1 September 2014 EY Tax Alert CBDT sets up a Committee to deal with retroactive indirect transfer taxation Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes a recent Order [1] issued by the income tax administrative body, the Central Board of Direct Taxes (CBDT). The CBDT has set up a Committee to decide on cases relating to indirect transfer provisions of the Indian Tax Laws (ITL). For all transactions of indirect transfer falling prior to 1 April 2012, and where no action has been initiated as on 28 August 2014, the Tax Authority would need to make a reference to and obtain prior approval of the Committee. The Committee will accord an opportunity to the taxpayer to present its case and will endeavor to take a decision within 60 days of the reference. The Tax Authority needs to proceed in accordance with the directions of the Committee. [1] F. No. 149/141/2014-TPL dated 28 August 2014
Background Cross-border transactions resulting in indirect transfer of shares of/interest in Indian companies have been the focus of tax litigation in India over the last few years. It is fairly well-established that, if an acquisition involves direct transfer of shares of an Indian company, the same would trigger capital gains under the ITL. In January 2012, the Supreme Court (SC) pronounced a landmark ruling on taxation of indirect transfer in the case of Vodafone International Holdings BV [2] The SC held that the transfer, by a nonresident (NR) to another NR, of shares of a foreign company holding an Indian company does not amount to transfer of capital asset situated in India. Accordingly, the transaction was held not liable to tax in India. Certain clarificatory amendments relating to the definitions of transfer, capital asset and source rule in the ITL were made by Finance Act, 2012, with retroactive effect from 1 April 1962. In terms of the amendments, it was provided that a share/interest in a company or entity, registered or incorporated outside India, would be deemed to be situated in India if the share/interest derives, directly or indirectly, its value substantially from assets located in India. Various concerns were raised by classes of NR investors regarding the taxability of transactions involving transfer of assets by NRs where the underlying asset was in India. The concerns were two fold viz., the widening of the tax base by introducing taxation of indirect transfer and the other due to amendment on a retroactive basis. To allay fears about reopening closed assessments on account of retroactive amendment, the CBDT had issued a clarification [3], dated 29 May 2012, directing the Tax Authority not to reopen tax assessments under the ITL on account of the "indirect transfer" amendments in cases where tax assessment proceedings have been completed prior to 1 April 2012 and for which no notice of reassessment has already been issued prior to that date. The Government of India had, in 2012, constituted an Expert Committee (EC) [4] on General Anti-avoidance Rule (GAAR) under the chairmanship of Dr. Parthasarathi Shome. The scope of reference to the EC was, subsequently, expanded to also examine implications of retroactive amendments introduced in the ITL relating to indirect transfer. Amongst others, the EC recommended the following: Prospective application, and not retroactive taxation, of indirect transfers. Provide clarity on terms such as substantially, directly or indirectly, point of time for value determination in the context of such transfers etc. While there are no legislative changes in the ITL, the Finance Minister (FM), during his Budget Speech of 2014, assured investors that no changes will be made to the ITL, which have a retroactive effect, thereby creating a fresh tax liability. Furthermore, the FM proposed to provide a stable and predictable tax regime that would be investor and growth friendly. The FM also announced that a Committee would be constituted to scrutinize fresh cases dealing with indirect transfer. [3] Refer EY Tax Alert dated 31 May 2012 titled CBDT Clarification on applicability of retrospective amendments to completed assessments [2] Refer EY Tax Alert dated 20 January 2012 titled The Vodafone case: SC rules transfer of shares of a foreign company that indirectly held underlying Indian assets not taxable for more details [4] Refer EY Tax Alert dated 10 October 2012 titled Draft Report of the Expert Committee on Retrospective Amendments relating to Indirect Transfer
CBDT Order In terms of the above, the CBDT has constituted the Committee to look into matters relating to the indirect transfer provision of the ITL. The Committee comprises four members from the tax administration viz., Joint Secretary (FT&TR-I), Joint Secretary (TPL-I), Commissioner of Income-tax (ITA), and Director (FT&TR-I). The Director will be the Secretary of the Committee to whom the reference needs to made by the Tax Authority. Where the Tax Authority considers that any income is taxable in India for indirect transfer cases falling prior to 1 April 2012, the Tax Authority would need to obtain a prior approval of the Committee before initiating any action. The Committee, on receipt of the reference, shall examine the proposed action and, after providing an opportunity to the taxpayer, take a decision on the same. The Committee shall endeavor to decide the reference within 60 days of its receipt. Having due regard to the limitation period involved in the proposed action, the Tax Authority shall, thereafter, proceed in accordance with the directions of the Committee. The approval of the Committee is not required, if, as on 28 August 2014, in relation to income from indirect transfer: proceedings for assessment/reassessment or notice for the proposed assessment/reassessment are pending; or proceedings for treating the payer in default of tax withholding obligation have been initiated, or the notice for initiation of such proceedings has been issued. The CBDT may intervene in the working/deliberations of the Committee as and when required. The Committee shall submit its report in respect of references decided by it in the relevant period to the CBDT. The first report shall be submitted in respect of the period ending 31 December 2014 and subsequent reports shall be submitted on a half-yearly basis (30 June and 31 December every year). Comments While taxpayers and the investor community were expecting amendments/clarifications in respect of wide and obscure indirect transfer tax provisions, the FM, in his Budget Speech of 2014, proposed constitution of a high-level committee to scrutinize initiation of action to deal with new cases of indirect transfers. The present Order constituting the Committee translates this assurance of the FM to reality and requires the Tax Authority to seek prior written approval before initiating action in relation to income from indirect transfers. The Committee is required to give an opportunity of hearing to the taxpayer. As the directions of the Committee are binding on the Tax Authority, the taxpayer may wish to make best use of the same. While the directions are binding on the Tax Authority, a taxpayer, aggrieved by the direction, would need to evaluate the possibility of filing a writ or pursuing the conventional appellate remedy. Incidentally, vide its clarification dated 29 May 2012, the CBDT had already directed the Tax Authority not to re-open tax proceedings completed as of 1 April 2012 for cases covered by retroactive amendments, including indirect transfer provisions. The said clarification continues to be operative. Read with the present Order, the reference to the
Committee will essentially be applicable to new cases where no proceedings are pending against the payer or the payee in relation to income from indirect transfers. Incidentally, in a recent decision of the Delhi High Court in the case of Copal Research, the Delhi High Court has held that the reference to substantially in indirect transfer provisions is synonymous to principally, mainly or at least majority. While the Committee may also be guided by such a legal position, suitable clarifications on the scope of indirect transfer provisions (such as, meaning of substantial, basis of value determination etc.) will go a long way in providing the desired certainty to taxpayers.
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