Case nº AAR No. 643 of 2004 of Authority for Advance Rulings, March 30, 2005 (case In Re: Anurag Jain Vs)
| Judge | For Appellant: Joseph Vellapally, P. Srinivasan, Advs. and For CIT: K. Ramalingam, Adv. |
| President | Syed Shah Mohammed Quadri, J. (Chairman), K.D. Singh and A.S. Narang, Members |
| Resolution Date | March 30, 2005 |
Judgment:
Syed Shah Mohammed Quadri, J. (Chairman)
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This application under Section 245Q(1) of the IT Act, 1961 (for short the 'Act'), is by a non-resident who holds 15,000 shares of M/s Vision Health Resources India (P) Ltd. (for short the "Indian company"), incorporated under the Companies Act, 1956. The Indian company carries on business in information technology enabled services involving processing of medical billing and medical insurance claims. The authorised capital of the Indian company is Rs. 10,00,000 which is divided into 1,00,000 equity shares of Rs. 10 each. The entire share capital is held by five individuals including the applicant. Of the five shareholders two are non-residents--applicant and his wife Mrs. Gunjan Jain--and the remaining three shareholders are residents. M/s Vision Healthsource Inc. at Delaware USA, is a non-resident US company (referred to as the "American company"). The applicant, Mrs. Gunjan Jain and Mr. Vishal Gupta held 6,75,000 shares in the American company. They entered into an agreement (styled as stock purchase agreement) for the transfer of entire 6,75,000 shares of the American company in favour of Perot System Corporation, a Delaware Corporation, USA (referred to as "PSC") and PS BP Services LLC; a Delaware Corporation Limited Company and a subsidiary of PSC (referred to as "PSBV"). It is noteworthy that under the stock purchase agreement there is no element of contingent payment, the entire consideration is to be paid by the closing date. At the same time the Indian company and all its shareholders entered into another agreement to transfer its entire business and share capital in favour of: (1) M/s Perot Systems Investments BV, Netherlands (PSIBV) (taking 99,999 shares); and (2) M/s Perot Systems BV, Netherlands (PSBV) (taking 1 share) for consideration of $ 93,00,000 on 15th April, 2003 (referred to as the "purchase agreement"). We are mainly concerned here with the purchase agreement. The Reserve Bank of India, Exchange Control Department, granted permission and issued no objection certificate for the foreign equity participation in the equity capital of the Indian company by the aforementioned purchasers. The sale consideration under the share purchase agreement for the transfer of shares of the Indian company is said to comprise of two components--(1) fixed amount of $1 23,00,000 payable in lumpsum (referred to as the closing payment) and (2) the payer and the provider contingent payments payable in single instalment by 31st March, 2004, 31st March, 2005 and 31st March, 2006 as per the Ex.-A1 (referred to as 'contingent payments'). However, the contingent payments are not to be made unless aggregate earnings before interest, tax, depreciation allowance (EBITDA) of the business for the applicable period equals or exceeds the contingent cumulative threshold EBITDA; if the aggregate EBITDA exceeds the applicable cumulative threshold EBITDA, the applicable payment will be determined in the manner indicated in Ex. A of share purchase agreement, referred to above. Two expressions, the "payer business" and the "provider business", used therein, need to be clarified. The payer business is the portion of the operation which is focused on persons that provide finance or pay the cost of medical care including a health insurance issuer, a group health plan, employee welfare benefit plan, etc. The providers business is the portion of an operation, which is focussed on service providers of medical, and health services and any other person who furnishes bills or is paid for health care in the normal course of the business.
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On the aforementioned facts, the applicant set out three questions in this application for seeking advance ruling of the Authority. As the questions were vague and ambiguous, the applicant was asked to reframe the questions. The reframed questions are as under:
"1. Whether the gains arising from the transfer of 15,000 equity shares in Vision Health Source India (P) Ltd. covered by the share purchase agreement dt. 15th April, 2003 read with Ex. "A" and "B" thereto is chargeable to capital gains tax or not, either wholly or in part?
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If the aforesaid gains arising from the above transfer is liable to be charged to capital gains tax, either wholly or in part, in which year of assessment does the liability to pay capital gains tax arise for the following amount received/receivable as consideration for the transfer of the shares aforesaid, which in aggregate amounts upto US $ 9,300,000 termed as purchase price as per Clause 1 of the aforesaid share purchase agreement dt. 15th April, 2003?
