By Dhishat B. Mehta | Bhaumik Goda
Chartered Accountants
12. AAR No. 1555 to 1564 of 2013 A to J, In Re
Explanations 6 and 7 to section 9(1)(i) of
the Act – Indirect transfer tests of 50% threshold of ‘substantial value’
(Explanation 6) and small shareholder (Explanation 7) are to be applied
retrospectively
FACTS
In F.Y. 2013-14,
Applicant 1 (buyer, a Jersey-based company) and Applicant 2 (sellers /
shareholders based in the US, UK, Hong Kong and Cayman Islands) entered into a
transaction for sale of 100% shares of a British Virgin Islands-based company
(BVI Co). Individually, each seller had less than 5% shareholding in BVI Co.
BVI Co was a
multinational company and had subsidiaries across the globe. It indirectly held
100% shares in an Indian company (I Co) through a Mauritian company (Mau Co).
The sellers submitted the valuation report of the shares of BVI Co, as per
which the value derived directly or indirectly from assets located in India was
26.38%. The applicants approached AAR in December, 2013 with respect to
taxability arising in India as regards the transfer of the shares of BVI Co.
Indirect transfer
provisions were introduced in the Act in 2012. These were amended in 2015 by
introducing Explanation 6 and Explanation 7 to section 9(1)(i). The amended
provisions provided the following benchmarks:
- 50%
value threshold to ascertain substantial value of foreign shares or interest,
from assets in India (50% threshold).
- Proportionate
tax (i.e., to the extent of value of assets in India).
- Indirect
provisions not to apply to shareholders having less than 5% shareholding, or
voting power, or interest in foreign company or entity, if they have not
participated in management and control during the 12-month period preceding the
date of transfer (small shareholder exemption).
The question before
the AAR was whether amendments made in 2015 could be applied to a transaction
retrospectively?
HELD
- From
2012 to 2015, the term ‘substantially’ was statutorily not defined, though it
was interpreted by the High Court1
and the AAR2. Both rulings held that the term ‘substantially’
would only include a case where shares of a foreign company derived at least
50% of their value from assets in India.
- The
provision inserted in 2015 begins with the expression ‘for the purposes of
this clause, it is hereby declared…’. Relying on the principles of
statutory interpretation dealing with declaratory states3, AAR held
that declaratory or curative amendments made ‘to explain’ an earlier provision
of law should be given retrospective effect.
- Explanation
6 pertaining to 50% threshold is clarificatory in nature. Similarly,
Explanation 7 pertaining to small shareholder exemption is inserted to address
genuine concerns of small shareholders. Hence, both should apply
retrospectively to give a true meaning and make the indirect provisions
workable.
The AAR concluded
on principles and did not adjudicate on valuation. It held that tax authorities
could scrutinise the valuation report to ascertain whether it met the 50%
threshold and satisfied the conditions of small shareholders exemption.
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1 DIT
vs. Copal Research Ltd., Mauritius [2014] 49 taxmann.com 125 (Delhi)
2 GEA Refrigeration Technologies GmbH, In
re [2018] 89 taxmann.com 220 (AAR – New Delhi)
3 Principles
of Statutory Interpretation by Justice G.P. Singh (Sixth Edition 1996)
