TII Instant Update - 2018-TII-INSTANT-ALL-541

CASE LAWS

2018-TII-16-HC-KAR-TP

MERCEDES-BENZ RESEARCH AND DEVELOPMENT INDIA PVT LTD Vs ACIT: KARNATAKA HIGH COURT: (Dated: March 8, 2018)

Income tax - applicability of TNMM - right to question - withdrawal of appeal

The Assessee company preferred present appeal challenging the order passed by ITAT, Bengaluru Bench pertaining to A.Y 2004-05, whereby the assessee had moved a memo seeking permission to withdraw, without prejudice to its right to question the applicability of TNMM as the MAM in its assessments for other A.Ys.

On appeal, the HC held that,

Whether withdrawal of appeal sought by Assessee with regard to selection of appropriate method benchmarking, should not prejudice its right to question the same in subsequent A.Ys - YES: HC

+ the matter being at the initial stage and having not been admitted, this court is inclined to grant the prayer so made. It goes without saying that the dismissal of this appeal on withdrawal for the A.Y 2004-05 does not conclude the issue sought to be raised in this matter as regards other A.Ys. However, in the interest of justice, it is made clear that the issue remains open and may be examined in future, in accordance with law.

Assessee's appeal dismissed as withdrawn

2018-TII-17-HC-MUM-INTL

CIT Vs LINKLATERS: BOMBAY HIGH COURT (Dated: March 7, 2018)

Income tax - source based taxation - treaty benefits

The assessee is a law firm, engaged in rendering consultancy on cross border transactions. Pursuent to disallowance made by AO, the Assessee had approached the ITAT, which held that the partnership firm was eligible for treaty benefits in the source country even though it was not taxable in its own right in the resident country.

On appeal, the HC held that,

Whether any further writ interference is warranted, when an issue regarding eligibility of treaty benefits in the source country even though it was not taxable in its own right in the resident country, is admitted and pending consideration before writ court - NO: HC

+ the counsel for Revenue states that the appeal filed for A.Y 1995-96 by the Revenue in Director of Income Tax (IT)-II Vs. M/s. Linklaters (Income Tax Appeal No.1156 of 2011) has been dismissed by this Court. However, while doing so this Court had left this issue open for the Revenue to agitate in the appeal filed by the assessee for A.Y 1995-96 being M/s. Linklaters Vs. Dy. Director of Income Tax (Income Tax Appeal No.6384 of 2010), which was admitted on 30th April, 2014;

++ for the subject A.Y 1997-98, the appeal of assessee being M/s. Linklaters Vs. The Dy. Director of Income Tax (Income Tax Appeal No.276 of 2015) has been admitted on 10th July, 2017. Therefore, for the reasons recorded in the order passed in Income Tax Appeal No.1156 of 2011 dated 30th April, 2014, this appeal by the Revenue is dismissed. However, the issue as raised by the Revenue herein is left open to be agitated by it in the assessee's appeal, being Income Tax Appeal No.276 of 2014.

Case disposed of

2018-TII-10-ARA-IT

FINNISH FUND FOR INDUSTRIAL COOPERATION LTD: AAR (Dated: February 28, 2018)

Income tax - Sections 2(42A), 2(29A), 48, 112 & 197 - CBDT Circular No. 636 & 657

Keywords - concessional rate of tax - income arising to non resident - investment in shares listed on stock exchange - transfer of long term capital asset

The Applicant, a development finance company engaged in providing long-term risk capital for private projects, is owned by the Government of Finland, Finnvera Plc and the Confederation of Finnish Industries. During the relevant year, the Applicant had acquired 21,25,005 shares of Andhra Pradesh Paper Mills Ltd, an Indian listed company, under the Foreign Direct Investment route. Subsequently, the Applicant had sold 6,52,000 equity shares on recognized stock exchange in India. After some time, the Applicant again sold 7,48,608 shares, pursuant to an open offer vide document issued by IP Holding Asia Singapore Pte. Ltd. The balance 7,24,397 shares were sold on a recognized stock exchange. On these sale of shares, the Applicant earned capital gains of Rs. 32,64,28,935 under the open offer. Consequently, it filed an application u/s 197 for determining the rate of tax to be withheld on the Long-term Capital Gains arising on sale of shares under the open offer. Pursuant to an order passed by the Dy DIT, IP Holdings withheld tax at 21.012% aggregating to Rs. 6,84,44,021 on such Long Term Capital Gains. Accordingly, the present application had been preferred seeking a ruling of AAR as to whether the tax on the long-term capital gains earned by the Applicant on sale of shares of A P Paper Mills Ltd., pursuant to an open offer, was required to be computed at 10.506% as per the proviso to section 112(1) of Income tax Act.

On Application, the AAR held that,

Whether tax payable on long term capital gains arising on sale of shares acquired of Indian company will be 10.506% of the amount of capital gains as per the proviso to section 112(1) - YES: AAR

+ the basic contention of the Applicant is that the tax payable on the long term capital gains arising on the sale of acquired shares of M/s Andhra Pradesh Paper Mills Limited will be 10.506% of the amount of capital gains as per the proviso to section 112(1), which is applicable in the case of a non-resident as well, in spite of section 48. On the other hand, the Revenue has submitted that the computation of capital gains in the case of the Applicant is to be decided as per section 48. It is Revenue’s contention that wherever the first proviso to section 48 is applied in the case of a non-resident, the second proviso will not apply, as the two provisos are mutually exclusive. And since the second proviso is not applicable in this case, the Applicant being a non-resident, tax has to be deducted at 21.012% instead of 10.506% as contended by the Applicant. As regards Revenue’s objection that the arguments made in the instant case were not put forth before the High court when the case of Cairn UK, was heard, it may be mentioned that in giving its decision in Cairn UK, the High Court also considered the case of Timken France SAS in detail, wherein also many of the arguments made by the Revenue were taken into account, and not agreed to. In fact, the High Court observed that in Cairn UK, the AAR had adopted the intent or purposive interpretation of the provisions contained in sections 48 and 112, whereas in Timken France SAS the literal interpretation rule was applied. After examining the provisions and the two Rulings, the High Court endorsed the literal interpretation adopted in Timken France SAS, and categorically stated that the language of the section syntactically and grammatically mandates only one interpretation and therefore, there is no need to go into the purposive interpretation or intention of the legislature;

+ the facts of the case in Cairn UK are similar to the case at hand. 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 capital gains derived by it. On a writ filed by the applicant against the order of this Authority before High Court of Delhi, the ruling was reversed and it decided the matter in favour of applicant and held that the benefit of proviso to section 112(1) is available to a non-resident on sale of equity shares in question. 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 APPML will be 10.506% of the amount of capital gains as per the proviso to Section 112(1) of the Act. Therefore, following the said decision, this Authority concludes that the benefit under the proviso to section 112(1) of the Act could not be denied to the Applicant.

In favour of Assessee