Foreign company gains deriving less than 50% of its value form Indian assets, not taxable

Delhi High Court: Answering the question, whether the transaction of sale and purchase of shares of an overseas company deriving only a minor part of its value from assets located in India, would be taxable in India, the Court held that after amendment of S. 9(1)(i) Explanations 4, 5 Income Tax Act, 1961, post the “Vodafone case” Vodafone International Holdings BV v. Union of India: (2012) 6 SCC 613, any share/interest in a company registered outside India, shall be deemed to be situated in India, if such share derives (directly/indirectly) its value “substantially’” from assets located in India. The Court further clarified that as per the Shome Committee report on retrospective amendment relating to indirect transfer of assets and Direct Tax Code Bill, 2010, the gains arising from sale of shares of a company incorporated overseas, deriving less than 50% of its value from assets situated in India, would not be taxable u/S. 9(1)(i) of the Act r/w Explanation 5. 

In this case the Copal group (an overseas company) sold shares of an Indian company, to Moody’s Cyprus and shares of a US company (having an Indian subsidiary) to Moody’s USA. The group sold 67% of its shareholding in Copal-Jersey (the ultimate holding company) to Moody UK for $93,509,220. While 33% stake was held by banks and financial institutions. This purchase price was not inclusive of any value in Indian companies as 100% economic interest in these companies was already acquired by Moody’s group. On applications filed by these companies for above transactions, the Authority of Advance Rulings (AAR), ruled that such transactions were not taxable in India and Moody’s group, as buyers, had no obligation to withhold tax. This ruling was challenged by the Revenue. 

Agreeing with AAR’s view, the Court reasoned that since, value of shares derived from assets outside India was $93,509,220, and that from assets situated in India was $28,530,435.8, only a fraction of the value of shares of Copal-Jersey was derived indirectly from the value of shares of the Indian companies. Such transactions would not attract tax in India and Moody’s group did not have any withholding tax obligations. Director of Income Tax (International Tax) v. Copal Research Limited, Mauritius, W.P.(C) 2033/2013, decided on 14-08-2014

To read the full judgment, refer SCCOnLine

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