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Article 13 of India-Singapore DTAA – (i) while a call option simplicitor is not a capital asset, a perpetual call option coupled with grant of enjoyment of shareholder rights under a Power of Attorney results in transfer of capital asset in form of valuable right, which is distinct from shares; (ii) Capital gain arising on transfer of such asset is not chargeable to tax in India by virtue of Article 13(6) of India-Singapore DTAA.
Facts:
The Taxpayer, a non-resident Indian and a tax resident of Singapore, held majority of shares in ICo. The Taxpayer entered into an agreement, whereby the Taxpayer granted option to MauCo to buy the shares in ICo at a strike price of USD1 within a period of 150 years. Furthermore, the Taxpayer executed an irrevocable Power of Attorney (PoA) in favor of a bank, confirming that he would not revoke the same. Taxpayer also gave an undertaking that he would not transfer the shares in any other manner.
The Taxpayer received certain consideration for grant of call option under the agreement during the relevant year. The Taxpayer did not offer such income to tax in India. The AO contended that the Taxpayer had effectively alienated his shares in ICo by way of an irrevocable PoA. Accordingly, the AO held that the income from grant of call option resulted in income through or from a capital asset in India and hence sought to tax the same as income from other sources under the Act.
Upon appeal, the CIT(A) confirmed the order of the AO . Aggrieved by the order of CIT(A), the Taxpayer preferred an appeal before the Tribunal.
Held:
•Rights arising pursuant to grant of call option may not be treated as a ‘capital asset’ because, without exercising the option, no actual asset is acquired by the option holder. However, in the present case, the period of option in the agreement was fixed for an incredibly large period of 150 years. Also, an irrevocable PoA, in respect of ICo shares, was executed in favor of a bank, confirming that the Taxpayer would not, at any time, revoke the same. This suggests that the call option was granted for perpetuity. Further the rights which were enjoyed by the Taxpayer as a shareholder were exercised by the PoA holders to participate in the affairs of the company.
•Such a bundle of substantive rights would generally not be given under normal call option agreements. Thus taxpayer has in effect alienated a substantive and valuable right as an owner of the shares without alienating the shares itself.
•Such valuable rights/interest in shares qualifies as a “capital asset” and transfer of such results in “capital gain” chargeable to tax in India under the Act. However, as per Article 13 of the India-Singapore DTAA applicable for the relevant year, such gains are taxable only in Singapore.
