Attempt of the assessee to bring the transferring of shares within the ambit of the term “reorganisation” is not correct, since the object of the arrangement was not financial restructuring, but to provide an exit route to the non-resident shareholders. Thus the Capital Gains are taxable and assessee is entitled to concessional rate of tax @ 10% on the impugned Capital gains
1. The assessee is a resident of Netherlands
2. It held 38.24% of shares comprising of 1,09,52,280 shares in the paid capital of M/s Century Enka Ltd, an Indian public listed company
3. During the year under consideration, the assessee tendered 85,93,109 equity shares having face value of Rs.10/- each to M/s Century Enka Ltd at Rs.122/- per shares under a scheme of arrangement, by way of buy back of own shares, as per the approval given by Hon‟ble High Court of Calcutta u/s 391 of the Companies Act
4. The said tendering of shares resulted in a capital gain of Rs.58.64 crores
5. The assessee placed reliance on paragraph 5 of Article 13 of India Netherlands DTAA in order to contend that the capital gain referred above is not taxable in India
6. The same was not acceptable to both the AO and Ld CIT(A). Aggrieved by this decision of Ld CIT(A), the assessee has filed appeal before Tribunal
7. With regard to the rate at which the capital gain is taxable, the assessing officer held that the concessional rate of taxation @ 10% provided in the second proviso to sec. 112 of the Act is not applicable to the assessee. Accordingly he levied tax @ 20%
8. However, the Ld CIT(A) decided this issue in favour of the assessee and hence the revenue has filed appeal before Tribuanal as cross appeal
9. With regard to the issue relating to taxation of capital gains, the assessee has placed reliance on Article 13(5) of the DTAA entered between India and Netherlands, which reads as under:-
“Gains from the alienation of any property other than that referrred to in paragraphs 1,2,3 and 4 shall be taxable only in the state of which the alienator is a resident. However, gains from the alienation of shares issued by a company resident in other state of which, shares form part of at least 10 percent interest in the capital stock of the company may be taxed in that other State if the alienation takes place to a resident of that other state. However, such gains shall remain taxable only in the State of which the alienator is a resident if such gains are realized in the course of a corporate organization, reorganization, amalgamation, division or similar transaction and the buyer or the seller owns at least 10 percent of the capital of the other.”
While the tax authorities have held that the condition highlighted in bold letters shall be applicable to this transaction, the assessee is contending that the condition highlighted by under scoring shall be applicable.
10. The AO has interpreted the provisions highlighted in bold letters as under:-
“….the gains arising from the alienation of shares issued by a company resident in other state (Century Enka Ltd, in the case under consideration) of which, shares form part of at least 10 percent interest in the capital stock of that company (30% in the case under consideration) may be taxed in that other state (i.e., in India), if the alienation takes place to a resident of that other state (i.e. Indian Company in this case)”.
Accordingly, the AO held that the capital gains is taxable in India as per Article 13(5), referred above
From the decision taken by Ld CIT(A), it can be noticed that the Ld CIT(A) has observed that the scheme of arrangement framed by M/s Century Enka Ltd was only with the purpose of p oviding an exit route to the non-resident share holders. Thus, the objective of the scheme was to enable the assessee to transfer its shareholding. Further the Ld CIT(A) has observed that the subsequent cancellation or writing off the shares is nothing to do with the transfer made by the assessee, even though the same has resulted in reduction of paid up share capital of the company, M/s Century Enka Ltd. We agree with the above said observations made by Ld CIT(A). As observed by him, two different activities have been combined with the scheme of arrangement. The first one was to buy back shares belonging to non-resident share holders and the second one was to cancel the shares so purchased. We agree with the view taken by Ld CIT(A) that they are two different actions and both should not be clubbed together, even though M/s Century Enka Ltd has combined the same, for the sake of its convenience, in the scheme of arrangement. The assessee herein, in our view, should in no way concerned by the action of cancellation of share resulting in reduction of share capital. Accordingly, we are of the view that the attempt of the assessee to bring the transferring of shares within the ambit of the term “reorganisation” may not be correct, since the object of the arrangement was not financial restructuring, but to provide an exit route to the non-resident shareholders.
In view of the above, we are of the view that the Ld CIT(A) was justified in upholding the view taken by the AO on this issue. Accordingly we uphold his order on this issue.
The only contested in the appeal filed by the revenue relates to the rate at which the capital gains is taxable. The Ld A.R submitted that this issue is covered in favour of the assessee by the decision rendered by Hon‟ble Delhi High Court in the case of Cairn U.K. Holdings Ltd (2013)(359 ITR 268), which was followed by the co-ordinate bench of Tribunal in the case of ADIT Vs. Abbott Capital India Ltd (65 SOT 121)(Mum). Hence, we are of the view that the Ld CIT(A) was justified in holding that the assessee is entitled to concessional rate of tax @ 10% on the impugned Capital gains
Cases referred to