Delhi HC rules that nonresident is entitled to concessional rate of 10% on long-term capital gains on sale of shares

 

This Tax Alert summarizes a recent ruling of the Delhi High Court (HC) in the case of Cairn UK Holdings Ltd. (Taxpayer) on the issue of whether a nonresident (NR) is taxable in India at the concessional rate of 10%, under proviso to Section 112 of the Income Tax Act (ITA), on long-term capital gains from sale of shares of an Indian company in an off–market transaction.

The HC overturned the ruling of the Authority for Advance Rulings (AAR) and held that the concessional rate of 10% applies to the NR Taxpayer. In doing so, the HC referred to earlier favorable rulings of the AAR where a view in favor of the concessional rate was taken. The HC held that benefit of concessional rate of tax would be available to the NR in respect of capital gains which is determined in the currency in which the shares were initially acquired. In the HC’s view, the benefit of concessional rate was supported by the clear language of the provisions and was in lieu of indexation benefit. As gain in the hands of the NR Taxpayer is calculated without grant of indexation benefit, the Taxpayer can claim the benefit of concessional rate.

The question of availability of concessional rate of 10% on capital gains to an NR which pays tax on capital gains by adopting the applicable exchange rate has been a contentious issue. The view emerging from the earlier rulings (which includes rulings of the AAR and the Income Tax Appelllate Tribunal) had largely been favorable to taxpayers. The AAR ruling in the case of Cairn UK unsettled this position by taking a divergent view from its earlier ruling in the case of Timken France. This HC ruling is a welcome decision which settles the controversy in favor of the Taxpayer.