Advance Ruling

Subject matter of Ruling

Transfer outside India of shares of an Indian company by one non resident to another non resident, whether liable to tax in India and who shall be treated as the Representative Assessee

1. Facts

1. M/s. Triniti Advance Software Labs (P) Ltd. (in short M/s. TASL (P) Ltd.), S. P. Road, Hyderabad is an Indian company registered with the Registrar of the Companies, Andhra Pradesh, having share capital of 52,800 shares of Rs. 10 each

2. One shareholder Mr. Jeff Slosar, a USA resident, entered into an agreement with the applicant, M/s. Triniti Corporation, USA, on 13-9-2006, to transfer his shares in a phased manner. To be more eloquent, 25% of the shares, held by Mr. Jeff Slosar have been transferred on 1-11-2006 and the remaining shares are to be transferred in 44 (forty four) equal monthly instalments beginning from March, 2007.

2. Question

1. Section 9(1)(i) of I. T. Act, 1961 as there is a transfer of a capital asset viz. Shares of Triniti Advanced Software Labs (P) Ltd. whose Registered Office is situated in India.

2. Under Article 13 of the Tax Treaty between India and USA – Each contracting state may tax capital gains in accordance with the provisions of its domestic laws.

3. Contention of the Department

1. Revenue submitted that since the capital asset; i.e., shares of TASL, is situated in India, the income accruing on the transfer of the shares is clearly exigible to capital gains tax in view of the provisions of section 9(1) of the Act.

2. There is a ‘business connection’ between Mr. Jeff Slosar, the non-resident and T.A.S.L., the Indian resident company, as per section 163(1)(b) of the Act and it must be, deemed that the non-resident is in receipt of income through T.A.S.L. [Section 163(1)(c)]. As such, in the opinion of the revenue, T.A.S.L. is an agent of Mr. Jeff Slosar, who has transferred the shares to the applicant.

3. According to Revenue, the capital gains did arise in the hands of Mr. Slosar and has to be assessed in the hands of M/s. T.A.S.L. as an agent for the transferor; i.e., Jeff Slosar.

4. Contention of the applicant

1. Applicant contended the fact that M/s. T.A.S.L., Hyderabad can’t be regarded as an agent of Mr. Jeff Slosar and the capital gains tax is also not chargeable under section 9(1) of the Act, as the transfer of the shares had taken place outside India and the transaction was between two non-residents.

5. Ruling

1. On analysis, it transpires that under section 9(1)(i) of the Act, any income accruing or arising, whether directly or indirectly,

(i) through or from any business connection in India; or
(ii) through or from any property in India; or
(iii) through or from any asset or source of income in India
(iv) through the transfer of a capital asset situated in India. is deemed to accrue or arise in India.

2. The capital asset; i.e., shares of an Indian company (TASL), which have been transferred, are situated in India and income has directly or indirectly accrued/arisen to the non-resident through the transfer of the said capital asset.

3. It was held in case of G. V. K. Industries Ltd. vs. I.T.O., 228 I.T.R. 564, A.P. that income dealt with in each clause of section 9(1) of the Act is distinct and independent of the other, and the requirement to bring income within each clause, are separately noted, as such it is not necessary that income, falling in one category under any one of the sub- clauses, should also satisfy the requirements of other sub-clauses to bring it within the ambit of the expression ‘income deemed to accrue or arise in India’.

4. 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 accrual or arisal basis in India, as the capital asset is or happens to be situated in India.

5. Article 13 of the Double Taxation Avoidance Agreement between India and U.S.A. reads as under:—

   “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.”

   As such, even the DTAA, will not bail out the transferee from the chargeability of the capital gains under section 9(1)(i) of the Act read with section 45(1) of the Act.

6. A close look into section 163 of the Act, as against the facts of the case, reveals that as per the ‘inclusive clause’ of the aforesaid section, where the income in question 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. Such transferee, as the inclusive provision of the section 163 of the Act stipulates, may either be a resident or a non-resident.

7. Since the applicant is held to be an agent/representative assessee of the transferor and has also offered to pay tax under the head capital gains; there is no need to examine the other question, whether the Indian company (M/s. TASL (P) Ltd.) can also be regarded as an agent under clauses (b) & (c) of section 163(1) of the Act, as contended by Revenue. In fact, the comment of the C.I.T. is based on the assumption that no one else other than the Indian company, is the agent.

8. It is also observed that the applicant has to keep in view the provisions of section 195 of the Act relating to tax deduction at source.

9. It was ruled that the first question; i.e., taxability of Capital gains in India is answered in affirmative and the second question; i.e., applicant to be held as an agent of the non resident is also answered in affirmative in pursuance of inclusive provision of section 163 of Income-tax Act.