A Revisit :
RKBK Fiscal Services Pvt. ... vs Department Of Income Tax ...
http://indiankanoon.org/doc/41801415/
a. The full value of consideration for transfer of impugned shares is Rs.90/- per share for the purpose of calculation of capital gains; b. Rs.15/- per share is to be assessed as income under the head' business' as per section 28(va)...
[PDF]In a case involving a taxpayer's claim that ... - KPMG
ACIT vs. RKBK Fiscal Services Ltd (ITAT Kolkata) - itatonline ...
Click here to download the judgement (RKBK_Fiscal_control_interest_shares.pdf)
Share sale price cannot be apportioned towards transfer of “controlling interest”
·Share sale price cannot be apportioned towards transfer of “controlling interest”
As per my understanding, and in my opinion, the correctness or otherwise of the view taken by the tribunal , calls for a close and insightful review. For this purpose, a careful reading of the court’s order / observations in the Vodafone case is called for.
It is my conviction that, the court’s order does not speak of or lend any scope for any such apportionment of the ‘consideration’ for the transfer of ‘shares’.
In a recent article published in Business Line (ref. Issue of 29th Jan 2011), there is a similar discussion of ‘apportionment’. In that article, inspiration has been sought to be drawn from certain related provisions in the DTC Bill. However, for forming any independent opinion, one should separately examine and keep in sharp focus, also the true implications and relevance of the newly proposed provisions in the DTC Bill.
·
Apropos of my earlier comment:I have since read the 52 page (downloaded) order. Frankly, my impression is that, – the case makes for a classic instance, though not a solitary one, in the history of case law: On the first blush, the Revenue may have reason to rejoice over its success at the second appeal stage; but not rightly so. For, its arguments before the tribunal seem to basically contradict and impair its own stance in the Vodafone case; so also several others pending court decision. In those cases, the stakes involved are known to be many times. Going by a critical appraisal, perhaps, there is no gainsaying that, the Revenue has accomplished, though unwittingly, what in common parlance is called,- ‘same side goal’.
On the other hand, the assessee in the tribunal case has, to suit its own purpose, chosen to take advantage of and adopt the same stance of the Revenue as in the Vodafone case.
Both sides are seen to have referred to and / or relied on the HC’s order in the Vodafone case, for supporting their respective but varying pleas on the crucial aspect of – ‘controlling interest’. In doing so, both seem to have overlooked or bypassed, among others, one very important aspect; that is this, – the subject matter of ‘transfer’ under litigation in that case is the shareholding of a foreign company, in, unlike in the tribunal case, another foreign company.
REVENUE's
5.1 The AO held that managerial control is not a separately tradable entity. It forms an inalienable part of the whole share. Share and managerial control could not be traded separately. Reliance was placed by him on the following cases:- a. Maharani Ushadevi Vs. CIT 131 ITR 445(MP) b. Venkatesh (Minor) Vs. CIT 243 ITR 367(Mad) c. C.R Rajendra Vs. CIT 125 Taxman 55 d. CIT Vs. Mahadeo Ram Kumar 166 ITR 477(Cal)
5.2 The AO in terms of section 48 of the Act took the full value of consideration for transfer of impugned shares at Rs.105/- per share and calculated the short term capital gain at Rs.5,33,52,600/- and long term capital gain at Rs.10,40,35,050/-.
On Appeal :
<
3. That the Ld. CIT(A) was not justified in upholding the contention of the assessee that consideration amounting to Rs.28,45,68,900/- was received for parting with Controlling interest and thus was not taxable.
4. That the Ld. CIT(A) erred in holding that the decision of the Bombay High Court in the case of M/s. Vodafone (2009) 311 ITR 46 supports the case of the present assessee, whereas in fact it is the other way round. >
Cross refer >>>
856732 Deloitte Controlling Interest.indd
www2.deloitte.com/.../Deloitte/.../us-tax-controlling-interest-real-estate-tr...
· However, depending on
the law of the
applicable taxing jurisdiction, a merger or ... In some cases, a controlling-interest transfer tax is administered in
the same or ... than the appraised value in which
case it is the
greater of fair market value
or ...
[PDF]China SAT re-defines tax matters related to non-residents ...
www.ey.com/.../vwLUAssets/...defines...indirect-transfer...assets/.../EY-chin...
Feb 7, 2015 - expand the
subject of the indirect transfers to China taxable asset. In
other words .... concept in the
international tax practice. ..... non-resident withholding agent may experience during a tax filing in China,
e.g., the cross border.
TCSR (BL)
Xtract
DTC provisions
It is in this context that the DTC Bill provides new vistas with
regard to taxation of non-residents based on Source Rule. Section 5 of the DTC
Bill defines in specific terms when income will be deemed to accrue in India.
Sec 5(1) of the DTC Bill is worded on similar lines of the Income Tax Act,1961
under Section 9(1)(i).
