Case nº A.A.R. No. 950 of 2010 of Authority for Advance Rulings, August 01, 2011 (case Cairn U.K. Holdings Ltd. Vs Director of Income-tax (International Taxation))
|P.K. Balasubramanyan, J. (Chairman) and V.K. Shridhar, Member
|August 01, 2011
V.K. Shridhar, Member
1. The applicant, Cairn UK Holding Ltd. (CUHL), is a private limited company registered in Scotland. It acquired the equity shares of Cairns India Limited (CIL) in 3 tranches: 50,000 equity shares were acquired by way of initial subscription in August, 2006; 365,028,898 equity shares by way of allotment as fully paid up equity shares and Anr. 861,764,893 equity shares pursuant to a share purchase agreement on 12.10.2006. As per this share purchase agreement, 135,267,264 equity shares of Cairn India Holdings Limited (CIHL) were transferred by the applicant to CIL and as a consideration, CIL issued 861,764,893 equity shares to the applicant. Accordingly, these equity shares of CIL were allotted to the applicant under a swap of share arrangement. Approval of the Foreign Investment Promotion Board of India was also obtained. On 12th October 2009, Patrons Corporation Intl. Limited (PCIL) acquired 2.29% equity shares in CIL from the applicant through an agreement dated 14th October 2009, pursuant to which the applicant transferred 4,36,00,000 equity shares to PCIL for a consideration of USD 241,426,379.
The transaction took place in off-market-mode and not through the recognized stock exchange.
2. As per the application, the following question has been framed for a ruling from this Authority:
Whether on the stated facts and in law, the tax payable on long term capital gains arisen to CUHL on sale of equity shares of CIL will be 10% of the amount of capital gains as per proviso to Section 112(1) of the Act?
3. The applicant submits that in terms of Section 195 read with Section 9(1) of the Income Tax Act 1961 (Act), PCIL was liable to withhold taxes from the consideration to be paid to the applicant. An application made under Section 197 of the Act for a certificate for withholding of tax by PCIL at the rate of 10% on the long-term capital gains in view of the proviso to Section 112(1) of the Act was turned down and the applicant was asked to withhold tax at the rate of 20%.
4. The applicant submits that proviso to Section 112 provides that where the tax payable in respect of any income arising from the transfer of a long- term capital asset, being listed securities or units or zero coupon bond, exceeds 10% of the amount of capital gains before giving effect to the provisions of the second proviso to Section 48 of the Act, then, such excess shall be ignored for the purposes of computing the tax payable by the Assessee. The proviso to Section 112 was enacted with a view to provide lower rate of tax of 10% on long-term capital gains in respect of listed securities or units or zero coupon bonds. The applicant is of the view that what is relevant is the capital gains arising from transfer of the above mentioned specified securities and it is immaterial whether the Assessee who has earned the capital gain is a resident or non-resident.
5. The applicant explains that the proviso limits the rate of tax to 10%, but with a rider that the quantum of capital gains should be arrived at without taking into account the benefit of indexation laid down in the second proviso to Section 48 of the Act. An Assessee cannot simultaneously claim two benefits: the benefit of indexation provided in the second proviso to Section 48 and the benefit of lower rate of tax at 10% as provided in proviso to Section 112 of the Act.
6. Learned advocate contends that the phrase "before giving effect to provisions of second proviso to Section 48' used in the proviso to Section 112 has been misinterpreted by the Hon'ble Tribunal in case of BASF Aktiengesellchaft, reported in 293 ITR 1. The view of the learned ITAT that as the second proviso to Section 48 is not applicable to non-residents who are covered by the first proviso to Section 48, the proviso to Section 112 will also not apply to the non-residents and that the eligibility to avail benefit of indexation under 2nd proviso to Section 48 is a sine qua non to avail the benefit of lower rate of tax under the proviso to Section 112, is not the correct position in law for the following reasons:
The benefit of lower rate of tax at 10% under the proviso to Section 112 has been extended to zero coupon bond ("ZCB?) by an amendment made in the proviso to Section 112 by the Finance Act 2005. However, for computation of capital gains under Section 48 in respect of ZCBs, the benefit of indexation under the 2nd proviso to Section 48 is specifically excluded by the 3rd proviso to Section 48. If it is accepted that the eligibility of benefit of indexation under the 2nd proviso to Section 48 is a sine qua non for availing the benefit of lower tax rate of 10% under the proviso to Section 112, then ZC Bs would go out of the purview of Section 112(1), whereas ZC Bs have been specifically included by way of amendment in the proviso to Section 112 so as to be eligible for the lower rate of tax at 10%. This interpretation would render the amendment infructuous.
