CASE LAWS

2016-TII-50-HC-DEL-INTL

DIT Vs JC BAMFORD EXCAVATORS LTD: DELHI HIGH COURT (Dated: September 9, 2016)

Income Tax - Sections 9(1) & (vii), 44AA, 44DA, 195A & 234B, Rule 10 - India-UK DTAA - Articles 5, 7 & 13.

Keywords: Seconded employees - Service PE - royalty - fees for technical services - business profits - sufficient cause - re filing of appeals - condonation of delay.

Whether the application filed for condonation of delay in filing appeals can be entertained even if it is agreed that the reasons given by the appellants do not constitute "sufficient cause" for the same - NO: HC

The assessee, JC Bamford Excavators Ltd (JCB), a tax resident of the UK, entered into a Technology Transfer Agreement (TTA) with its wholly owned subsidiary JCB India Ltd. The assessee also entered into an International Personnel Assignment Agreement (IPAA) with JCB India. The assessee received certain amount as royalties/fees for technical services from JCB India in consideration for grant of exclusive rights to manufacture and market 'Excavator Loader' in the territory of India and outside under the trademark of 3DX. This amount of royalties/fees for technical services was offered for taxation at the rate of 15% by treating the receipt as 'Royalties and Fees for technical services' under Article 13(2) of DTAA between India and UK.

The impugned order in this case was made by the Income Tax Appellate Tribunal on 14.03.2014 = 2014-TII-26-ITAT-DEL-INTL. The appeals itself were filed in the year 2014 and since returned to the Income Tax Department for curing the defects/objections.

Held that,

+ this court notices that the explanation is not only unconvincing but entirely contrary. That the appeal was filed in August, 2014 and returned thereafter is not denied. The appeal papers were received by the Income Tax Department itself, which had reorganized its panel. The Income Tax Department reallocated its files to new standing counsels in April, 2015. The applicants further state that they became aware about pendency of large number of appeals including the present one. However, this reason in fact contradicts the previous averments that the appeal was returned to the office between some time in September-December, 2014. In these circumstances, these reasons cannot be said to constitute "sufficient cause". Further, court notices that there is no explanation for further delay which accrued between August, 2014 and 13.06.2016 when the appeals were actually re-filed. This court has been consistently dismissing applications for condonation of delay in re-filing of the appeals wherever the delay has been more than a year, generally speaking. In these circumstances, the C.M.Nos. 27741/2016 and 27742/2016 are rejected. Consequently, the appeals are also dismissed.

Revenue's appeal dismissed

2016-TII-49-HC-DEL-INTL

CIT Vs MR WARDLE: DELHI HIGH COURT (Dated: September 7, 2016)

Income tax - Sections 10(6)(viia),

Keywords: secondment - exempted perquisite - business connection - status of employer.

Whether Indian Railways, a part of the Union Government, can be said to be carrying on a bussiness - YES: HC

Whether when a foreign company deputes the assessee, its employee, to carry a contract with Indian Railways, and bears his tax liability, the assessee is entitled to exemption of such perquisite as per Sec 10(6)(viia) - YES: HC

Assessee was deputed by his foreign employer GEC General Signals Limited to carry a contract granted by Indian Railways to it. The assessee received salary, net of tax – his employer bore the tax liability. The assessee had filed in his income tax return for the year 1994 declaring a total income of Rs 17,90,940/-; he claimed exemption in respect of the tax amount under Section 10(6)(viia) as an exempted perquisite. This claim was rejected by the AO on two grounds; (1) that the assessee was not a technician and (ii) his employer GEC General Signals Limited was not carrying on any business in India.

The CIT (A) set aside the findings with respect to the assessee being a technician and held that he was one. However, on the merits it was held that the assessee was not entitled to relief since exemption could be granted only if the employer of the assessee carried on business in India – a condition precedent for application of Section 10(6)(viia).

The ITAT on further appeal followed the decision of the authority for advance ruling in Re: Arthur E Newell and held that firstly the status of the employer was not relevant and that the assessee’s employer could be said, in the overall circumstances, to have carried on business in India.

On appeal, the HC held that,

+ this court is of the opinion that though an ustated premise, the fact remains that assessee was deployed by his employer to carry on and discharge his function in respect of the business activities of the Indian Railways. Here, the revenue’s contention is that the Indian Railways does not carry on business – a proposition not only difficult to subscribe to but requiring to be stated merely to reject. That the Indian Railways in its multifarious activities is subjected to all commercial laws and is in fact a limb of the government but carrying on a large measure of business activities cannot be denied. It is no doubt governed by the Indian Railways Act which establishes the structures required for its functioning; it is equally covered by sovereign guarantee of the Union;

+ we find no reason to depart from the reasoning of the ITAT. The question of law is accordingly answered against the revenue and in favour of the assessee.

