Assessment involving indirect transfer before 28-05-2012
Introduction
The Taxation Laws (Amendment) Act, 2021 has provided that the retrospective amendment to Section 9(1)(i) to tax indirect transfer will not apply to the assets transferred before 28-05-2012. Accordingly, all pending assessments shall be deemed to have been concluded without additions for such income. Further, the demand raised in concluded assessments or rectification orders shall be nullified on the fulfillment of specified conditions.
1. About
Section 9 enumerates various categories of income under clauses (i) to (viii). Income falling under each of the clauses shall be deemed to accrue or arise in India. As per Section 9(1)(i), whether directly or indirectly, the following incomes are deemed to accrue or arise in India:
(a) Through or from any business connection in India;
(b) Through or from any property in India;
(c) Through or from any asset or source of Income in India;
(d) Through the transfer of capital assets situated in India.
The issue of taxability of income, arising on indirect transfer of assets located in India due to the transfer of the shares of a foreign company, was a subject matter of prolonged litigation. This issue first time arose in the case of Vodafone International Holdings. In 2006, Vodafone International Holding (Vodafone) and Hutchison Telecommunication International Limited (HTIL) entered into a transaction by which HTIL transferred the share capital of its Cayman Islands based subsidiary company to Vodafone. By this transaction, Vodafone indirectly acquired a controlling interest of 67 per cent in Hutchison Essar Limited (HEL), an Indian Joint venture company.
The Income-tax Department in 2007 served a notice to Vodafone for its alleged failure to deduct withholding tax from the consideration paid to HTIL. The controversy finally settled in favour of Vodafone by the Supreme Court. The Supreme Court had ruled
2. Amendment by the Finance Act, 2012
The Govt. amended the provisions of Section 9 by the Finance Act, 2012 with retrospective effect. The Finance Act, 2012 inserted Explanation 4 and Explanation 5 to Section 9(1)(i) with retrospective effect from 01-04-1962. The amendment has clarified that gains arising from the sale of shares of a foreign company are taxable in India if such shares, directly or indirectly, derive their value substantially from the assets located in India. The Govt. had termed the amendments as clarificatory in nature.
In Vodafone's case (supra) the Supreme Court observed that the word 'through' in section 9 does not mean 'in consequence of'. Explanation 4 was inserted to neutralize these observations by clarifying that the expression 'through' in section 9(1)(i) shall mean and include and shall be deemed to have always meant and included 'by means of', 'in consequence of' or 'by reason of'.
The Supreme Court (supra) held that Section 9(1)(i) does not cover indirect transfers of capital assets/property situated in India. Explanation 5 was inserted to clarify that an asset or a capital asset (being any share or interest in a company or entity registered or incorporated outside India) shall be deemed to be and shall always be deemed to have been situated in India if they derive, directly or indirectly, their value substantially from the assets located in India.
3. Scope of Explanation 5 to Section 9(1)(i)
Explanation 5 to Section 9(1)(i) clarifies that an asset or a capital asset, being any share or interest in a company or entity registered or incorporated outside India, shall be deemed to be situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. In other words, an asset or capital asset shall be deemed to have been situated in India, and income arising from transfer of such asset shall be deemed to accrue or arise in India if the following conditions are satisfied:
(a) The asset or capital asset is a share (or interest) in a company (or entity) registered or incorporated outside India;
(b) The share or interest derives its value substantially from the assets located in India; and
(c) Such value may be derived directly or indirectly from the assets located in India.
However, the share or interest shall not be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if, on the specified date, the value of such assets:
(a) Does not exceed Rs. 10 crores; and
(b) Does not represent at least 50% of the value of all the assets owned by the company or entity, as the case may be.
4. Amendment by Taxation Laws (Amendment) Act, 2021
The Taxation Laws (Amendment) Act, 2021 (hereinafter referred to as TLA, 2021) inserted three provisos (Fourth, Fifth, and Sixth Proviso) in Explanation 5 to Section 9(1)(i) to give relief to certain eligible entities impacted by the above retrospective amendment. These amendments provides that the provisions of indirect transfer of assets in India shall not apply to the assets transferred before 28-05-2012 (i.e., the date on which the Finance Bill, 2012 received the assent of the President). Accordingly, all pending assessments shall be deemed to have been concluded without additions for such income. It is further provided that the demand raised in concluded assessments or rectification orders for indirect transfer of Indian assets made before 28-05-2012 shall be nullified on the fulfillment of specified conditions. The impact of these Provisos has been discussed below.
4.1. Impact on pending assessments
The Fourth Proviso to Explanation 5 to Section 9(1)(i) provides that the provisions of Explanation 5 (hereinafter referred to as 'indirect transfer of Indian assets') shall not apply, in respect of income accruing or arising through or from the indirect transfer of Indian asset made before 28-05-2012, to:
(a) An assessment or reassessment to be made under Section 143, Section 144, Section 147 or Section 153A or Section 153C;
(b) An order to be passed enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under Section 154; or
(c) An order to be passed deeming a person to be an assessee in default under Section 201(1).
