Capital gains on transfer by a foreign company of shares in another foreign company holding assets in India is taxable in India

To put the facts very simply in a narrow compass , the assessee company is a tax resident of United Kingdom which was incorporated on 26^th of June 2006. On 30/06/2006, it entered into the share exchange agreement with Cairn energy Plc where the entire issued share capital of 9 wholly owned subsidiary of Cairn energy plc were exchanged by issue of 221444034 shares of appellant at the face value of GBP 1 each. Thereafter the appellant entered into a share exchange agreement dated 07/08/2016 with another company Cairn India Holdings Ltd which was incorporated on 02/08/2006 in Jersey and appellant exchanged all the shares of those 9 subsidiaries with that company for issue to the appellant of 221444034 shares of GBP 1 each at par of that co, further for a debt of GBP 29780710 of Cairn energy hydrocarbons Ltd to Cairn energy plc was assigned to appellant for a consideration of 2978 0710 ordinary share of GBP 1 each by appellant to Cairn energy plc. It was further assigned by appellant to Cairn India holding Ltd, Jersey for 29780710 ordinary shares of GBP 1 each issued by Jersey company to the appellant. Thereby, in nutshell, 29780710 shares were acquired by appellant of Cairn India holding Ltd on account of sale/ transfer/ assignment of debt. Therefore by this stage appellant acquired ( 221444034 + 29780710) 251224744 of Cairn India holding Ltd. Subsequently the assessee sold all the shares to a newly formed company in India i.e., cairn India Ltd, through subscription and share purchase agreement dated 15/09/2006, and share purchase deed dated 12/10/2006. As per submission of the assessee, consideration for this transfer was settled partly in cash and partly by shares issued in cairn India Ltd in favour of the appellant. It is an undisputed fact that Cairn India holding Ltd is the holding company of 9 subsidiary companies in India who are engaged in the business in oil and gas sector in India. Therefore the transaction entered into by appellant of transferring 251224744 shares of Cairn India holdings Limited to Cairn India Limited on 12/10/2006 is whether liable to tax in India or not is the precise issue before us. We also examined the other connected issues raised before us arising out of the about transaction as under:-

i. The 1^st contention of the assessee is that lower authorities have erred in holding that capital gains arising to the appellant on account of the sales of shares of Cairn India Holdings Ltd to cairn India Ltd is deemed to accrue or arise in India under section 9 (1) (i) of the act and is therefore, chargeable to tax in India. The argument of the assessee is that retrospective amendment to section 9 (1) (i) of the act by The Finance Act, 2012 is bad in law and ultra vires. In view of the decision of the Hon‘ble Supreme Court in L. Chandra Kumar V Union of India 2002-TIOL-159-  SC-CB  this is not the right forum to challenge validity of provisions of the Income Tax Act. In view of this contention of the assessee rejected.

Also, Check out at capital gains tax on shares.

ii. The 2^nd contention raised before us by the assessee is that it is an internal reorganization of the group, as there is no change in controlling interest as a result of these internal or reorganization. The contention of the assessee is that the reason for the internal reorganization was with a view to bring entire Indian business  operations of Cairn group under one Indian company. This was followed by listing the shares of this Cairn India Ltd on various Stock exchanges in India. It is further contended that there is no 3rd party involved in the whole transaction except the group itself and there can be no tax, which can be levied on the internal reorganization when there is no increase in the wealth of the appellant. Explanation to section 2 (14) was a added by The Finance Act, 2012 with retrospective effect from 1/4/1962 as under :-

“Explanation For the removal of doubts, it is hereby clarified that “property“ includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever;^‖

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