Indian Company who is not a Party to Agreement can’t be taxed for Share Transfer between Two Non-Resident Companies: Madras HC [Read Judgment]

Share Transfer - Taxscan

A division bench of the Madras High Court recently held that an Indian company who is not a party to the agreement cannot be taxed for share transfer between two non-resident companies.

In the instant case, the consideration for the transfer was settled by WABCO, Singapore, by issuance of its own shares to Clayton Dewandre by execution of a Share Transfer Agreement between Clayton Dewandre and WABCO, Singapore.

The department alleged that scrutiny assessment of Clayton Dewandre established that the place of effective management was the United Kingdom, but Clayton Dewandre had deliberately made a paper transaction to obtain undue benefit of the Indo Netherlands treaty. The notice further alleged that capital gains had directly arisen as a result of the consideration received from the appellant. The respondent, therefore, proposed to treat the appellant as agent of Clayton Dewandre in respect of tax liability that might arise for the Assessment Year 2014-15, on account of capital gain tax. Accordingly, additions were made against the assessee.

The show cause notice issued by the department was challenged before the Single Judge by way of writ petition. However, the same was dismissed by the Court and directed the assessee to reply to the show cause within six weeks.

Before the division bench, the counsel for the appellants, Mr.R.V.Easwar, pointed out that the appellant was not a party to the said Share Transfer Agreement, which was between two non-residents. It was pointed out that necessary disclosures were made to Securities Exchange Board of India (SEBI) on required.

Chief Justice Indira Banerjee, who penned the judgment, observed that in exceptional cases, a show cause notice might be interfered with in proceedings under Article 226 of the Constitution of India.

The bench relied on the decision in General Electric Co. and another vs. Deputy Director of Income-Tax and Others wherein the Delhi High Court held that no case was made out by the Department that in respect of transfer of share to a third party, that too outside India, the Indian company could be taxed when the Indian company had no role in the transfer. In that case, it was held that merely because those shares related to the Indian company, that would not make the Indian company as agent qua deemed capital gain purportedly earned by the foreign company.

Relying on the above decision, the bench held that “We are in full agreement with the judgment of the Division Bench of Delhi High Court in General Electric Co. and another, supra. Maybe, there is an appeal from the aforesaid judgment, as contended on behalf of the Revenue, but the fact remains that the judgment has not yet been interfered with. The issues in this writ appeal are covered by the aforesaid judgment of the Delhi High Court, with which we are in full agreement.”

To Read the full text of the Judgment CLICK HERE