Authority For Advance Rulings (Income Tax), New Delhi
Pan-Asia Igate Solutions, Mauritius, In Re
Section : 112, 195
Justice Dr. Arijit Pasayat, Chairman And T.B.C. Rozara, Member
A.A.R. No. 1041 Of 2011
May 9, 2014
1. Pan-Asia iGate Solutions, Mauritius has filed the present application u/s 245Q(1) of the Income-tax Act, 1961 (in short “Act”)seeking ruling on the questions:
“(1) Whether on the stated facts and law, the tax is required to be withheld by the Applicant under section 195 of the Income-tax Act, 1961 on purchase of 1,82,55,396 equity shares of Patni Computer Systems Ltd (hereinafter referred to as ‘Patni’), being listed security, from iSolutions, Inc. USA at 10.56 per cent (inclusive of surcharge and cess) of the amount of long term capital gains arising to iSolutions, Inc. as per the proviso to section 112(1) of the Income-tax Act, 1961?
(2)Whether on the stated facts and in law, the tax is required to be withheld by the Applicant under section 195 of the Income-tax Act, 1961 on purchase by it of 1,59,20,264 shares (included in 1,82,55,396 shares referred to above) issued by Patni as bonus equity shares, being listed security, from iSolutions, Inc. USA as 10.56 per cent (inclusive of surcharge and cess) of the amount of long term capital gains arising to iSolutions, Inc. as per the proviso to section 112(1) of the Income-tax Act, 1961?”
2. Background facts highlighted for seeking ruling are as follows:
The Applicant is a Mauritius company, having its registered office at International Financial Services Limited, IFS Court, Twenty Eight, Cybercity, Ebene, Mauritius incorporated on 17 December 2010, and registered under the Mauritius Companies Act, 2001. The control and management of the affairs of the Applicant is situated outside India and therefore, qualifies as a non-resident company under the provisions of the Income-tax Act, 1961 (‘the Act’).
The Applicant passed a board resolution at a Board Meeting held on 7 January 2011 proposing to purchase 1,82,55,396 (One crore eighty two lacs fifty five thousand three hundred ninety six) equity shares of Patni Computer Systems Ltd. (‘Patni’) from iSolutions, Inc. a US based company (‘Seller or ‘iSolutions’).
Patni is an Indian company, incorporated in the year 1978, and is registered under the Companies Act, 1956 having its registered office at S-1A, Irani Market Compound, Yerawada, Pune, Maharashtra. It is engaged in the business of providing information technology services and business solutions. Patni is listed on the Bombay Stock Exchange Limited, National Stock Exchange of India Limited and New York Stock Exchange.
iSolutions, incorporated on 1st October, 1999, and registered under the Company Laws of USA has its office at 1105, North Market Street, Suite 1300, Wilimington DE 19801.
iSolutions purchased the original equity shares of Patni in foreign currency. The bank statements of Mr.Anirudh Patni and Mrs.Poonam Patni (original share holders/promoters from whom iSolutions purchased the shares) reflect the remittance by iSolutions to Mr.Anirudh Patni and Mrs.Poonam Patni of USD 23,99,994 and 22,99,994 respectively on April 24, 2000.
iSolutions passed a resolution on 28 December 2010 wherein its Board of Directors proposed to sell upto 1,82,55,396 equity shares (which include both originally acquired equity shares purchased in May, 2000 as well as bonus shares acquired upto August, 2003) of Patni (as it has now transpired) to the applicant. iSolutions held the aforesaid 1,82,55,396 shares of Patni for a period of more than 12 months for affecting such sale, iSolutions has entered into a Share Purchase Agreement dated January 10, 2011.
The applicant is now approaching this Hon’ble Authority to determine the rate at which tax ought to have been deducted under section 195 of the Act from the payment made to iSolutions for the purchase of equity shares of Patni.
3. The rival submissions need not detain us, in view of the fact that the decision of this Authority in Cairn UK Holdings Ltd., In re  337 ITR 131/201 Taxman 111/12 taxmann.com 266 was set aside by the Hon’ble Delhi High in Cairn UK Holdings Ltd. v. DIT  359 ITR 268/ 220 Taxman 230/ 38 taxmann.com 179 by Judgment dated 7th October, 2013.
