Case Law Details
Richter Holding Ltd Vs. ADIT, DDIT and Union of India (Karnataka High Court), Writ Petition No. 7716/ 2011
The Vodafone controversy continues – To determine tax ability of acquisition of shares of a non-resident company holding majority shares in an Indian company by another non-resident, it may be necessary for the fact finding authority to lift the corporate veil to look into the real nature of transaction to ascertain virtual facts.
Facts:
Richter Holding Ltd (the assessee), a company incorporated in Cyprus, purchased 60% of shares in Finsider International Company Ltd (FICL) register in UK from another UK company called Early Guard Limited (EGL). FICL was holding 51% shares of Sesa Goa Ltd (SGL), an Indian Company. The assessee and West Globe Ltd., a company incorporated in Mauritius, had entered into an agreement for purchase and acquisition of all the shares of FICL on 23.04.2007 from EGL for a consideration of US $ 981 million.
On 13.3.2009, a writ petition was filed by SGL against notice issued by the Revenue to treat it as an Agent under section 163 of the Income Tax Act (the Act) proposing to tax the sale proceeds realized on sale of shares of FICL by EGL to the assessee and WGL under the head ‘Income from Capital Gains’. Since the Revenue intended to withdraw the notice issued against SGL, the High Court disposed off the said writ petition as withdrawn.
Thereafter, the Revenue issued a notice to the assessee under section 201(1) and 201 (1A) of the Act alleging indirect acquisition of 51% shares in SGL, without deduction of tax at source. The assessee denied its obligation to deduct tax arguing that it was only an acquisition of shares, which does not amount to acquisition of immovable property and hence, question of treating the same as capital gains and to deduct income from capital gains did not arise. The AO sought more information; but the assessee regretted its inability to provide information pertaining to EGL and filed a writ before the High Court against such notice.
Contention of the Assessee:
The assessee had relied on the Bombay High Court judgement in the case of Vodafone International Holdings BV v. UOI (329 ITR 126) and argued that the transfer of share in non¬resident company from one non-resident to another non-resident did not amount to acquisition of immovable property or controlling the management and it was only an incident of ownership of the shares in a company, which flew out of the holding of shares. Therefore controlling interest was not an identifiable or distinct capital asset independent of the holding of shares and the nature of the transaction had to be ascertained from the covenants of the contract and from the surrounding circumstances.
Contention of the Revenue:
The Revenue argued that the shares held by FICL in SGL constituted a capital asset as per section 2(14) of the Act. When the shares of FICL was purchased by the the assessee and WGL, it amounted to a transfer of a capital asset of 51% shares of SGL as per section 45 r.w.s 2(47) r.w.s 9 of the Act.
Further, as per section 195 of the Act, any person paying to a non-resident is liable to deduct tax at source. Accordingly, the assessee falls within the definition of capital asset r.w.s 9 of the Act and therefore, liable to deduct tax in respect of payments made for purchase of capital asset i.e. 51% shares of SGL. Reliance was placed on the Supreme Court decision in the case of Vodafone International Holdings BV v. UOI (179 Taxman 129).
Observations and decision of the High Court:
• It is for the assessee to urge all contentions before the revenue authority pursuant to the show-cause notice issued to contend that the purchase of 51% shares does not amount to transfer of capital asset. The agreement produced is said to be between the assessee, EGL and Mitsui Company Ltd., Japan. That may not be sufficient to know what is the transaction between FICL and SGL since it is premature at this stage to arrive at a conclusion that there is no avoidance of tax obligations and the assessee is not liable to tax on capital gains as the transfer of shares does not amount to transfer of capital assets.
• Therefore, it may be necessary for the fact finding authority to lift the corporate veil to look into the real nature of transaction to ascertain virtual (vital) facts. It is also to be ascertained whether the assessee enjoys the power by way of interest and capital gains in the assets of the company and whether transfer of shares in the case on hand includes indirect transfer of assets and interest in the company.
• It is for the assessee to appear before the revenue authority pursuant to the SCN issued who shall consider the case of the assessee and pass appropriate orders in accordance with law. Accordingly, the High Court has dismissed the writ petition filed by the assessee.
Our View:
This is an another judgement passed by the High Court after Vodafone case, dismissing the writ petition, which was filed against the show-cause notice issued by the tax department, asking a non-resident buyer, that why it cannot be considered as an “assessee in default” for not withholding tax under section 195, while acquiring the controlling interest in an Indian company in the course of purchasing the shares of a non-resident company from another non-resident.
The High Court has also allowed the tax department to lift the corporate veil to look into the real nature of transaction to ascertain vital facts and to ascertain whether the buyer, as a majority share holder, enjoys the power by way of interest and capital gains in the assets of the company and whether transfer of shares in the case on hand includes indirect transfer of assets and interest in the company.
The vital controversy of the issue is revolving around the applicability of section 9(1)(i) of the Income tax Act to the indirect transfer of shareholding in India and whether transaction of transfer of shares of a non-resident company, which has indirect control in the Indian company, between two non-residents can be brought within the ambit of capital gains taxation in India. Further, whether change in controlling interest is incidental to the transfer of shares or it is a separate capital asset other than holding of shares.
The jurisprudence so far evolved in India, prior to Vodafone case, is that capital gains are deemed to accrue or arise in the country where the situs of shares is situated. Therefore, we need to wait and watch how the Supreme Court evolves the law further in the case of Vodafone.
In this case, the India-UK tax treaty (if at all applicable on such indirect transfer of controlling interest in the Indian company) would come into play and accordingly, as per the treaty the capital gains would be taxable as per the domestic tax laws. However, the moot point would be whether under the treaty the capital gains that accrue to the UK resident would be governed only by the provisions of section 45 of the Act or also, the deeming fiction of section 9 would come into play.
Keeping in mind the historical background, rather its origin, one feels that, neither Vodafone, being the first court case of its kind, nor any of the other Indian tax cases which have come to be widely discussed with reference to the Vodafone case, can be strictly regarded to have been considered by invoking the principle of – ‘lifting the corporate veil’ (in fact, the term often more appropriately used is – ‘piercing the corporate veil’). To put it differently, in most of these court cases of recent origin, the issue might be said to be rested on the controversy – whether or not the true nature of the given transaction(s) should be ascertained wholly and necessarily having regard to the actual / factual terms of the related contract agreement (s). Thus, the real ‘battle of wits’ is one of – Form vs Substance.
For an analytical study, and an appreciation of the above comment, the following material in public domain may be of help:
Lifting the corporate veil definition
Articles piercing the corporate veil
Fdcc quarterly piercing the corporate veil
Fdcc quarterly separate corporate personality piercing
Separate corporate personality articles