GOOD YEAR CASE - TRANSFERABILITY OF INDIAN SHARES BETWEEN TWO NON-RESIDENT COMPANIES- NO LONG TERM CAPITAL GAIN IS INVOLVED

Details of the case

 

In 2011, US based manufacturer Goodyear Tire and Rubber Company had transferred 74% of its holding in Goodyear India to its subsidiary in Singapore without taking any consideration. The Indian Tax claimed that there is a tax implication in this transaction, while the Authority for Advanced Ruling (AAR), ruled that this particular transaction is not subject to tax in India. The tax department challenged the ruling and filed a writ petition in the Delhi High Court, saying that the transfer of shares are of an Indian listed company is subject to taxation.

Tax-Department Claim

 

The tax department petitioned that the said transaction between the Goodyear US and Singapore entities involves treaty shopping. According to the India-US tax treaty, shares sold by a US based organization, is considered capital gains and hence would be subject to taxation both in India as well as the US.

information about the Case

According to laws, capital gains are considered to be of long-term in nature, if the shares of a company listed in India, have been sold after an initial holding period of 12 months. The AAR hence had held, that transfer of shares of an Indian entity between two non-resident entities, even if done for a consideration, will be exempt from taxation in India as long-term capital gains on sale of shares of companies listed in India, is exempt from Indian tax laws. If at all, only a securities transaction tax needs to be paid under the purview of such deals.
In this case, Goodyear USA, had transferred its shares in Goodyear India (being the transferor), which was a long-term capital asset arm for them, to Goodyear Singapore (transferee), and that too without any considerations.

 Verdict

 

In light of these facts i.e. no tax liability on share transfers of Indian listed companies for long-term capital gains, the tax department’s arguments have been held to be of no consequence.

The Hon’ble HC said that no illegality has been pointed out in the ruling by the AAR, and court saw no reason to interfere. The high court has accepted AAR’s view, and emphasized that the HC has in fact not exercised any appellate jurisdiction. Instead they had only invoked an extra-ordinary jurisdiction which has been given / granted to them as per the Constitution.

It was however mentioned that if the shares had been sold by the Singapore entity instead, the capital gains out of the share tranfers, would then be taxed only in Singapore as per the India-Singapore tax treaty.
The Delhi high court has since dismissed the petition relating to this transfer. Both the orders AAR and Delhi HC ruling needs to be read together now.

Liability of the director(s) u/s 179 of the Income Tax Act is towards the amount of “tax” only and not towards “interest” and “penalty”

Liability of the director(s) u/s 179 of the Income Tax Act is towards the amount of “tax” only and not towards “interest” and “penalty”

Case Law: SANJAY GHAI Vs. ASSTT. CIT & ORS. in W.P.(C) 2303/2012 & 5175/2012 Dated 11.10.2012 (DHC)

 

Decided in Whose Favour ? -- Assessee

 

Facts _ Issue Involved: In this case, the issue involved was that if there is a default on the part of a private limited company in payment of its income tax dues to the Income Tax Department then the liability of the company can be shifted to its director(s) u/s 179 of the Income Tax Act and accordingly, the Income Tax Department can hold the said director(s) liable to pay income tax dues of the company. The question arose as to whether it is the amount of “tax” only that can be shifted upon the director(s) or even other components of income tax demands such as “interest” and “penalty” can also be recovered from the director(s) u/s 179 of the Income Tax Act.

Decision

: Hon’ble Delhi High Court after analyzing Section 179 and other provisions of the Income Tax Act held that it is the amount of “tax” only which can be recovered form the director(s) u/s 179 and no other demand i.e. “interest” or “penalty” can be recovered from director(s) u/s 179 of the Income Tax Act.

 

Significance of the Judgement

This decision helps the director to pay only income tax as in many cases the portion of “interest” and “penalty” becomes higher than the actual income tax. IT department may levay  penalty can be levied upto 300% of the amount of tax and this verdict gives some relief to those at default.

 

 

 

Notwithstanding Loan at High Rate of Interest, Share capital Gain cannot be assumed as Business Profit and will be treated as Capital Gains

Notwithstanding Loan at High Rate of Interest, Share capital Gain cannot be assumed as Business Profit and will be treated as Capital Gains

Case: Commissioner of Income-Tax v NIRAJ AMIDHAR SURTI

Merely because the shares had been purchased from borrowed funds obtained on high rate of interest would not change the nature of the transaction from investment to one in the nature of an “adventure in the nature of trade.

A capital investment and resale do not lose their capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced values motivated the investment.

It was held by the Gujarat High Court that the character of the transaction in question to be one of capital gain and not an adventure in the nature of business or trade and cannot be construed as business profits but to be assessed as capital gains.

Interest paid by a branch of a Foreign Bank to its Head Office is deductible in the hands of the branch?

