Non-residents are eligible for the benefit of 10% tax rate on long-term capital gains under the Proviso to s. 112. The AAR should avoid giving conflicting rulings
October, 11th 2013
The assessee, a company based in Scotland, sold 4,36,00,000 equity shares of Cairn India Ltd to Petronas International, Malaysia, for consideration of US$ 241 Million. The sale was not through a stock exchange and resulted in long-term capital gain of US$ 85 Million in the hands of the assessee after applying the benefit under first proviso to s. 48. The assessee filed an application for advance ruling in which it claimed that the said capital gains was chargeable to tax at the rate of 10% as per the proviso to s. 112(1). However, the AAR (337 ITR 131), departing from its earlier view in Timken France SAS 294 ITR 513 (AAR), held that the expression “before giving effect to the 2nd proviso to s. 48” in the Proviso to s. 112(1) presupposes the existence of a case where computation of long-term capital gains could be made in accordance with the formula contained in the 2nd proviso in s. 48 (indexation) and that as non-residents were not eligible for indexation, the lower rate of tax specified in the Proviso to s. 112 was not available. On a writ petition by the assessee to challenge the AAR’s ruling, HELD by the High Court reversing the AAR:
It is not possible to decipher the exact legislative purpose behind the proviso to s. 112(1) in a categorical and unambiguous manner. However, if one squarely focuses on the words used in the proviso and interprets them without extracting or subtracting any phrase or word, a non-resident assessee is entitled to benefit of the said provision. The proviso to s. 112(1) does not state that an assessee, who avails benefits of the first proviso to s. 48, is not entitled to benefit of lower rate of tax @ 10%. The said benefit cannot be denied because the second proviso to s. 48 is not applicable. In case the Legislature wanted to deny the said benefit where the assessee had taken benefit of the first proviso to s. 48, it was easy and this would have been specifically stipulated. The fact that by this interpretation, a non-resident becomes entitled to double deductions by way of computation of gains in foreign currency under the first proviso to s. 48 and then the benefit of lower rate of tax under the proviso to s. 112(1) is no reason to interpret the proviso differently. Further, as the AAR had taken a view in Timkin France SAS which was followed in several cases over several years, it ought not to have taken an opposite view and brought about uncertainty in understanding the effect of the proviso to s. 112(1). There should be consistency and uniformity in interpretation of provisions as uncertainties can disable and harm governance of tax laws. The AAR should follow its’ earlier view, unless there are strong grounds and reasons to take a contrary view.