity’ is not to be disregarded and that courts have evolved principles of ‘lifting the corporate veil’ and ‘looking through the transactions’ only to find out shams and colourable devices aimed at tax evasion. However, in this process, genuine and strategic tax planning is not ruled out. There is no ‘look through’ concept in Section 9 of the Income tax Act and the relevant principle is ‘look at’ principle.
Underlining the role of policy, the Supreme Court observed “tax policy certainty is crucial for taxpayers (including foreign investors) to make rational economic choices in the most efficient manner”.
It remains to be seen how the government responds to the fall out of this judgement. Reports suggest that legislative amendments may be brought to plug potential revenue leakage through this route.