BEFORE THE AUTHORITY FOR ADVANCE RULINGS NEW DELHI

Transcription

1 BEFORE THE AUTHORITY FOR ADVANCE RULINGS NEW DELHI 7 th Day of February, 2018 A.A.R. No 1200 of 2011 PRESENT Mr. R.S. Shukla,In-chargeChairman Mr. Ashutosh Chandra, Member (Revenue) Name & address of the applicant Present for the applicant Present for the Department : Honda Motor Co Limited, Minami-Aoyama, Minato-ku, Tokyo, Japan : Mr.TarunGulati, Advocate Mr. Manish Rastogi, Advocate : Mr. G C Srivastava, Advocate Mr. SukhsagerSyal, CA Mr. A.K.Verma, DCIT, DR Mr. D.K. Srivastava, DCIT(IT), Noida RULING (ByAshutosh Chandra) The present Application for Advance Ruling has been filed by the Applicant under Section 245Q of the Income Tax Act, 1961 (Act, for short) on , and the same was admitted on The Applicant is a Corporation under the laws of Japan and having its principal office at Tokyo, Japan, and is amongst the world s largest manufacturers of automobiles and engines. It is a tax resident of Japan within the meaning of Article 4 of the India-Japan DTAA. 2. The Applicant along with Hero Investments Pvt. Ltd. and Bahadur Chand Investments Pvt. Ltd., the Indian Partners established Hero 1 AAR/1200/2011

2 MotoCorpLimited (HHML) as a joint venture company in HHML is a public listed company existing under the laws of India. The Applicant acquired shares in HHML by direct allotment of shares in the year 1985, right issue of shares in the year 1987 and bonus shares issued in the year 1995 and This resulted in the Applicant s holding of 1,03,83,750 equity shares [of Rs. 10 each] in the total equity capital of HHML as on Thereafter, on ,each share of HHML was sub-divided into 5 equity shares of Rs. 2 each, thereby resulting in Applicant s ownership of 5,19,18,750 equity shares [of Rs. 2 each] in the total equity capital of HHML, (being 26%), as on the date of such sub-division and thereafter, till the date of transfer of the shares. The Applicant purchased the shares issued under direct allotment as well as right issue in convertible foreign exchange. 2.1 On , the Applicant entered into shares transfer agreement with the Indian Partners in order to sell its stake in HHML, which were held by the Applicant for more than 12 months as on the date of the transfer, and accordingly were long-term capital asset on the date of the transfer. The resultant capital gain tax applicable would be long-term capital gain tax. 2.3 In the process, on it incurred expenses towards Fees for the computerization of share certificates in order to transfer them to the escrow account, amounting to USD 10,000 and further on an amount of INR 55,150 as Fees for the computerization of share certificates in order to transfer them to the escrow account. These were incurred in terms of the Transfer Agreement which provided for, inter alia, dematerialization and execution of Escrow Account for the subject transfer. Therefore, all the expenses incurred by the Applicant were for the purposes of transferring the shares from the Applicant to the buyer. 2 AAR/1200/2011

3 3. On the above facts, the Applicant is seeking a Ruling on the following questions: (i) Whether, on the stated facts and circumstances of the case and in law, the tax payable by the Applicant on the long term capital gains arising on the sale of equity shares of the Hero Honda Motors Limited [now known as Hero MotoCorp Limited] (hereinafter referred to as HHML ), being listed securities, will be 10% (plus surcharge and cess) of the amount of capital gains as per the proviso to section 112(1) of the Act? (ii) Whether, on the stated facts and in the circumstances of the case and in law, the Applicant is eligible to claim deduction for expense incurred by the Applicant in connection with the transfer of shares of HHML, as per provisions of section 48 of the Act? 4. The Applicant submits that it is entitled to the benefit of proviso to Section 112 (1) of the Act although it is not eligible to the benefit of indexation under Second proviso to Section 48 of the Act, and that the applicability of this proviso is not a condition precedent for availing the benefit of lesser rate of tax under the proviso to Section 112 (1) of the Act. 4.1 It is submitted that the expression before giving effect to the provisions of second proviso to Section 48 used in the proviso to Section 112 (1) of the Act requires a taxpayer to compute the capital gains without taking cognizance of or giving effect to the second proviso to Section 48 of the Act. It is further submitted that the applicability of the second proviso to Section 48 of the Act or the eligibility of a taxpayer to actually claim the benefit under the said proviso is not a sine qua non for applying the reduced rate of 10% prescribed by the proviso. Therefore, irrespective of whether or not the Applicant is entitled to claim benefit of second proviso to Section 48 of the Act, the benefit under the proviso to Section 112 (1) of the Act should be allowed 3 AAR/1200/2011

