Benefits of lower tax rates of 10 per cent as per proviso to section 112(1) is not available where shares of listed company are sold in off-market mode

Cairn U.K. Holdings Ltd. In re (AAR) The relief provided for by the proviso to Section 112 is intended to cover cases where effect of inflation is not provided for. That is why the proviso specifies that the calculation of 10% of the Capital Gain should be “before giving effect to” indexation. ‘Before giving effect to’ connotes that effect has otherwise to be given. That means, the asset must be one qualified for indexation under the second proviso to Section 48 of the Act. There is no justification in not giving effect to the words used in the proviso. Nothing stood in the way of the legislature in specifying that all assets will qualify for protection. That has not been done. On the scheme of the provisions and the level playing field sought to be achieved, the natural way of understanding the proviso is to confine its operations to assets not covered by the first proviso to Section 48 and the assets specified in the proviso to Section 112 itself.

The applicant is not eligible to avail the benefit of lower rate of tax of 10% on the capital gains on the sale of shares of an Indian company to a foreign company in off-market mode

AUTHORITY FOR ADVANCE RULINGS (INCOME-TAX) NEW DELHI

Cairn U.K. Holdings Ltd., In re

AAR No. 950 of 2010

AUGUST 1, 2011

RULING

(By Mr. V.K. Shridhar)

The applicant, Cairn UK Holding Ltd. (CUHL), is a private limited company registered in Scotland. It acquired the equity shares of Cairns India Limited (CIL) in 3 tranches: 50,000 equity shares were acquired by way of initial subscription in August, 2006; 365,028,898 equity shares by way of allotment as fully paid up equity shares and another 861,764,893 equity shares pursuant to a share purchase agreement on 12.10.2006. As per this share purchase agreement, 135,267,264 equity shares of Cairn India Holdings Limited (CIHL) were transferred by the applicant to CIL and as a consideration, CIL issued 861,764,893 equity shares to the applicant. Accordingly, these equity shares of CIL were allotted to the applicant under a swap of share arrangement. Approval of the Foreign Investment Promotion Board of India was also obtained. On 12^th October 2009, Petronas Corporation Intl. Limited (PCIL) acquired 2.29% equity shares in CIL from the applicant through an agreement dated 14^th October 2009, pursuant to which the applicant transferred 4,36,00,000 equity shares to PCIL for a consideration of USD 241,426,379.