Case Law Details
Learned counsel for the Revenue argued that the beneficial ownership of the shares vested with Copal Jersey and that ownership should determine the applicatory law. India did not have a treaty with Jersey and hence on the application of the Income-tax Act, the capital gains are taxable in India. He pointed out that there was no dispute that the gains were taxable under the Act.
Counsel for the applicants in answer pointed out that the test of beneficial ownership has not been applied in such circumstances and the legal ownership of the shares vested in the company that held it. The fact that the owner company is a 100% subsidiary of another company will not alter the legal ownership. Every corporation is an independent legal entity.
As things now stand, in such cases the theory of beneficial ownership has not prevailed over the apparent legal ownership. Company law also recognized the recorded owner of the shares and not the person on whose behalf it may have been held (even if, possible). I am, therefore, satisfied that this attempt of counsel for the Revenue must also fail.
The share purchase agreement also provided for the seller to get ‘earn-out’ consideration calculated as per a formula contained in clause 5.3 of the agreement and subject to clause 3.8 and 5.5 of the agreement. The applicant has argued primarily that this payment is part of the sale consideration and hence, it will form part of the capital gains the seller makes and same rules as taxing capital gains should apply.
AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI
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