Sale of originally held and bonus shares - Long-term capital gains arising to non-resident company - benefit of 10% rate u/s 112 cannot be denied : Advance Ruling Authority
The applicant purchased 15,20,000 equity shares of Moron Tea Company (India) Ltd. from Moron Holdings PLC, U.K. a non-resident company as per the sale & purchase agreement executed between the purchaser and seller on 18th January, 2007, wherein the purchaser agreed to purchase the said shares of Moron Tea Company held by the seller @ Rs.273 per share. Out of the said shares, the original 5,18,000 shares were acquired by the seller in lieu of all the assets of the Moron Tea Ltd. on 6th April, 1979, after obtaining permission from RBI. Subsequently, Moron Tea Company issued 10,28,000 fully paid up equity shares of Rs.10/- each as bonus shares during the year 1990 and 1998. Thus, 15,20,000 shares (listed securities) sold by Moron Holding PLC U.K. to the applicant consisted of original as well as bonus shares acquired from Moron Tea Company, it is further stated that the effective date of agreement was extended till 7th October 2007, and the sale consideration payable for the transfer of shares, was to the tune of Rs.41,49,60, 000/-. The transfer of aforesaid shares could not be effected through the stock exchange. As such, the applicant authorized ICICI Bank Ltd. for arranging and remitting the sale proceeds amounting to Rs.33,24,06, 160/- after deducting tax @ 20%, inclusive of the surcharge, on the long term capital gains. Accordingly, the sale proceeds were remitted to the seller on 1.10.2007 through 'Swift' (inter bank transfer). The shares were then credited through off market transaction in the Demat account of the purchaser after the transaction of sale was completed.
The question before the Authority is : Whether the tax payable on long term capital again arisen to Moran Holdings PLC on sale of originally acquired shares of Moran Tea Company (India) Limited will be 10% of the amount of capital gain as per Proviso to Section 112 (1) of the Income Tax Act or the same is to be computed by applying Sec 48 without having regard to either the first or the second proviso to the Section?
Having heard the arguments the Authority observed that,
++ Except for the facts, the legal issues involved in this case are similar to the case of Timken France (2007-TIOL-13- ARA-IT) which was extensively examined by the Authority and it had taken the view that the benefit of the proviso to section 112(1) of the Act could not be denied to non-residents/ foreign companies even if they are entitled to another relief in terms of the proviso to section 48 of the Act. The Authority also held that the proviso to section 112(1) of the Act was a special provision in relation to transfer of certain long-term capital assets viz listed securities, units etc. and there was no warrant to limit the 10 per cent effective rate provided therein as against the normal rate of 20 per cent only to the three categories of resident assesses specified in clause (a), (b) and (d);
++ The stand taken by the revenue is patently contrary to the ruling in Timken France (supra) which considered the same questions and provisions. The only difference in facts between the case of Timken, France and the present case is that in the former case the non-resident company acquired the original shares by utilizing foreign currency, whereas in the case of applicant, it does not appear that foreign currency was so utilized. That means, the applicant may not be able to avail of the benefit under the first proviso to Section 48. This distinguishing feature does not in any way support the contention of the Revenue.
Thus the Authority held that the tax payable on a long-term capital gains arisen to Moron Holdings PLC on the sale of originally acquired shares of Moron Tea Company (India) Ltd. will be @ 10% in consonance with the proviso to section 112(1) of the Act. Even in respect of sale consideration arising out of the bonus shares, the tax liability of the non-resident foreign company will be @ 10% only as per the proviso to section 112(1) of the Act.