However, the DTC Bill has a new provision excluding from
consideration certain types of income in the hands of non-residents with regard
to transfer of shares outside India.
Section 5(4) (g) of the DTC Bill lays down that income deemed to
accrue in India under subsection (1) shall not include, in the case of a
non-resident, income from transfer, outside India, of any share or interest in
a foreign company unless at any time in 12 months preceding the transfer, the
fair market value of the assets in India, owned, directly or indirectly, by the
company, represent at least 50 per cent of the fair market value of all assets
owned by the company.
The assumption behind the new sub-clause (g) of 5(4) is that
ordinarily, income from transfer of any share or interest in a foreign company
is covered by Section 5(1) (the deeming clause). Upon such assumption, the Bill
seems to be generous and gives the exemption of all such income in all cases
except where the fair market value of the assets India, as mentioned in sub
clause (g), representing at least 50 per cent of the fair market value of all
assets owned by in the 12 months preceding the transfer. The incorporation of
sub clause (g) in Section 5(4) appears a bit hasty.
The government has assumed that the views expressed by the Bombay
High Court in this regard in the case of Vodafone International Holdings B.V
Vs. Union of India 321 ITR 126 will ultimately be upheld by the Supreme Court
in appeal. Assuming that the ultimate ruling goes in favour of Vodafone, what
will happen to this new provision under 5(4)(g)?
New formula
In the Vodafone case, the court also examined the doctrine of
apportionment. The difficulty in applying the principle of apportionment is
sought to be resolved in Section 5(6) of the DTC Bill by incorporating a
formula — A X B divided by C, where A represents income from the transfer
computed in accordance with the provisions of the code as if the transfer was
effected in India; B is the fair market value of the assets in India owned,
directly or indirectly by the company; and C is the fair market value of all
assets owned by the company. The formula looks very elegant and thus attempts
to solve the problem relating to apportionment of income in respect of a
multinational confronted with demands for tax from the source country as well
as the residence country.
The utility of this formula will ultimately hinge on the final
ruling of the Supreme Court in the Vodafone case.
TAXMANN
(commentary)
It is pertinent
that the Finance Minister, while moving amendments to the Finance Bill, 2012,
has stated on 7th May, 2012 as follows:
"I would like to confirm that
clarificatory amendments do not override the provisions of Double Taxation
Avoidance Agreement (DTAA) which India has with 82 countries. It would impact
those cases where the transaction has been routed through low tax or no tax
countries with whom India does not have a DTAA." (para 7 of the Speech).
In the face of the clear provisions of
the above-referred DTAAs and the amended provisions it is a moot point as to what
extent the concession by the Finance Minister will be binding on the officers
unless followed by a circular by the CBDT [see Anandji Haridas & Co.
Pvt. Ltd. v. Engineering Mazdoor Sangh [1975] 45 Comp. Cas. 386
(SC): Finance Minister's speech cannot be used to construe the clear language
of a statute; also see CIT v. Agricultural Market Committee
[2011] 337 ITR 299 (AP): Finance Minister's Speech while
replying to the debate may not have much assistance for the purpose of
interpretation].
Cross refer
856732 Deloitte Controlling Interest.indd
www2.deloitte.com/.../Deloitte/.../us-tax-controlling-interest-real-estate-tr...
· However, depending on
the law of the
applicable taxing jurisdiction, a merger or ... In some cases, a controlling-interest transfer tax is administered in
the same or ... than the appraised value in which
case it is the
greater of fair market value
or ...
[PDF]China SAT re-defines tax matters related to non-residents ...
www.ey.com/.../vwLUAssets/...defines...indirect-transfer...assets/.../EY-chin...
Feb 7, 2015 - expand the
subject of the indirect transfers to China taxable asset. In
other words .... concept in the
international tax practice. ..... non-resident withholding agent may experience during a tax filing in China,
e.g., the cross border.
Xtract
DTC provisions
It is in this context that the DTC Bill provides new vistas with
regard to taxation of non-residents based on Source Rule. Section 5 of the DTC
Bill defines in specific terms when income will be deemed to accrue in India.
Sec 5(1) of the DTC Bill is worded on similar lines of the Income Tax Act,1961
under Section 9(1)(i).
However, the DTC Bill has a new provision excluding from
consideration certain types of income in the hands of non-residents with regard
to transfer of shares outside India.
Section 5(4) (g) of the DTC Bill lays down that income deemed to
accrue in India under subsection (1) shall not include, in the case of a
non-resident, income from transfer, outside India, of any share or interest in
a foreign company unless at any time in 12 months preceding the transfer, the
fair market value of the assets in India, owned, directly or indirectly, by the
company, represent at least 50 per cent of the fair market value of all assets
owned by the company.
