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Long term capital gain on off-market sale of listed shares by non-residents is taxable at 10 percent
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Long term capital gain on off-market sale of listed shares by non-residents is taxable at 10 percent

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Recently, the Delhi High Court (High Court) in the case of Cairn UK Holdings Limited held that non-resident sellers are eligible for lower rate of 10 percent, on capital gains arising on sale of …

Recently, the Delhi High Court (High Court) in the case of Cairn UK Holdings Limited held that non-resident sellers are eligible for lower rate of 10 percent, on capital gains arising on sale of listed shares, as per proviso to Section 112(1) (Section 112 Proviso) of the Income-tax Act, 1961 (the Act).

The High Court also held that applicability of second proviso to Section 48 of the Act to the seller is not a pre requisite for applying the beneficial rate of 10 percent under Section 112 Proviso.

Published in: Business, Economy & Finance

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  • 1. KPMG FLASH NEWS KPMG IN INDIA Long term capital gain on off-market sale of listed shares by non-residents is taxable at 10 percent 15 October 2013 Background Recently, the Delhi High Court (High Court) in the case of 1 Cairn UK Holdings Limited (the Petitioner) held that nonresident sellers are eligible for lower rate of 10 percent, on capital gains arising on sale of listed shares, as per proviso to Section 112(1) (Section 112 Proviso) of the Income-tax Act, 1961 (the Act).  The Petitioner earned long term capital gain of USD 85.58 million after considering impact of first proviso to Section 48 of the Act. First proviso to Section 48 of the Act removes impact of foreign exchange fluctuation in computation of capital gains. The High Court also held that applicability of second proviso to Section 48 of the Act to the seller is not a pre requisite for applying the beneficial rate of 10 percent under Section 112 Proviso.  Section 112(1) of the Act provides that capital gain on sale of listed shares shall be liable to tax at 20 percent of capital gains computed under Section 48 of the Act. Facts of the case  According to Section 112 Proviso, if the tax computed as above exceeds 10 percent of capital gains computed without considering the indexation benefit under Section 48 of the Act, such excess should be ignored.  According to the Petitioner, the long-term capital gain on sale of CIL shares was eligible to be taxed at beneficial rate of 10 percent.  The Petitioner, a company based in United Kingdom, held shares in an Indian listed company i.e. Cairn India Limited (CIL). The Petitioner sold 4.36 million equity shares in CIL for USD 241.43 million. The transaction was an off-market transaction, i.e. not through stock exchange. ________________ 1 Cairn UK Holdings Limited v. CIT [Writ Petition (Civil) No. 6752/2012] – Taxsutra.com © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 2.  The Petitioner had approached the Authority for Advance Rulings (AAR) and sought the benefit of reduced tax rate of 10 percent.  The AAR held that for the proviso of Section 112(1) to apply, the second proviso to Section 48 of the Act should also be applicable to Petitioner’s case. As second proviso to Section 48 of the Act was not applicable to the Petitioner, benefit of lower rate of tax at 10 percent was not available to the Petitioner.  Aggrieved by the ruling of the AAR, the Petitioner filed this writ petition before the High Court.  If the lower rate is allowed, it would lead to double benefit of protection against currency fluctuation and lower tax rate of 10 percent on long-term capital gains.  Section 112 Proviso was not applicable to the case of the Petitioner and the Petitioner is not eligible to the benefit of lower tax rate of 10 percent on the long term capital gains on the sale of shares of CIL. High Court’s ruling  The AAR ruling in this case and the earlier decision of the AAR in Timken France SAS cannot be reconciled and are diametrically opposite.  After considering the two provisions i.e. Section 48 and Section 112(1) of the Act, the High Court was inclined to accept the legal position approved and accepted in Timken France SAS.  Section 112 Proviso does not state that the taxpayer, who avails benefits of the first proviso to Section 48 of the Act, is not entitled to benefit of Section 112 Proviso. Also, the benefit cannot be denied because the second proviso to Section 48 of the Act is not applicable.  If the Legislature wanted to deny the benefit where the taxpayer had taken benefit of the first proviso to Section 48 of the Act, it was easy and this would have been specifically stipulated. The legislature in fact did not intend to deny the said benefit.  First proviso to Section 48 of the Act is applicable when a non-resident had purchased shares in foreign currency and the second proviso is applicable to all others including non-residents who are not covered by the first proviso.  First Proviso to Section 48 of the Act ensures that non-resident who utilised foreign currency is taxed after taking into consideration the fluctuation in exchange rate. Second proviso to Section 48 of the Act neutralises inflation impact. It was also held that foreign exchange fluctuation is impact of various factors and not only impact of inflation. Therefore, it was held that benefit under first and second proviso are neither identical nor serve the same purpose.  The possible outcome that all the taxpayers covered under first proviso to Section 48 of the Act would be liable to tax at 10 percent and will never be liable at 20 percent, cannot be a ground for contextually read the Section 112 Proviso differently. Issue before the High Court  Whether long term capital gains, arising to the Petitioner, on sale of equity shares in CIL will be taxable at 10 percent as per the Proviso? Petitioner’s contentions  Section 112 Proviso nowhere stipulates that the Petitioner taking benefit of first proviso to Section 48 of the Act is not eligible to claim benefit under Section 112 Proviso.  Also, the language of Section 112 Proviso does not suggest that only the taxpayer entitled to benefit of the second proviso to Section 48 of the Act is eligible to get benefit under Section 112 Proviso.  The language of Section 112 Proviso is clear and unambiguous.  The asset sold, being listed shares, satisfies the statutory requirement of assets to be listed securities and hence covered by Section 112 Proviso.  As the benefit of indexation under the second proviso to Section 48 of the Act was not claimed, the Petitioner is eligible to claim benefit of Section 112 proviso.  The long-term capital gain on sale of CIL shares was eligible to be taxed at beneficial rate of 10 percent.  This view about availability of beneficial rate was repeatedly accepted and followed by the AAR at least in six prior cases, including in case of Timken France 2 SAS . Tax department’s contentions / AAR ruling  For being eligible to claim benefit under the Section 112 Proviso, second proviso to Section 48 of the Act should be applicable to the Petitioner. This was implicit from the provision read together and from the purpose and intention behind the provisions. _______________ 2 Timken France SAS [2007] 294 ITR 513 (AAR) © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 3.  Considering the fact that the applicability of Section 112 Proviso was upheld in 6 rulings of the AAR, the diametrically reverse view taken in the present case has brought about an uncertainty in understanding the impact and the effect of Section 112 Proviso. The High Court mentioned that there should be consistency and uniformity in interpretation of the provisions and AAR should follow their earlier view, unless there are strong grounds and reasons to take a contrary view. It was held that in the present case there is no compelling justification and reason to override and disturb the earlier view.  Allowing the writ and quashing the AAR ruling, it was held that the Petitioner will be entitled to benefit of Section 112 Proviso on sale of equity shares in question. Our comments This is a welcome decision settling position of law which was consistently followed by the AAR in the past, holding that foreign companies can also claim the benefit of the lower rate of 10 percent under the Section 112 Proviso. This decision provides a much awaited certainty, about applicable rate of tax on gains arising on transfer of listed shares through private deals, to non-resident investors. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  • 4. www.kpmg.com/in Ahmedabad Safal Profitaire B4 3rd Floor, Corporate Road, Opp. Auda Garden, Prahlad Nagar Ahmedabad – 380 015 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. © 2013 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.