Interest paid by a branch of a Foreign Bank to its Head Office is deductible in the hands of the branch?

CASE: ABN AMRO Bank NV vs. CIT

Sections: section 90 of the Income-Tax Act, 1961,

 Section 195 of the Income-Tax Act, 1961

section 40(a)(i) the Income-Tax Act, 1961

 

Facts

Calcutta High Court in its verdict opined that the appellant before us is  a foreign company incorporated in Netherlands and having its principal branch office in India. In course of its banking activities the appellant’s said branch in India remits substantial funds to its head office as payment of interest.

There is a continuous process of the said branch receiving interest from its head office and other branches and remitting of interest by the branch to the head office and other branches.

There are principally only two issues in this appeal, namely,

 1. Whether interest payment made by the Indian branch of the appellant to its head office abroad was to be allowed as a deduction in computing the profits of the appellant’s branch in India?

 2. Whether in making such payment to the head office, the appellant’s said branch was required to deduct tax at source under Section 195 of the said Act?

Under section 90 of the Income-Tax Act, 1961,the Government of India has entered into the above agreement with the government of Netherland for relief of tax and avoidance of double taxation. The appellant is an assessee to whom such agreement applies. Therefore, for the purpose of relief of tax which is related to avoidance of double taxation, a more beneficial provision amongst rival provisions in the agreement and the Act will apply to the assessee.

Therefore, if no tax is deductible under section 195(1) & section 40(a)(i) of the Income Tax Act , 1961 will not come in the way of the appellant claiming such deduction as from its income. Therefore, in the circumstances the appellant would be entitled todeduct such interest paid, as permitted by the convention or agreement, in the computation of its income.

WHETHER TRANSACTION BETWEEN London head office of the assessee and its branch in India tantamount to Sale ?

WHETHER TRANSACTION BETWEEN London head office of the assessee and its branch in India tantamount to Sale ?

Case: Betts Hartley Huett and Co Ltd vs Commissioner of Income Tax,West Bengal-II Calcutta

Facts  

 

 

 A Division Bench was concerned with a transaction between the London head office of the assessee and its branch in India. The question before the court was whether it was sale. The court held in construing the transaction that the head office and the branch office being parts of the same entity there could not be a sale by the head office to itself, that is, the branch office.

Tax Residency Certificates (TRC) FOR NON-RESIDENT INVESTORS IN INDIA

Tax Residency Certificates (TRC) FOR NON-RESIDENT INVESTORS IN INDIA

 

All foreign investors will have to produce tax residency certificates (TRC) of their base nation to claim benefits under the double taxation avoidance treaty from April 1, 2013, says a government notification.

The amendments to the Income Tax Act, 1961, the Central Board of Direct Taxes (CBDT) said, will take effect from April 1, 2013 and will apply in relation to the assessment year 2013-14 and subsequent years.

The notification amends Section 90 and Section 90A of the Act dealing with taxation of foreign investment and tax benefits under the Double Taxation Avoidance Agreements (DTAAs). Currently, India has a total of84 DTAAs with foreign countries.

The TRC for availing tax benefits was proposed in the 2012-13 Budget, presented by the then Finance Minister Pranab Mukherjee.The TRC to be obtained by an assessee, not being a resident in India,from the Government of the country or the specified territory, shall contain the name of the assessee, status as to whether it is anindividual or company, its nationality and country wherein it is
registered or incorporated.

Besides, the TRC should also have the tax identification number of the assessee, its residential status for the purposes of tax, period for which the TRC is applicable and address of the assessee during that
period.

Under a clause in the DTAA entered into between two countries, the assessee can take the advantage of paying capital gains tax in either of the two nations.

Development expense for website is revenue expenditure and amount advanced for it if become unrecoverable is allowable as “Bad Debt”

Development expense for website is revenue expenditure and amount advanced for it if become unrecoverable is allowable as “Bad Debt”

Case ; DCIT vs  M/s Edelweiss Capital Ltd.

Section :28 of the Income-Tax Act ,1961

Facts

The ITAT , Mumbai in this case was of the view that if the expenditure on the development websites, the expenditure could not have been regarded as capital expenditure since the website is put up for the purposes of day-to-day running of the business and even if one were to view that some enduring benefit is obtained by the assessee, the benefit cannot be said to accrue to the assessee in the capital field.

A website is something where full information about the assessee’s business is given and it helps the assessee’s customers in dealing with it. A website constantly needs updating, otherwise it may become obsolete. It helps in the smooth and efficient running of the day-to-day business. The expenditure would have been allowable as revenue expenditure; as a corollary, when the website did not materialize, the amounts advanced to the companies who were engaged to develop the websites, when they became irrecoverable, can be written off and claimed as loss incidental to the business. The loss is thus allowable as business loss in terms of section 28 of the Act