TDS on Indirect Transfer of Capital Assets deriving Value substantially from Assets situate in India prior to Retrospective Amendments hit by Doctrine of Impossibility: ITAT

TDS - indirect transfer of capital assets - assets - amendments - ITAT - Taxscan

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench ruled that the TDS on indirect transfer of capital assets deriving value substantially from assets situated in India prior to retrospective amendments hit by doctrine of impossibility.

The assessee, WNS Capital Investments Ltd Mauritius is a company which is owned by WNS Mauritius which, in turn, is owned by the ultimate holding company situated in Jersey, purchased 100% equity shares in Aviva Global Services Singapore Pte Ltd (AGSPL) from Aviva International Holdings Ltd UK (AIH-UK) for a consideration of £ 3,23,76,435.

The Assessing Officer probed the matter further wherein it was held that even though the transfer is of the shares of a foreign company, by one non-resident to another non-resident, since these shares “derive, directly or indirectly, its value substantially from the assets located in India”, in view of Explanation 5 to 9(1)(i), the income on transfer of these shares is taxable in India. The Assessing Officer further noted that in the light of insertion of Explanation 2 to Section 195 inserted by the Finance Act 2012, with retrospective effect from 1st April 1962, even a non-resident is under obligation to withhold taxes, under section 195, from any payments by such non-resident to another non- resident, when income embedded in such payments is taxable in India.

It was thus concluded that the assessee has defaulted in not withholding taxes from payments made to AIH-UK. Accordingly, demands were raised under section 201(1) and 201(1A), read with Section 195(2), in respect of the tax on income, taxable in India, embedded in such sale consideration, and also for interest on account of delay in realization of these withholding taxes, i.e. from the date on which the taxes ought to have been withheld till the date on which taxes are actually realized.

The assessee has raised the issue whether the CIT(A) has erred in holding that interest under section 201(1A) of the Act is not chargeable in the case of the assessee as it had no liability to deduct tax at source under section 195(1) of the All on payments made to Aviva International Holdings Ltd UK in July, 2008 on the premise that the law at that time did not have a charge on taxation of capital gains arising from indirect transfer of capital assets deriving their value substantially from assets situate in India prior to retrospective amendments made to section 9(1)(i) and section 195(1) of the Act by the Finance Act, 2012, thereby meaning that these amendments were not declaratory and clarificatory in nature and do not explain and clarify the existing law.

The coram headed by the Vice President Pramod Kumar relied on the decision of the Supreme Court in the case of Engineering Analysis Centre of Excellence Vs CIT wherein it was held that the “person” mentioned in section 195 of the Income Tax Act cannot be expected to do the impossible, namely, to apply (the law as it did not exist as the point of time when the obligations in question were being performed) the expanded definition of “royalty” inserted by explanation 4 to section 9(1)(vi) of the Income Tax Act, for the assessment years in question, at a time when such explanation was not actually and factually in the statute.” The Apex Court also observed that “this question is answered by two latin maxims, lex non cogit ad impossibilia, i.e., the law does not demand the impossible and impotentia excusat legem, i.e., when there is a disability that makes it impossible to obey the law, the alleged disobedience of the law is excused”.

The Tribunal said, “it cannot thus be said that, on the facts of this case, tax was deductible under section 195 at the time of making the said payment. We hold them. Once we hold so, the very foundation of impugned demands under section 201 r.w.s. 195 ceases to be sustainable in law, as the entire case of the revenue authorities hinges on Explanation 2 to Section 195, and it’s retrospective application. Having said that, we must add that, in any event, this issue is entirely tax neutral inasmuch as it is a case in which the person selling the shares, i.e. Aviva International Holdings Ltd UK, is said to have already paid taxes on the capital gains, and independent proceedings in the said matter are in progress, and the matter is said to be pending for adjudication, on merits, before a coordinate bench.”

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