(i) Initial lumpsum payment equal to US $ 2,300,000 (referred to in the aforesaid share purchase agreement as the closing payment) received on 1st July, 2003 in the previous year relevant to the asst. yr. 2004-05.
(ii) Contingent payments as per Clause 1 of the share purchase agreement dt. 15th April, 2003 (referred to in Ex. A therein) receivable for each of the three years as noted below having regard to the fact that these amounts, contingent on the existence of EBITDA, can be determined only when the EBITDA as per Clause 1 of the said share purchase agreement dt. 15th April, 2003 relating to the three contingent payments as defined in Clause 1 therein, is computed.
By whom paid and nature Year in which to be Where defined
of payment paid
Payer and provider first year For year ended Exhibit A
contingent payment 31.3.2004
Payer and provider second year For year ended Exhibit A
contingent payment 31.3.2005
Payer and provider third year For year ended on Exhibit A
contingent payment 31.3.2006
3. If the gains arising from transfer of shares aforesaid is not to be charged as capital gains, either wholly or in part, under what head of income the contingent payments made to/received by the applicant towards transfer of shares covered by the aforesaid share purchase agreement dt. 16th April, 2003 read with the Exhibit attached thereto, are taxable and in which year of assessment?
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Whether any relief or concession in respect of income charged as capital gains or as other income under any other head is available under applicable provisions of Double Taxation Avoidance Agreement between India and US and India and Netherlands? and if so, to what extent?"
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The Director of IT (International Taxation), Chennai (hereinafter referred to as the "CIT") forwarded the return of income filed by the applicant for the asst. yr. 2003-04 together with connected records and submitted the following comments to the application. It is stated that the applicant is a non-resident assessee and the relevant assessment year for the transaction is 2004-05. The applicant, Mrs. Gunjan Jain and Mr. Vishal Gupta own 6,75,000 shares of the American company, which is engaged in the activities of business process outsourcing in the "Neche Market of processing medical billing and medical insurance claims". The applicant and other shareholders of the Indian company agreed to transfer all the 1,00,000 shares of the company in favour of PSIBV and PSBV for the aggregate consideration of $ 93,00,000 by agreement dt. 15th April, 2003 and simultaneously entered into another agreement, called, stock purchase agreement. Under the share purchase agreement of 15th April, 2003, PSIBV undertook to purchase 99,999 shares and PSBV agreed to purchase 1 share from the said shareholders. The purchase price mentioned in Clause 1.3 of that agreement is as follows:
"PSI and PSN will pay an aggregate amount of up to US $ 93,00,000 which consists of the following:
(i) an amount equal to US $ 23,00,000 (closing payment)
(ii) the payer and the provider first year contingent payments (each as defined in Ex. A), if any.
(iii) The payer and the provider second year contingent payments (each as defined in Ex. A), if any, and
(iv) The payer and the provider third year contingent payment (each as defined in Ex. A), if any.
The consideration to be paid by PSN for one share will be 1/1,00,000 of the purchase price and the consideration to be paid by PSI for 99,999 shares will be 1/99,999 (sic) of the purchase price." [It would read 99,999/1,00,000]
It is not disputed that the transfer of 1,00,000 equity shares has been approved by the Reserve Bank of India stating that the seller applicant and the other four shareholders are entitled to additional sale consideration equivalent to $ 7 million over the next 4 years on a pro rata basis subject to the term of meeting revenue targets as agreed to by the sellers and purchasers and that the sale consideration payable to the applicant and Mrs. Gunjan Jain shall be credited to their NRI accounts in India. It is clarified that the actual inflow of FDI in the transaction would be $ 2.3 million. The applicant has also entered into a non-competition agreement under which he would receive a portion of the purchase price in respect of his ownership interest and will also receive substantial direct and indirect benefits from the transaction contemplated under the agreement which is for 5 years employment as C.E.O. Similar agreements are entered into by the other shareholders also.
It is stated that under the Act, capital gain arose to the applicant in the year in which the transfer was complete, which would be the previous year 2003-04. The consideration including additional consideration (contingent payments), as approved by the RBI became due on account of transfer of the shares, hence the gain arising therefrom is the deemed income of the previous year in which the transfer took place and is chargeable to tax under the head capital gains. The additional consideration was stipulated by the parties by taking into account all the relevant factors, viz., net growth of Indian company, its past performance, goodwill of the company and a...
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