CIT (IT) v. Augustus Capital Pte. Ltd (2024)

🏢 CIT (IT) v. Augustus Capital Pte. Ltd. – Delhi High Court on Retrospective Application of Explanations 6 & 7 to Section 9(1)(i) and Capital Gains on Indirect Transfers (2024)

📌 Background

The taxability of indirect transfers under Section 9(1)(i) of the Income-tax Act, 1961, has been one of the most debated areas of international taxation, especially after the landmark Vodafone International Holdings BV v. UOI (2012) 341 ITR 1 (SC) decision and the subsequent legislative response via the Finance Act, 2012.

In CIT (IT) v. Augustus Capital Pte. Ltd. [(2024) 296 Taxman 398 / 463 ITR 199 (Delhi)(HC)], the Delhi High Court examined whether Explanations 6 and 7 to Section 9(1)(i)—inserted by the Finance Act, 2018—apply retrospectively, and whether gains arising from the sale of foreign shares held by a Singapore-based company could be taxed as capital gains in India.

The Court upheld the ITAT’s ruling, holding that Explanations 6 and 7 must be treated as retrospective, as they are clarificatory and linked to Explanation 5, which itself operates retrospectively from 1 April 1962.

📂 Facts of the Case

• Assessee: Augustus Capital Pte. Ltd., a company incorporated and resident in Singapore.
• Investment: Equity and preference shares of “A”, a Singapore-incorporated company.
• Transaction: On 27 March 2015, the assessee sold its entire shareholding in “A” to “J”, an Indian company.
• Assessment Year: 2015–16.

Revenue’s Stand:

• The Assessing Officer (AO) treated the transaction as an indirect transfer of Indian assets, invoking Explanation 5 to Section 9(1)(i).
• Computed long-term capital gains arising from the transfer of shares of “A”, alleging that substantial value of those shares was derived from assets located in India.
• The Dispute Resolution Panel (DRP) upheld the AO’s action.

Assessee’s Contention:

• The assessee contended that Explanations 6 and 7 (inserted by the Finance Act, 2018) should be treated as retrospective, being clarificatory in nature.
• When read with Explanation 5, which applies retrospectively from 1 April 1962, the 2018 amendments must also apply from the same date.
• Hence, the transaction did not fall within the mischief of Section 9(1)(i), as the shares sold did not derive value substantially from Indian assets.

❓ Point of Dispute

Whether the capital gains arising from the transfer of foreign shares (held by a Singapore-based company) to an Indian company were taxable in India, and whether Explanations 6 and 7 to Section 9(1)(i) apply retrospectively to the Assessment Year 2015–16.

📑 Submissions by the Assessee

• Indirect Transfer Provision: The transfer of foreign shares was outside India; hence, Section 9(1)(i) could not apply unless the value of such shares was substantially derived from assets located in India.
• Retrospective Nature of Explanations 6 & 7:
  • Explanation 5 was introduced via Finance Act, 2012 with retrospective effect from 1 April 1962, clarifying that indirect transfers involving Indian assets could be taxed.
  • Explanations 6 and 7, introduced by Finance Act, 2018, merely clarified the method of valuation and computation mechanisms for such transfers.
  • Therefore, these should also apply retrospectively, being procedural and clarificatory.
• OECD Model Convention – Article 13:
  • Cited that under Article 13 of the OECD Model Convention, capital gains are taxable only in the State of residence, unless the property is immovable or the company derives its value primarily from immovable property situated in the source State.
  • Since “A” was a Singapore company and its assets were outside India, the gain could not be taxed in India.

📑 Submissions by the Revenue

• The Revenue argued that:
  • The shares of “A” derived substantial value from Indian assets, attracting the deeming fiction under Explanation 5 to Section 9(1)(i).
  • The Explanations 6 and 7, being inserted in 2018, could only apply prospectively.
  • Hence, the transaction (AY 2015–16) should be governed only by the 2012 amendments, and not by the 2018 clarifications.

⚖️ Court’s Findings & Legal Reasoning

1. Context of Explanations 4, 5, 6, and 7

The Court reviewed the legislative history:

• Explanation 4 & 5 (Finance Act, 2012): Introduced post-Vodafone ruling to clarify that income arising from indirect transfers of Indian assets is taxable in India.
• Explanations 6 & 7 (Finance Act, 2018): Added to clarify the computation rules for determining whether a share derives “substantial value” from Indian assets and to avoid double taxation of the same gains.

The Court noted that all these Explanations form one integrated framework, and hence Explanations 6 and 7 must be read alongside Explanation 5.

2. Retrospective Application

• The Court held that Explanations 6 and 7 are clarificatory in nature and not substantive amendments.
• Since Explanation 5 operates retrospectively from 1 April 1962, the subsequent explanatory amendments (6 and 7) must logically apply retrospectively as well.

💡 “Explanations 6 and 7 have to be treated as retrospective, as they have to be read along with Explanation 5 which operates from 1-4-1962.”

3. OECD Model Convention – Article 13 Reference

• The Court referred to Article 13 of the OECD Model Tax Convention, which deals with taxation of capital gains.
• It observed that capital gains on transfer of foreign shares are taxable only in the country of residence, except where the shares derive substantial value from immovable property in the source state.
• Since the assessee’s investment and transaction were outside India, the gain was not taxable in India.

4. Tribunal’s Findings Affirmed

• The Court upheld the ITAT’s detailed reasoning, which concluded that:
  • The assessee’s share transfer did not fall within the scope of indirect transfer provisions.
  • The Explanations 6 and 7 applied retrospectively, protecting the assessee from taxation in India.
• The Revenue failed to demonstrate any perversity or substantial question of law.

🏁 Held

The Delhi High Court held that:

✅ Explanations 6 and 7 to Section 9(1)(i) are clarificatory and hence retrospective, operating in conjunction with Explanation 5, which applies from 1 April 1962.

✅ The capital gains arising from the transfer of shares of a Singapore company to an Indian company were not taxable in India, as the shares did not derive substantial value from Indian assets.

✅ The ITAT’s order deleting the capital gains addition was affirmed.

✅ Practical Impact for Taxpayers

• Retrospective clarity: The judgment confirms that Explanations 6 & 7 apply retrospectively, offering certainty for historic cross-border share transfers.
• Capital gains shield: Gains from sale of foreign shares are not taxable in India unless they derive substantial value from Indian assets.
• OECD-aligned interpretation: The ruling aligns India’s interpretation with OECD Article 13 principles on source-based capital gains.
• Investor-friendly precedent: Provides clarity and relief for foreign investors in multi-tier structures involving Indian subsidiaries.

🔑 Key Takeaways

1. Explanations 6 & 7 are retrospective: They clarify computation and scope of indirect transfers under Section 9(1)(i).
2. Explanation 5 linkage: All three (5, 6, 7) operate as a single cohesive framework effective from 1 April 1962.
3. No taxation of foreign share transfers: Unless shares derive substantial value from India.
4. OECD alignment: Upholds India’s treaty consistency on capital gains and source rules.

📢 Why This Case Matters

The CIT (IT) v. Augustus Capital Pte. Ltd. (2024) ruling is a significant precedent on indirect transfer taxation and the interpretation of retrospective amendments. It brings much-needed clarity for foreign investors and multinational groups engaged in cross-border M&A involving Indian assets.

By holding that Explanations 6 and 7 are retrospective, the Court reaffirmed India’s commitment to treaty-aligned and certainty-driven tax interpretation, mitigating litigation risk on indirect transfers.

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