In what comes as a relief to foreign investors stuck in litigation around indirect transfer of share (transfer prior to April 2015) held in an Indian company, the Delhi Bench of ITAT in the case of Augustus Capital PTE Ltd has held that the threshold specified in Explanations 6 and 7 of section 9(1)(i) of the Income tax Act would have to be read with Explanation 5 and given retrospective effect.
Explanation 5 inserted by the Finance Act 2012 provides that shares in a foreign company shall be deemed to have been situated in India if the shares derives, directly or indirectly, value substantially from the assets located in India. This has retrospective effect. Explanation 6 and 7 were inserted by the Finance Act 2015 (i.e. made effective from FY 2015-16). Explanation 6 provides thresholds for the applicability of indirect transfer rules i.e. the value of assets (owned by the foreign entity whose shares are being sold) exceeds INR 10 Cr and represents 50% or more of the value of all assets owned by the foreign entity. Further Explanation 7 excludes from the ambit transfers made by the non-resident transferor who directly or indirectly, neither holds management right/control over the foreign company or voting power/ share capital exceeding 5% at any time during the period of 12 months preceding the date of transfer.
The tax authorities have been contesting that while the ambit of indirect transfer has been made retrospective, the exclusion only applies prospectively from FY 2015-16. Thus, indirect transfer made prior to April 2015 will be subject to tax in India. The ITAT decision would come as a relief to foreign investors who can now take benefit of the thresholds prescribed under Explanation 6 and 7, a claim being denied by the tax authorities. It is useful to take note that the Hon'ble Delhi High Court in the case of Copal Market Research Limited had interpreted the term ‘substantially’ in Explanation 5 to cover transfer of shares of a company incorporated overseas, which derive more than 50% of their value from assets situated in India, and not otherwise. The decision was rendered before the insertion of Explanation 6 and 7. However by reading of Explanation 6 and 7 as being retrospective by the ITAT, the ruling provides additional benefit to certain category of foreign investors who may have otherwise not satisfied the 50% India assets value criterion.
Yatin can be reached at yatin.sharma@aureuslaw.com. Views are personal.