4 to the Applicant as long as the provisions contained in second proviso to Section 48 are not being given effect to by the Applicant. 4.2 It is further submitted that its case is squarely covered in its favour by the judgment of the Hon ble High Court of Delhi in the case of Cairn UK Holdings Ltd. vs. DIT, 2013 (359) ITR 268, wherein the Ruling of this Authority in the case of Timken France, In Re (2007) 212 CTR 349 (AAR) was affirmed by the Hon ble High Court of Delhi. This has been followed by this Authority in the case of Pan-Asia igate Solutions, Mauritius, In Re 2014 SCC Online AAR 13. Further, reliance is placed on the Rulings of this Authority in the following cases: Fujitsu Services Ltd., In re, (2009) 225 CTR 121 (AAR); Four Star Oil & Gas Co., In re, (2009) 223 CTR 121 (AAR); CompagnieFinanciereHamon, In re, (2009) 221 CTR 734 (AAR); Burmah Castrol Plc., In re, (2009) 221 CTR 63 (AAR). The order of the ITAT in the case of DDIT vs. Mitsubishi Motors Corp, 2016 SCC, dated has also been cited in support. In view of this position, it is argued that the first question ought to be decided in favour of the Applicant, following judicial discipline as held in the case of UOI&Ors. vs. Kamlakshi Finance Corporation Ltd., 1992 Supp (1) SCC 443. It is also stated that during the course of hearing in its case, the Department did not dispute that the Applicant s case is covered by the aforesaid judgment of the Hon ble Delhi High Court. 5. Opposing the contentions of the Applicant, the Revenue submitted that the expression before giving effect to the 2 nd proviso to section 48 presupposes the existence of a case where computation of long-term capital gains could be made in accordance with the formula contained in the 2 nd proviso to section 48. Occasion to apply the proviso to section 112(1) does not arise as the 2 nd proviso to section 48 is not applicable to non-residents. The 1 st and the 2 nd proviso to section 48 are mutually exclusive as they provide distinct modes of computation of capital gains to two different sets of persons. 4 AAR/1200/2011

5 The non-resident foreign company cannot claim to have the double benefit of the protection against rupee value fluctuation as well as the indexation. 5.1 It was submitted that the intention of the legislature in introducing the 1 st proviso to section 48 is also clear from explanatory notes to the Finance Act 1992 issued vide CBDT s Circular No.636 dated It would not be a logical interpretation that legislature s intention could be that while the persons falling under the 2 nd proviso have to forego the benefit of indexation to avail the lower rate of 10%, the persons falling under the 1 st proviso would be granted the benefit of lower rate of 10% after having availed the benefit of 1 st proviso, even when nothing is mentioned about it in the proviso to section 112(1). Whenever the legislature intended to refer to persons falling under either of the two provisos to section 48, it specifically mentioned either or both of the provisos depending upon its intention. 5.2 The Revenue further stated that the primary issue is whether even those assessees who are entitled to the benefit of the first proviso to section 48 and the protection against inflation regarding specified assets have again to be given a second benefit. The disadvantage lay with the resident assessee regarding bonds and debentures, they being excluded from the benefit of the first proviso and the second proviso. The level playing field has been provided to the resident assessees and that is what is done by the proviso in Section 112 in respect of listed securities units and zero coupon bonds. The proviso explicitly mentions that the calculation of the 10% of the Capital Gain shall be before resorting to indexation contemplated by the second proviso to Section 48. That means an assessee not coming under the first proviso to Section 48 in respect of specified assets is given protection against inflation which has already been given to a non-resident, in respect of specified assets, thus achieving a level playing field. 5 AAR/1200/2011