The assumption behind the new sub-clause (g) of 5(4) is that
ordinarily, income from transfer of any share or interest in a foreign company
is covered by Section 5(1) (the deeming clause). Upon such assumption, the Bill
seems to be generous and gives the exemption of all such income in all cases
except where the fair market value of the assets India, as mentioned in sub
clause (g), representing at least 50 per cent of the fair market value of all
assets owned by in the 12 months preceding the transfer. The incorporation of
sub clause (g) in Section 5(4) appears a bit hasty.
The government has assumed that the views expressed by the Bombay
High Court in this regard in the case of Vodafone International Holdings B.V
Vs. Union of India 321 ITR 126 will ultimately be upheld by the Supreme Court
in appeal. Assuming that the ultimate ruling goes in favour of Vodafone, what
will happen to this new provision under 5(4)(g)?
New formula
In the Vodafone case, the court also examined the doctrine of
apportionment. The difficulty in applying the principle of apportionment is
sought to be resolved in Section 5(6) of the DTC Bill by incorporating a
formula — A X B divided by C, where A represents income from the transfer
computed in accordance with the provisions of the code as if the transfer was
effected in India; B is the fair market value of the assets in India owned,
directly or indirectly by the company; and C is the fair market value of all
assets owned by the company. The formula looks very elegant and thus attempts
to solve the problem relating to apportionment of income in respect of a
multinational confronted with demands for tax from the source country as well
as the residence country.
The utility of this formula will ultimately hinge on the final
ruling of the Supreme Court in the Vodafone case.
TAXMANN
(commentary)
It is pertinent
that the Finance Minister, while moving amendments to the Finance Bill, 2012,
has stated on 7th May, 2012 as follows:
"I would like to confirm that
clarificatory amendments do not override the provisions of Double Taxation
Avoidance Agreement (DTAA) which India has with 82 countries. It would impact
those cases where the transaction has been routed through low tax or no tax
countries with whom India does not have a DTAA." (para 7 of the Speech).
In the face of the clear provisions of
the above-referred DTAAs and the amended provisions it is a moot point as to what
extent the concession by the Finance Minister will be binding on the officers
unless followed by a circular by the CBDT [see Anandji Haridas & Co.
Pvt. Ltd. v. Engineering Mazdoor Sangh [1975] 45 Comp. Cas. 386
(SC): Finance Minister's speech cannot be used to construe the clear language
of a statute; also see CIT v. Agricultural Market Committee
[2011] 337 ITR 299 (AP): Finance Minister's Speech while
replying to the debate may not have much assistance for the purpose of
interpretation].
xtract
The view the recent court verdict has brought to
surface once again, if looked at or through, is to the following effect: the
subject matter of transfer is really the intangible asset, dubbed as
‘controlling interest ‘. Pithily stated,
according to the thinking behind, what has been transferred by seller
and bought by the purchaser should be taken as
a slice of the operating company’s net worth, i.e. Proportionate assets
minus liabilities as on the date of transfer.
The stated premise, if
perceptively analyzed, as sufficiently canvassed in knowledgeable circles, goes
against the very grain of the underlying scheme of the provisions of the law.
Further, more importantly, is seen to give rise to a quandary; that can be
illustrated as under:
Cost of acquisition of the
shares (even if it be looked at or through as ‘controlling interest’/ a
proportionate slice of the business) could not, by no means, be taken at no
more or less than the price negotiated and actually /factually paid for. In
case it were to be regarded as price paid for not the ‘shares’ but the controlling interest / the slice of
the business it represents , going by common sense and logical reasoning, on
its transfer the seller has to be taken to have demanded and received, and the
buyer has to be taken to have agreed and paid, such an amount as considered its
fair market value or its intrinsic value.
In the nature of things,
however, there could again be no denying that, the seller has been able to realize
more than what he paid for, only because of the appreciation in the value of
the “capital asset”. There could be no doubt that it is such appreciation in
value which in tax parlance is referred to as/termed ‘cost of improvement’.
Now, if the foregoing is
translated arithmetically:
Cost of acquisition (of
controlling interest) being the cost/equivalent of the shareholding held – say.
X
Sales price – say, y
Cost of improvement (being
excess of y over x ) – i.e. Y-x
Cost + improvement cost = x +
(y -x)
Cg = y – (x + (y – x))
I.e. Y – x – y + x
Is not the result/can it be
different than an absolute – ‘zero’?
Key note:
The suggested line of
reasoning, in one’s conviction, cannot be simply ignored as a puzzle requiring
a mathematical genius to solve; much less, as fiendishly difficult to
understand by anyone, even if endowed with an average iq, hence deserves to be
gone into in-depth. For, after all, the fact staring in the face is that the
same line of reasoning, as is more than obvious, has been adopted in framing the
corresponding provisions proposed in the dtc (pending enactment). Except that,
the formula as framed therein for arriving at the taxable income , in one’s
view, does not have any semblance of simplification sought to be accomplished ,
but suffers from certain other fallacies of a different kind.
Is the comment puzzling and
open to any intelligent and well reasoned counterview?
If so, readers remain to be
enlightened.
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