Revenue's appeal dismissed

2016-TII-206-ITAT-MUM-INTL

PRAFUL CHANDARIA Vs ADDIT: MUMBAI ITAT (Dated: August 26, 2016)

Income tax - Sections 2(14), 2(47), 9(1)(i), 147 & 148 - India-Mauritius DTAA - Article 13.

Keywords - alienation of substantive right - Escrow agent - income from other sources - right of call option - receipt of call money - reopening - transfer of share

Whether an agreement for substantive alienation of right to sell shares at a determined price, can be held merely as a call option agreement simplicitor - NO: ITAT

Whether where no right in the shares is given away by way of 'call option', albeit only right to buy the shares at a strike price within a stipulated time period is given, the same cannot be termed as "capital asset" u/s 2(14) as no actual asset can be created without exercising the option - YES: ITAT

Whether parting with any substantive interest in the asset or creating any substantive interest in any asset or extinguishment of a rights in an asset, directly or indirectly, could be reckoned as a 'transfer' of an asset u/s 2(47) of the I-T Act - YES: ITAT

Whether the consideration received by a Mauritius resident from an Indian resident, for alienation of its shares, is liable to be treated as capital gains under Article 13 of the Indo Mauritius DTAA - YES: ITAT

The assessee a NRI residing in Singapore, had acquired 56,60,026 Equity Shares in an Indian based company, 'Purse Holding (India) Pvt. Ltd. for sum of Rs.5,66,00,260/-. PHIL was established as a Special Purpose Vehicle (SPV) along with ING Barring Mauritius. Both PHIL and ING BM had invested in an Indian company named as ING Barring India Pvt. Ltd. The BI was mainly established as NBFC dealing in investment banking, brokerage business etc. in India. During subject year, the assessee along with other two directors entered into "Call Option Agreement" between BM and first shareholders to sell their shares held in PHIL to BM, wherein the call/strike price was agreed at US $ 1. The right of 'call option' was to be exercised within the period of 150 years and it was agreed that, upon the receipt of call notice and the payment of call value, the first shareholders shall be obliged to transfer the shares to BM within one month of the payment of call value. There was another "Call Option Agreement" between PHIL and BM, whereby PHIL agreed for giving BM an option to purchase the entire shares held by PHIL in BI and the consideration for this option was agreed at strike value/ call price at Re.1 and period of option was again for 150 years. Later on, the Department received the information that assessee had received the payments of US $ 24,50,000 in pursuance of aforesaid call option however, the said income was not offered to tax in India. Accordingly, a notice u/s 148 was issued for reopening the case.

The AO noted that, in pursuance of 'call option agreement' as above, M/s DSK Legal Mumbai were appointed as 'Escrow Agent' in respect of shares of PHIL under call option agreement between BI and PHIL. He observed that the Escrow agreement clearly showed that the original shares certificates have been deposited with the Escrow Agent, that was, have been handed over to them and this Escrow Agreement had been signed by one of the shareholders of the PHIL and Mr. Ajay Sanghavi. That apart, the assessee had given a notarized undertaking, wherein the assessee has clearly stated "for valuable consideration already received by each of the Purse Shareholders". The AO arrived to the conclusion that already consideration had been received by the assessee in pursuance of call option agreement. He further noted that, assessee had given irrevocable power of attorney to ING Bank NV to act as his lawful attorney. The AO further brought on record that, assessee had issued a letter of the same date to the Chairman of BM regarding remittance proceed of US $ 24,50,000 by which the assessee had authorized the Chairman of BM to remit the proceed on behalf of the Purse Finance Ltd with specific details of bank account in which the said amount was to be remitted. On appeal, the CIT(A) confirmed the order of the AO that the amount in question was to be taxed as "income from other sources" in terms of section 9(1)(i).