6 5.3 In case of non-resident assessees, gain from sale of shares in or debentures of an Indian company continues to attract the first proviso to section 48 and that assessee to the extent of those assets is kept out of the benefit of the second proviso. A set of securities of those to whom the second proviso to section 48 applied that had been kept out of the purview of the second proviso by the third proviso, have been brought in for relief. This does not justify an interpretation that what is covered by the first proviso to Section 48 of the Act is also brought in for a second line of protection. 5.4 It is submitted that Before giving effect to connotes that effect has otherwise to be given. That means the asset must be one qualified for indexation under the second proviso to Section 48 of the Act. There is no justification in not giving effect to the words used in the proviso. Nothing stood in the way of the legislature in specifying that all assets will qualify for protection. That has not been done. On the scheme of the provisions and the level playing field sought to be achieved, the natural way of understanding the proviso is to confine its operations to assets not covered by the first proviso to Section 48 and the assets specified in the proviso to Section 112 itself. 6. We have considered the submissions of both the Applicant and the Revenue. 6.1 It is seen from the submissions of the Revenue that, though it has raised objections to the arguments taken by the Applicant in support of its case for a lower rate of tax, the Revenue acceptsin its written submissions as well as during the course of these proceedings, that this issue was covered by the case of Cairn UK Holdings LimitedVs. DIT (Supra), as mentioned in the submissions of the Applicant. This was a case in which this Authority had, accepting Revenue s plea, ruled that the proviso to section 112(1) was not applicable, and the applicant could not avail the lower rate of 10% on the 6 AAR/1200/2011

7 capital gains derived by it. On a writ filed by the applicant against the order of thisauthority before Hon ble High Court of Delhi, the ruling was reversed and it decided the matter in favour of applicant and held that the benefit of proviso 112(1) is available to a non-resident on sale of equity shares in question. We have also considered the rejoinder filed by the Applicant to the objections taken by the Revenue, and it is seen that the thrust of its argument hinges largely upon the decision of the Hon ble High Court of Delhi in the case of Cairn UK. 6.2 In Cairn UK Holding Limited vs. DIT, (Supra), the Hon ble High Court of Delhi had, on similar facts, held as follows: 19. Having considered the two provisions i.e. section 48 and section 112(1) of the Act, the reasoning given in the case of the petitioner and in Timken France SAS (Supra), we are inclined to accept the legal position approved and accepted in Timken France SAS. Our reasons are elucidated below. 20. Language of proviso to section 112(1) syntactically and grammatically mandates one interpretation. If one squarely focuses and orates the words used in the proviso and interprets them without extracting or subtracting any phrase or word, a non-resident assessee is entitled to benefit of the said provision. The proviso to section 112(1) of the Act does not state that an assessee, who avails benefits of the first proviso to section 48, is not entitled to benefit of lower rate of 10%. The said benefit cannot be denied because the second proviso to section 48 is not applicable. The stipulation for taking advantage of the proviso to section 112(1) is that the aggregate of long-term capital gains to the extent it exceeds 10% of the amount of capital gains, should be before giving effect to the provisions of second proviso to section AAR/1200/2011

