HC order had exempted Mauritius-based Copal Group from capital gains tax liability in India
The income tax department has approached the Supreme Court seeking to quash a Delhi High Court order that exempted a series of transactions by Mauritius-based Copal Group — having assets in the US and in India — with Cyprus-based Moody’s group, from capital gains tax liability in India. The high court had also ruled that Indian assets have to account for 50% or more of the value of the overseas entity changing hands to be taxable in India under the indirect transfer provisions as amended in 2012.
An SC bench headed by justice Ranjan Gogoi on Friday asked the department to submit all the documents it had earlier placed before the Delhi High Court.
The apex court’s decision in the case could have an impact on the taxability of indirect transfer cases, where an overseas entity, the shares of which are changing hands, has assets in India less than half of its global valuation.
However, it is unlikely to affect the ongoing R14,200-crore Vodafone tax dispute as the British telecom giant had purchased 100% of the Indian assets of Hutch Essar in the 2007 deal.
The department said in its petition to the apex court that the HC had “erred in holding that transactions at Mauritius level were due to commercial reasons and not to create any design to avoid tax in India”.
In this case, non-resident entities of the Copal group sold shares of an American entity having a downstream Indian subsidiary to Moody’s USA and shares of an Indian company to Moody’s Cyprus. After that, the non-resident owners of the Copal group sold 67% held by them in the erstwhile ultimate holding company Copal Jersey to Moody’s UK for $93.5 million. Financial institutions held the 33% stake. This purchase price did not include any value in the Indian asset as 100% economic interest in these companies had already been purchased by the Moody’s group.
The tax department’s petition said that the first two transactions which entail tax liability (if shown to be carried out at Jersey level), were carried on November 3, 2011 and on the very next day, the holding company’s shares were transferred to Moody’s UK in a third transaction.
“The Copal group constitutes, selling entities and Moody’s group, the buying entities. If all the three transactions are treated as single transaction, the ultimate shareholder of Copal-Jersey is benefitted by avoiding tax at Mauritius level by claiming India-Mauritius tax treaty benefit,” it said.
“The sale of shares shown by the two Mauritius based companies was actually a sale by a holding company located at Jersey level and as a result the tax treaty should not be seen so as to determine the liability of capital gains in the transaction in question, the revenue authorities stated in its appeal,” argued the tax department.
In its order last August, the high court had held that MNCs with less than 50% asset base in India are exempt from capital gains tax in India while their local assets change hands as part of a global transaction. The court ruled that Copal Mauritius’ indirect transfer did not derive ‘substantial value’ from India for attracting tax liability here.
The Income Tax Act does not define the ‘substantial value’ for indirect transfer taxation purposes, but the draft direct tax code had said India will have taxing rights on offshore sale of companies only if the Indian assets account for at least 50% of their worldwide assets. It had also suggested that the tax liability in India will be proportionate to the ratio of assets in India and globally.