The proviso to Section 112(1) granting lower rate of tax at 10% is also applicable to listed securities. Explanation to the said proviso provides that listed securities means securities as defined in Clause (h) of Section 2 of Securities Contracts (Regulations) Act, 1956, which includes debentures. Thus, the proviso to Section 112(1) granting lower rate of tax at10% would be applicable to debentures. But in view of 3rd proviso to Section 48, the indexation benefit under the 2nd proviso will not apply to debentures. If this contention is accepted then a resident Assessee would have to pay tax at 20% for transferring the listed debentures which would give rise to unintended results. The law is fairly clear that if an interpretation gives rise to unintended results or renders a word redundant or superfluous, then it needs to be avoided as has been held by the Hon?ble Supreme Court in the cases of J.H. Gotla, 156 ITR 323; C.W.S. (India) Ltd. Etc, 208 ITR 649: Hindustan Bulk Carriers, 259 ITR 449 and Grasim Industries Ltd., (2002) 4 SCC 297.
7. In order to further explain the meaning of the phrase "before giving effect to? or "without giving effect to?, the learned advocate points out that the same phrase has been used in the Act in Section 88 which provides for a deduction from the amount of income tax. If the revenue?s interpretation of the phrase "before giving effect to? is to be accepted, then it would lead to an absurd result where an Assessee who is an individual or HUF and who is not eligible to claim deduction under the said chapter VI-A, would not be able to avail the rebate at all. That obviously is not the intention of the legislature. Similarly, Clause (a) to Explanation to Section 158BB(1) of the Act provides that for the purposes of determination of undisclosed income, the total income/loss shall be calculated "without giving effect to set off of brought forward losses..?. If the revenue?s interpretation of the phrase "before giving effect to? is to be accepted, it would lead to an absurd result as it would not be possible to compute undisclosed income of an Assessee who did not have any brought forward losses. In the case of Bhaskar Mittal, 202 ITR 612, it has been held that the same expression appearing in another provision of the Act should carry the same meaning which otherwise would give unintended results.
8. Learned advocate then submits that the proviso below Clause (d) to the Section 112(1) of the Act applies to all clauses to Section 112(1). This Authority in case of Timken France SAS, AAR 739 of 2009, has http://www.itatonline.org Page 7 of 32 expressed the view that it would be irrational and even incongruous to allocate the proviso only to the preceding clause, Clause (d) to section112 of the Act. The same view has been taken by Learned ITAT in the case of BASF cited supra. Moreover, this is self-evident from the formatting of Section 112(1) as it appears in the Act.
9. Without prejudice, the applicant submits that merely because a resident Assessee can have one of the benefits i.e. indexation or lower rate of rate of 10%, non-resident cannot be denied the benefit on the ground that it is also entitled to the benefit of first proviso to the Section 48. For example, Section 115BBA, and Section 115E of the Act extend additional benefits to non-resident assesses. In Timken France SAS cited supra, this authority has held that double benefit is not a taboo under the law. Similar was the view in the cases of Mandeep Eng. & Pkg. Ind. (P) Ltd.  292 ITR 1 (SC), G.V. Venugopal  273 ITR 207 (Mad) and Nagesh Devidas Kulkarni and Ors.  291 ITR 407 (Bom).
10. Learned advocate finally submits without prejudice that where two views are possible, the view in favour of the Assessee should be adopted as held by the Hon?ble Supreme Court in Madho Prasad Jatia  105 ITR 197, Naga Hills Tea Co. Ltd.  89 ITR 236, J.K. Hosiery Factory  159 ITR 85 and Poddar Cement (P) Ltd. Etc.  226 ITR 625. http://www.itatonline.org Page 8 of 32
11. The revenue submits that the expression "before giving effect to the 2nd proviso to Section 48? pre-supposes 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 Section 48. Occasion to apply the proviso to Section 112(1) does not arise as the 2nd proviso to Section 48 is not applicable to non-residents. The 1st and the 2nd provisos to Section 48 are mutually exclusive as they provide distinct modes of computation of capital gains to two different sets of persons. The non-resident foreign company cannot claim to have the double benefit of...
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