8 Inflation indexation shall be ignored. In case the Legislature wanted to deny the said advantage/benefit where the assessee had taken benefit of the first proviso to section 48, it was easy and this would have been specifically stipulated, that an assessee, who takes advantage of neutralization of exchange rate fluctuation under the first proviso to section 48 would not be entitled to pay lower rate of Legislature had a far easier and simpler way to deny benefit of the proviso to section 112(1) by using different words and phrases had thus been the intention. The legislature in fact did not intend to deny the said benefit. In fact it is seen that in Cairn UK case, the Hon ble High Court of Delhi also referred to in detail, and agreed with the case of Timkin France SAS (2007), 249 ITR 513 (AAR), where this Authority had agreed with the contention of the Applicant. In those proceedings the CBDT circular no. 636, dated was also considered, wherein the provisions of the Finance Act had been clarified. 6.3 In the instant case also the applicant is contesting that the tax payable on the long term capital gains arising on the sale of equity shares of Hero Honda Motors Ltd. will be 10% of the amount of capital gains as per the proviso to Section 112(1) of the Act. In short, that the benefit of the proviso of Section 112(1) of the Act is applicable in the case of non-resident as well,in spite of section 48. This issue is identical to the above case and the decision in Cairn UK is squarely applicable. Following the above decision we conclude that the benefit under Section 112(1) of the Act could not be denied to the Applicant. We have been following this line in several cases and more recently in the case of Pan-Asia igate Solutions, Mauritius, In Re 2014 SCC Online AAR On the second question, the Applicant has submitted that the expenditure incurred by it on computerization of share certificates and opening 8 AAR/1200/2011

9 of Escrow account enabling the share transfer transaction is liable to be deducted in as much as the said expenditure has been incurred wholly and exclusively in connection with such transfer and the same is covered under Section 48 of the Act. In terms of the Transfer Agreement dated dematerialisation and execution of Escrow Account were conditions precedent for the subject transfer. It had a direct nexus with the transfer and therefore, the deduction of the same ought to be granted to the Applicant in terms of Section 48 of the Act. In this connection, reliance has been placed on the following judgments: Sassoon J David & Co. Pvt. Ltd. vs. CIT, 1979 (3) SCC 524 (SC); CIT vs. ShakuntalaKantilal, (1991) 190 ITR 56 (BHC); CIT vs. P. Rajendran (1981) 127 ITR 810 (Ker); S.M. Wahi vs. DIT, (2010) 324 ITR 269 (DHC); CIT vs. Bradford Trading Co. Pvt. Ltd. vs. DCIT (2003) 261 ITR 222; and VA Vasumathi vs. CIT (1980) 123 ITR 94. In light of the above facts and cases, the expenditure incurred by the Applicant is liable to be deducted under Section 48 of the Act. 7.1 The Revenue had in its earlier report dated stated that the Applicant was eligible to claim deduction for expense in connection with the transfer of shares as per the provision of section 48. In a later report it was contended that the said expenses were neither wholly and exclusively in connection with the transfer of shares nor related to the cost of acquisition or improvement, and hence were not allowable. They were only for the convenience of the parties to the transaction. 7.2 We have considered the nature of expenses incurred. A perusal of the cases cited and the provision contained in section 48 shows that the words wholly and exclusively do not connote necessarily. If the expenses have been incurred in connection with the transfer, they are to be allowed. The words in connection with are of wide import and if such expenses have an intimate connection with the transfer, they have to be allowed u/s 48. In the instant case there is no doubt that the expenses are incurred for effecting the 9 AAR/1200/2011

10 transfer only. Even if it was a mutual decision of the two parties for their convenience, that the shares should be dematerialized and an Escrow account be opened, as contended by the Revenue, this in no way suggests that the expense were not incurred wholly and exclusively in connection with the transfer of shares. During the course of the final hearing, the Revenue has not opposed the Applicant s contentions on the issue. Hence, the same are to be treated as allowable as a deduction under section 48 of the Act. 8. In view of the foregoing discussions, the questions raised before us seeking a Ruling, are answered as under: 8.1 Question no. (i): Yes, the tax payable by the Applicant on the long term capital gains arising on the sale of equity shares of Hero Honda Motors Limited being listed securities, will be 10% (plus surcharge and cess) of the amount of capital gains as per the proviso to section 112(1) of the Act. 8.2 Question no. (ii): Yes, the Applicant would be eligible to claim deduction for expenses claimed as incurred in connection with the transfer of shares of HHML, as per provisions of section 48 of the Act. This Ruling is accordingly given and pronounced on this day of 7 th February, Sd/- (Ashutosh Chandra) Member(Revenue) Sd/- (R.S.Shukla) In-charge Chairman 10 AAR/1200/2011