In other words, the retrospective impact of Explanation 5 to Section 9(1)(i) shall be ignored if assets situated in India are indirectly transferred before 28-05-2012. Thus, the income accruing or arising through or from such indirect transfer of Indian assets or capital assets shall not be taxable in India. Therefore, all assessments or rectification applications pending before the authorities, to the extent it relates to the computation of income from indirect transfer of assets, shall be deemed to be concluded without any additions.
4.2. Impact on concluded assessments
See also: Conditions to claim relief for indirect transfer of assets before 28-05-2012
The Fifth Proviso to Explanation 5 to Section 9(1)(i) provides that the provisions of Explanation 5 shall not apply, in respect of income accruing or arising through or from the indirect transfer of Indian asset made before 28-05-2012, to:
(a) An assessment or reassessment made under Section 143, Section 144, Section 147 or Section 153A or Section 153C;
(b) An order passed enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under Section 154;
(c) An order passed deeming a person to be an assessee in default under Section 201(1); or
(d) An order passed imposing a penalty under Chapter XXI or under Section 221.
In other words, the retrospective impact of Explanation 5 to Section 9(1)(i) shall be ignored if assets situated in India are indirectly transferred before 28-05-2012. Thus, the income accruing or arising through or from such indirect transfer of Indian assets or capital assets shall not be taxable in India. Therefore, all assessments or rectification applications concluded by the authorities, to the extent it relates to the computation of income from indirect transfer of assets, shall be deemed to never have been passed or made.
The Sixth Proviso provides that where any amount becomes refundable to such person, then such amount shall be refunded to him, but no interest under Section 244A shall be paid on that amount.
The relief in cases of concluded assessments shall be given to only those assessees who satisfy the following conditions:
(a) Where the assessee has filed an appeal before an appellate forum or any writ petition before the High Court or the Supreme Court against any order in respect of said income, he shall either withdraw or submit an undertaking to withdraw such appeal or writ petition, in such Form and manner as may be prescribed;
(b) Where the said person has initiated any proceeding for arbitration, conciliation or mediation, or has given any notice thereof under any law for the time being in force or under any agreement entered into by India with any other country or territory outside India, whether for protection of investment or otherwise, he shall either withdraw or shall submit an undertaking to withdraw the claim, if any, in such proceedings or notice, in such Form and manner as may be prescribed;
(c) The said person shall furnish an undertaking, in such Form and manner as may be prescribed, waiving his right, whether direct or indirect, to seek or pursue any remedy or any claim in relation to the said income which may otherwise be available to him under any law for the time being in force, in equity, under any statute or under any agreement entered into by India with any country or territory outside India, whether for protection of investment or otherwise; and
(d) Such other conditions as may be prescribed.
The conditions as specified in Explanation to Fifth and Sixth Proviso to Section 9(1)(i) are prescribed by the CBDT in Rule 11UE. This Rule provides for the specified conditions which are required to be fulfilled in order to be eligible to claim relief under TLA 2021.
Following conditions are required to be fulfilled by a declarant and interested parties:
(a) Furnishing of undertaking in Form 1;
(b) Withdrawal of all proceedings or appeals;
(c) Withdrawal or waiver of all rights;
(d) Waiver of right to seek any cost in respect of any proceedings;
(e) Waiver of right in relation to any event which may otherwise be available;
(f) Indemnifying India from any cost arising from filing claim after furnishing Form 1;
(g) Refrainment from assisting any person to raise any claim or reward; and
(h) Issue of public notice.
4.3. Consequential amendment
Section 119 of the Finance Act, 2012 had inserted a validation clause to validate all demands raised/notices sent in connection with the indirect transfer of assets. It also provides that any decision of any Court, Tribunal, etc., including the decision of the Supreme Court in Vodafone's case (supra) which has held such indirect transfer as not falling within the scope of section 9(1)(i) will be disregarded.
The TLA, 2021 makes a consequential amendment to the above provision by inserting a proviso to Section 119 of the Finance Act, 2012. It provides that this Section shall cease to apply to the person who fulfills certain conditions as mentioned above, such as withdrawal or furnishing of undertaking for withdrawal of pending litigation and furnishing of an undertaking to the effect that no claim for cost, damages, interest, etc.
In this regard, the Board has notified the relaxation of Validation (section 119 of the Finance Act, 2012) Rules, 2021
References
Vodafone International Holdings B.V. v. Union of India [2012] 17 taxmann.com 202 (SC).
Notified vide Notification No. 120, dated 13-10-2021.
This article is general information and not tax advice. Provisions change. Confirm your position with a qualified professional before acting.