Facts of the Case

  • The assessee, Augustus Capital Pte. Ltd., a Singapore-based company, invested in shares of Accelyst Pte. Ltd. (Singapore).
  • Total investment: ₹4.91 crore.
  • The assessee sold its shares to an Indian company (Jasper Infotech Pvt. Ltd.) for ₹41.24 crore.
  • The assessee declared nil income, claiming gains were not taxable in India.
  • The Assessing Officer (AO) taxed ₹36.33 crore as long-term capital gains, invoking Section 9(1)(i).
  • DRP upheld the AO’s order.
  • ITAT ruled in favour of the assessee.
  • Revenue appealed before the Delhi High Court.

Issues Involved

  1. Whether Explanations 6 & 7 to Section 9(1)(i) are clarificatory/curative or substantive amendments.
  2. Whether these Explanations apply retrospectively or prospectively from 01.04.2016.
  3. Whether capital gains from indirect transfer of shares are taxable when shareholding is minimal and lacks control.

Petitioner’s Arguments (Revenue)

  • Tax law applicable is that in force during the relevant assessment year.
  • Explanations 6 & 7 introduce new exemptions (de minimis rule), hence are substantive.
  • Absence of express retrospective effect (unlike Explanation 5) indicates prospective application.
  • Even clarificatory amendments cannot be retrospective if they change the law materially.

Respondent’s Arguments (Assessee)

  • Explanations 6 & 7 clarify ambiguities in Explanation 5 (inserted via Finance Act, 2012).
  • Explanation 5 created hardship due to undefined terms like “substantially”.
  • Explanations 6 & 7:
    • Define “substantial value”
    • Introduce threshold (de minimis rule)
  • They are curative in nature and must apply retrospectively.
  • Without retrospective effect, the mischief of vague law persists.

Court’s Findings / Analysis

  • Explanation 5 (FA 2012) was introduced to overcome the ruling in Vodafone International Holdings BV v Union of India.
  • However, Explanation 5 contained ambiguities and vagueness, particularly:
    • Meaning of “share or interest”
    • Meaning of “substantially”
  • The Government constituted the Shome Committee, which recommended clarification.
  • Explanations 6 & 7 were introduced to:
    • Define “substantial value” (threshold concept)
    • Introduce safe harbour for small shareholders
  • The Court held:
    • These Explanations cannot operate independently
    • They must be read with Explanation 5
    • Hence, they are clarificatory and curative

 Court Order / Decision

  • The appeal filed by the Revenue was dismissed.
  • The Court upheld the ITAT order.
  • Held that Explanations 6 & 7 are retrospective in nature.

Important Clarifications by Court

  • Clarificatory amendments can be retrospective even without explicit wording.
  • Date of enforcement in statute is not decisive for determining retrospectivity.
  • Explanations 6 & 7:
    • Remove ambiguity
    • Prevent arbitrary taxation
    • Provide certainty in indirect transfer taxation
  • Section 9(1)(i) along with Explanations 4–7 forms a complete code for indirect transfers.

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS30112023ITA4052022_145350.pdf

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