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Overseas cos off-mkt deals in 10% tax net
November, 16th 2007
Non-resident companies selling shares in off-market deals will have to pay only a flat 10% tax on long-term capital gains, the authority for advance ruling (AAR) has ruled. The 20% rate demanded by the income-tax department is not in order, it has said.

The AAR decision is in sharp contrast to a 2006 ruling by a division bench of ITAT comprising Shri K C Singhal and Shri A K Garodia, on a similar issue. The bench had said the capital gains tax on such deals is 20%.

The AAR, in the order on application by the French firm Timken France SAS, has now ruled that the concessional rate of tax at 10%, available to Indian companies on such transactions, would be also available to non-residents as well.

The French company sold its entire stake in an Indian company NRB Bearings in 2005. The shares originally purchased in 1986 were sold to the promoters of the Indian company in 2005 at Rs 55 crore.

According to the income-tax department, residents are allowed a concessional rate of 10 % because they have an option of choosing a higher rate of 20 % with indexation benefits.

Indexation is not available for non-residents; but, there is an inflation protection for non-residents through the provision in the Income-tax Act that allows them to convert the consideration of the sale in the foreign currency- the currency in which they originally purchased the shares. Hence, non-residents are liable to pay capital gains tax at 20%.

The ITAT order in 2006 on an appeal filed by a non-resident, BASF Aktiengesellschaft on a similar issue, also favoured the departments stand, holding that there is no provision for claiming double benefits.

When a non-resident invests in Indian shares in foreign currency, the capital gains is determined only in that currency and no indexation is given. For example, if a foreign company bought a share for Rs 14 in 1987, when it was equivalent to $1, and sells that share in 2007 for Rs 60, when it is still equivalent to only $1.5, the capital gain will only be $0.50 (fifty cents).

If the same investment was to be done by an Indian resident, the capital gain will be Rs 46; this calls for indexation adjustment.

The ITAT had held that the rate of 10% can be given only to an Indian company when the indexation is not taken. Since the benefit of indexation not available to foreign companies anyway, the question of allowing the concessional rate of 10% to non residents does not arise.

The AAR did not agree. It has ruled that the concessional rate of 10% is indeed coupled with disability to get indexation benefit but that does not preclude a taxpayer from availaing due benefits. The AAR said, Double benefit or additional relief is not a taboo under the law. From the mere fact that the protection from rupee value fluctuation in terms of foreign currency is made available to the non-residents, it does not follow that the non-residents should not get the benefit of reduced rate of tax which the residents are getting.

The AAR is also severely critical to the ITAT order. With due respect to the learned Members of Tribunal, we find it difficult to appreciate the observation that the literal construction of proviso leads to the meaning it has attributed to the provision, it said.

Though the AAR rulings are applicable only in the cases decided by it, its decisions have very serious persuasive value on Income-tax assessments on similar issues. Appreciation or depreciation of local currency is of no consequence to a foreign investor and hence any decision based on such factors is irrational. The AAR decision in this case will have a bearing on similar cases, Senior advocate MS Syali said.
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