Non -Residents are also entitled for 10% tax rate on long term capital gains – Delhi High court

There was always an ambiguity in the minds of non-residents as to whether they are also eligible for lower rate of 10 % on capital gains earned on non-listed shares and equity.  The Delhi High Court in the case of Cairn UK Holding LTD has held that Non -Residents are also entitled for 10% tax rate on long term capital gains.  This ruling us very relevant in the absence of any clear ruling precedence and also non-standard approach of Income tax department.10pftax1

The facts of case in this case was :

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 (non-listed ) resulting in long-term capital gain of US$ 85 Million in the hands of the foreign company. The above referred foreign company filed an application before AAR ( Authority of Advance Rulings) claiming the resulted capital gains should be charged @10 % as per the proviso to s. 112(1). The AAR rejecting the claim of foreign company 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.

Being aggrieved, the aforesaid foreign company filed a a writ petition before the  High Court. The Delhi Court while passing an order in favour of the foreign company, stated following:  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. Interesting to point out that,  this ruling virtually approves  appeal pending in case of  Chicago Pneumatic and also in case of  Burmah Castrol Plc 16 DTR 145 (AAR). We can also check  ruling in case of  Anuj A. Sheth HUF 324 ITR 191 (Bom) where it was held that though bonus shares are not eligible for indexation, the benefit of the Proviso to s. 112 is available Thanks for reading for this article. Please feel free to write to us, if you are facing any issue with like this  at []. We would be more than happy to assist you.