4. Some of the relevant observations from the same need to be quoted.
“29. First proviso to Section 48 is applicable when a non-resident had purchased an asset being a share or debenture with foreign currency, converted into Indian rupee. It stipulates that on transfer or sale of the said share or debenture the consideration received in Indian rupee should be reconverted into the same foreign currency. Sale and purchase of shares has to be in Indian rupee, the legal tender in India, but the foreign investor had brought in foreign currency and, therefore, logically and naturally for him, the gain should be computed in foreign currency. The said investor would like to convert the sale consideration received in Indian rupee into foreign currency. This would reflect the true gain or income earned. For a non-resident who has utilized/brought in foreign currency for purchase of shares or debentures in Indian rupee, inflation in India is immaterial and inconsequential. For him, the gain or loss is to be computed with reference to the foreign currency utilized for purchase and foreign currency available to him for repatriation after the sale. From the said assessee’s view point and objective, he is most concerned with exchange rate fluctuation and his true and actual gain should take into account the exchange rate fluctuation. The second proviso is applicable to all others including non-residents, who are not covered by the first proviso and they are entitled to benefit of cost of indexation which neutralize inflation. It is a misnomer and wrong to state that inflation alone contributes and is the determinative factor in exchange rate fluctuation. No doubt, a country with persistent low inflation can expect rising currency value as purchasing power increases in relation to other currencies with high inflation rate, but it is equally true that countries with typically higher inflation rate might not see corresponding or equal depreciation in their currency value. Inflation by itself cannot be the sole or even a primary factor in exchange rate depreciation. Current account deficit and public debt, terms of trade, political stability, economic performance, etc. are various other factors, which determine the exchange rate. These are complex factors and several parameters can affect the foreign exchange rate fluctuation and, therefore, persons affected by exchange rate fluctuation indulge in hedging.
31. As already stated above, the first proviso to Section 48 ensures that a non-resident, who utilized his foreign currency, is taxed after taking into consideration the fluctuation in exchange rate. Indian rupee can and has in past appreciated against foreign currencies. In such cases, the long-term capital gains payable can increase. On the contrary we are not aware of occasions of deflation in India in last two decades and it would be incorrect to hold that the Legislature while enacting the second proviso had in mind or assumed that there would be deflation. The two provisos cannot be equated as granting same relief or benefit. They operate independently and have different purpose and objective.
32. In view of the above, it is difficult to state that benefits under the first proviso and the second proviso to Section 48 are identical or serve the same purpose.
33. There is some merit in the contention that if proviso to Section 112(1) is applied, then almost all assessees covered by the first proviso to Section 48 would be liable to pay tax @ 10% only and not @ 20% on long-term capital gains. This appears to be correct and a logical consequence of the proviso to Section 112(1) and the interpretation given by us, but this cannot be a ground to contextually read the proviso to Section 112(1) differently. The said proviso is applicable to listed securities or units or zero coupon bonds. Long-term capital gain is not payable on listed securities sold through stock exchanges as STT is payable. First proviso to Section 48 is applicable on sale of shares or debentures in Indian company, whether or not the said shares or debentures are listed or not. Thus, proviso to Section 112(1) is more restrictive and will not necessarily apply in all cases covered by the first proviso to Section 48. Secondly, the proviso to Section 112(1) is not applicable to debentures. Nevertheless, the proviso to Section 112(1) is applicable to units and zero coupon bonds, which are not covered by the first proviso to section 48 of the Act. Second proviso to Section 48 is not applicable on transfer of long-term capital asset being bond, debenture other than the capital index bond. Zero coupon bonds are, however, specifically made eligible for benefit under the proviso to Section 112(1).
It is clear from the aforesaid discussion that it is not possible to decipher and clearly elucidate the exact legislative purpose and object behind the proviso to Section 112(1) in a categorical and unambiguous manner. The purpose and object behind the proviso to Section 112(1) itself is somewhat debatable, except that the legislative intention was to tax long-term capital gain on listed shares, bonds and units @ 10%, without benefit of indexation under second proviso to Section 48 of the Act. Legislative policy and object is nothing more, and it is impermissible to read into the said provision an affirmative legislative intention on assumption and guess work and this would be beyond the acceptable principles of interpretation.
36. With the aforesaid observations, we allow the present writ petition and a writ of certiorari is issued and the impugned decision dated 1st August, 2011 passed by the Advance Ruling Authority in AAR No.950/2010 is quashed. It is declared that the petitioner will be entitled to benefit of proviso to Section 112(1) of the Act on sale of equity shares in question. This direction is being issued as it is not disputed and contested before us that other conditions of first proviso to Section 112(1) of the Act are satisfied.”
5. In view of the jurisdictional High Courts’ decision, we answer the questions in affirmative.
[Citation : 364 ITR 331]