Having heard the parties, the Tribunal held that,

+ the subject matter of dispute is, whether the sum of US $2,450,000 which in terms of INR is 11,71,00,000/- can be held to be taxable in hands of the assessee in India. Admittedly, the assessee is tax resident of Singapore and is non-resident Indian. In case of non-resident, while taxing any income accrued or arising in India has to be seen from the perspective of the Treaty, which here in this case India-Singapore DTAA and if any benefit is provided in the DTAA, then same has to be seen. As culled out in our earlier part of the order, the assessee is having more than 99% of shareholding in an Indian company, PHIL which in turn holds 25% of shares in another Indian Company called ING Barring India (BI). One Mauritius based company namely; ING Barring Mauritius (BM) holds 75% of shares in ING Barring India. Both assessee as well as PHIL vide separate "call option agreement" entered with Barring Mauritius granted an option to BM to call upon the PHIL shareholders to sell their entire shareholding in PHIL. The strike price or the call option was agreed for US $ 1 and the consideration mentioned was US $ 2,450,000 and such a call option spread into period of 150 years. In common parlance, a call option is reckoned as a contract in which the holder (buyer) has the right (but not an obligation) to buy a specified quantity of a security/shares at a specified price (strike price) within a fixed period of time. For the writer (seller) of a call option, it represents an obligation to sell the underlying security at the strike price if the option is exercised. The call option writer is paid a premium for taking on the risk associated with the obligation. Here in the present case, there is very peculiar agreement/ arrangement, where the strike price has been mentioned as US $ 1 and the fixed period of time for exercising the call option has been fixed for 150 years. This factum itself means that the call option in the shares have been given for perpetuity. Not only that, an irrevocable power of attorney has also been executed in favour of the ING Bank in respect of all the shares in PHIL confirming that, assessee will not at any time purport to revoke the same, which inter-alia shows that assessee has alienated a substantive and valuable rights as an owner of the shares in perpetuity, albeit without dejure alienating the shares itself. This aspect of the matter has also been highlighted by the AO in his order;

+ from the perusal and analysis of the material on record the AO has concluded that "it is evident that assessee had effectively alienated his shares in PHIL by way of irrevocable undertaking and power of attorney for which consideration was already received". Even the CIT(A) in his order has reconfirmed the same thing. Thus, here in this case if one goes by the 'call option agreement' and other materials facts on record, it is ostensibly clear that the a valuable and substantive right in the shares of PHIL, namely giving of right to sell shares at a determined price, has been alienated by the assessee and hence it cannot be held merely as a call option agreement simplicitor. Now, the core issue/ question left to be decided is, as to how the amount is to be taxed and whether such an amount would be taxable in the hands of the assessee in India or not and under which head. The revenue's case is that, it is taxable as "income from other sources" and has been brought to tax in India by invoking the deeming provisions of section 9(1)(i). However, the departmental authorities concede the position that the shares have not been transferred and that is why the gain has been assessed as income from other sources and not as "capital gains". But while holding so, the revenue has not made out a case as to how the "income from other sources" would be brought to tax under the clauses/articles of DTAA between India–Singapore. Here on the facts of the present case, though, there may not be any actual alienation of shares in terms of the 'call option agreement', but clearly a valuable and substantive right in the shares of an Indian company have been given to a non-resident company, that is Barring Mauritius. Under normal circumstances, no right in the shares is given away by way of 'call option', albeit only right to buy the shares at a strike price within a stipulated time period is given which may not be termed as "capital asset" u/s 2(14), because, without exercising the option no actual asset is created. Here in the present case, the right in the shares has been given for an incredibly large period of 150 years. Not only that, the rights which are enjoyed by the assessee as shareholder have been exercised by the power of attorney holders to participate in the affairs of the company and it has been further provided that, assessee shall not at any time purport to revoke the same. Such a bundle of substantive rights are generally not given under normal "call-option agreements";

+ in the peculiar facts of the present case, such an option right in the shares has to be reckoned as transfer/alienation of a valuable and substantive right, which would be a class of asset in itself, separate from shares which though continue to stand in the name of the assessee. Such a valuable rights/ interest in shares would certainly be a 'capital asset'. Parting with any substantive interest in the asset or creating any substantive interest in any asset or extinguishment of a right/s in an asset, directly or indirectly would surely be reckoned as a 'transfer' of an asset / property even under the domestic law, that is, u/s 2(47). Hence the consideration received has to be taxed under the head "capital gain" as there is a transfer of an asset/property. Hence, it is gains from the alienation of an asset or property and any gain from alienation of such kind of "property" will fall within the scope of Article 13 of the Indo Singapore DTAA, whereby, the taxing right has been given to the resident state, that is, the state of the alienator, which here in this case is Singapore. The allocation of taxing right under Article 13(6) cannot be attributed to India but to the resident state. With these observation, the addition made by the AO and as confirmed by the CIT(A) is directed to be deleted.

Assessee's appeal allowed