Transfer of shares by US resident to US company liable for Capgains tax in India

AIT News Network

NEW DELHI. Authority for Advance Rulings vide a significant ruling dated 16^th November 2007 AIT-2007-408-AAR has ruled that the transfer of shares by Jeff Slosar, a US citizen and a US resident, to Triniti Corporation, a US company and both being non-residents is liable for capital gains tax in India in respect of shares in Triniti Advance Software Labs (P) Ltd - An Indian Company. The capital gains on transfer of Shares in question is chargeable to tax under the Act, as it is deemed to accrue or arise in view of the fact that the capital asset is situated in India. The applicant is held to an agent of the non-resident (Jeff Slosar) in pursuance of the ‘inclusive provision; of section 163 of the Act.

T H E    F A C T S

M/s. Triniti Advance Software Labs (P) Ltd. (in short M/s. TASL(P) Ltd.), S.P. Road, Hyderabad is an Indian company registered with the Registrar of the companies, Andhra Pradesh, having the following share holding pattern of the share holders:

a) Srinath Alamela                             17500 Shares of Rs.10 each

b) Jeff Slosar                                  17500 Shares of Rs. 10 each

c) Issa Elkhoury                                17500 Shares of Rs. 10 each

d) A. S.Arun Kumar                            150 Shares of Rs. 1 0 each

e) Vasantha Srinivasan                       150 Shares of Rs. 1 0 each

The first three shareholders are non-residents and the remaining shareholders are resident Indians. It has further emerged that one shareholder Mr. Jeff Slosar, a USA resident, entered into an agreement with the applicant, M/s. Triniti Corporation, USA, on 13.9.2006, to transfer his shares in a phased manner. To be more eloquent, 25% of the shares, held by Mr. Jeff Slosar have been transferred on 1.11.2006 and the remaining shares are to be transferred in 44 (forty four) equal monthly installments beginning from March'07.

T H E    Q U E S T I O N S :

The Applicant required advance rulings from the Authority in regard to the following two questions only:

"1.          Whether on the facts and circumstances of the case the transfer of shares by Jeff Slosar, a US citizen and a US resident, to Triniti Corporation, a US company and both being non-residents is liable for capital gains tax in India in respect of shares in Triniti Advance Software Labs (P) Ltd - An Indian Company.

2.             If the answer to the first question is in the affirmative, whether the Applicant could be regarded as an Agent within the meaning of the inclusive definition contained in section 163(1) of the IT Act. 1961 in respect of the liability to Capital Gains Tax."

T H E    R U L I N G:

• On analysis, it transpires that under section 9(1)(i) of the Act, any income accruing or arising, whether directly or indirectly,

(a) through or from any business connection in India; or

(b) through or from any property in India; or

(c) through or from any asset or source of income in India

(d) through the transfer of a capital asset situate in India.

is deemed to accrue or arise in India.

• If we examine the issue on the touchstone of the above criterion, it emerges that in the instant case, the capital asset i.e. shares of an Indian company (TASL), which have been transferred, are situated in India and income has directly or indirectly accrued/arisen to the non-resident through the transfer of the said capital asset. In fact, the above clause is designed to catch any capital gains that a non-resident may make by transfer of any capital asset situated in India. Further, the expression 'capital asset' is defined in section 2(14) of the Act and the phraseology 'transfer' is defined in section 2(47) of the Act. In the generality of cases, the sale price is paid outside India and accordingly, any capital gains will escape charge on 'receipt basis'. Nevertheless, as per the existing provision of the Act, the capital gains becomes chargeable on an alterative basis viz. accrual or arisal basis in India, as the capital asset is or happens to be situated in India.

• The insertion of the clause, i.e. the situs of the capital asset being in India, has been ushered in the statute to take care of the situations like transactions between two non-residents taking place outside India. In simple words, even if the transaction relating to a capital assets takes place outside India but if the capital asset is situated in India, the profits or gains thereon, is accruing or arising in India in consonance with the provisions of section 9(1)(i) of the Act and is thus assessable under the head 'capital gains' under the relevant provisions of Income Tax Act.

• As such, inescapable inference is that the income under the head Capital Gains is deemed to have accrued or arisen in the hands of the non-resident transferor i.e. Mr. Jeff Slosar.

• Further, it has conclusively been held that income dealt with in each clause of section 9(1) of the Act is distinct and independent of the other, and the requirement to bring income within each clause, are separately noted, as such it is not necessary that income, falling in one category under anyone of the sub clauses, should also satisfy the requirements of other sub-clauses to bring it within the ambit of the expression 'income deemed to accrue or arise in India'. As such, in the instant case, the income in the hands of the applicant is a sequel to the transfer of a capital asset situated in India, and, this alone, in our considered opinion, is sufficient enough to bring it within the ambit of section of 9(1) of the Act, paving the way of chargeability to capital gains under section 45(1) of the Act. In other words, the situs of the capital asset being in India is a vital factor.

• In view of the above discussion, there remains no speck of doubt about the chargeability of the income accruing to the non-resident (Mr. Jeff Slosar) on account of the transfer of shares of TASL (P) Ltd. situated in India as capital gains in consonance with the provisions of section 9(1 )(i) read with section 45(1) of the Act. The applicant has also conceded this legal position, as per the written submissions extracted in the preceding paras.

• Undeniably, Double Taxation Avoidance Agreement (DTAA) prevails over section 9 of the Act. But, in the instant case, Article 13 of the OT AA between India and U.S.A. reads as under:

"Except as provided in Article 8(Shipping and Air transport) to this convention, each contracting state may tax capital gains in accordance with the provisions of its domestic law."

• As such, even the DT AA, will not, as conceded by the applicant's authorized representative also, bailout the transferee from the chargeability of the capital gains under section 9(1)(i) of the Act read with section 45(1) of the Act.

Treating the applicant as a representative assessee/agent under section 163(1) of the Act:

• A close look into the extract of section 163 of the Act, as against the facts of the case, reveals that as per the ‘inclusive clause’ of the aforesaid section, where the income in question is capital gains arising to the non-resident by reason of his having transferred a capital asset situated in India, the transferee (the applicant) may be assessed as a representative assessee of the transferor; he (the ;transferee’) is a person who has purchased the asset and has also paid the sale-consideration. Such transferee, as the inclusive provision of the section 163 of the Act stipulates, may either be a resident or a non-resident, Further, the Parliament has devised the method of deeming the capital gains as having accrued or arisen in India that on the basis of such deeming provision, the operation of section 160(1)(i) read with section 163(1) would enable the authorities to levy tax on the transferee (purchaser), as a representative assessee, and tax be realized from him. Accordingly, the applicant is held to be an agent/representative of the non-resident individual i.e. Mr. Jeff Slosar. The liability of representative assessee is provided for by Section 161 of the Act.

• The applicant has to keep in view the provisions of section 195 of the Act relation to tax deduction at source.

(Click here for full text of ruling AIT-2007-408-AAR)

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