Merely because a person is an agent or is to be treated as an agent, it would lead to an automatic conclusion that he becomes liable to pay taxes on behalf of the non-resident. That would only mean that he would be treated as representative assessee. However, liability of such a representative assessee only if the eventualities stipulated in Section 161 of the Act are satisfied. Section 161 of the Act makes a representative assessee liable only “as regards the income in respect of which he is a representative assessee”.
GENERAL ELECTRIC COMPANY & ANR. vs DDIT (HC)
Dated: 12th Aug 2011
Notice u/s 163 - Capital gains arising from the transfer of shares
1. Whether petitioner a non-resident company is chargeable to tax in India where he has transferred the share holding to another non-resident.
2. Whether the respondent No.4 can be treated as representative assessee of the first petitioner.
3. Whether the conditions stipulated in Section 163 read with Section 161 of the Act for the purposes of treating the respondent No.4 as representative of petitioner No.1 is satisfied or not.
Important Para -
The first petitioner is a company incorporated in the State of New York in the United States of America its principal place of activity is the United States and it has business interests all over the world. It has been assessed to tax in India over the last several years in respect of its income taxable in India, as a non-resident.
The second petitioner is a company incorporated in Mauritius that holds shares of group companies and investments and had a wholly owned subsidiary in India called GE Capital International Services (for brevity „GECIS‟), now known as Genpact India, which is registered under the Companies Act, 1956 and is respondent No.4 herein.
The entire share capital of GECIS was acquired by the second petitioner along with certain individuals as nominee shareholders in 1998 with the approval of the Foreign Investment Promotion Board. The second petitioner is a wholly owned subsidiary, through various intermediate holdings, of the first petitioner. The remote business processing and offshore support operation that provided specified business process outsourcing services (BPO) to the first petitioner and its affiliates were carried out from facilities located in India (through GECIS as explained aforesaid), as well as in China, Hungary, Mexico, the United Kingdom and the United States of America, through other, this BPO business grew, acquiring outside clients apart from the petitioner‟s group of companies and gathered value. With certain investors evidencing interest in acquiring 60% of the petitioner‟s BPO business and, with a view to divesting it worldwide ownership in companies through which such business was conducted, the petitioners‟ along with other affiliated companies embarked on a series of transactions in December, 2004.
The only capital asset in India which was transferred in the course of the restructuring and reorganization transactions was the gift of the shares of CECIS by the second petitioner – a Mauritius company and certain nominee shareholders to GECIS India Investments and GECIS India Holdings, respectively (each a Mauritius incorporated company). Therefore, no income had accrued or arisen or can be deemed to accrue or arise in India. The Income Tax Department, on the other hand, maintains that it is a taxable event in India.
Respondent No.1 who is the Deputy Director of the Income Tax (International Taxation) in New Delhi issued a show cause notice dated 11.04.2007 to the respondent No.4. In this notice, it was stated that from the records available with him, it appeared that General Atlantic Partners and Oak Hill Capital had purchased 60% shareholding in respondent No.4 from the first petitioner. The notice further recites that the said shareholding transferred which was valued at US Dollar $500 million and that no application was made under Section 197 of the Act by the payee “with regard to the transactions relating to the sale of the stake” in respondent No.4. It was further stated that the income arising to the first petitioner from the sale of its direct/indirect stake in respondent No.4 is liable to tax in India in view of the deeming provisions contained in Section 9(1)(i) of the Act. It was proposed in the notice to treat the respondent No.4 as an agent and consequently, the representative assessee of the first petitioner under the provisions of Section 136 read with Sections 160 and 161 of the Act and proposed to proceed to act in accordance with law. This show cause notice also referred to the earlier notice dated 02.11.2006 issued to the respondent No.4 stating that such information had not been furnished. Accordingly, the respondent No.4 was required to show cause as to why such action of treating the respondent No.4 as representative assessee be not taken and income accrued to the petitioner No.1 assessed in accordance with the law.
Respondent No.4 submitted its reply to the said show cause notice, inter alia, stating that it had no obligation to deduct the tax at source in respect of such transactions between the petitioners on the one hand and General Atlantic Partners and Oak Hill Capital on the other hand. According to it, merely because by the said transaction, shareholding of respondent No.4 was transferred by one party to other, both being non-resident, the respondent No.4 could not be treated as representative assessee. Since none of the conditions specified in Section 13 of the Act were fulfilled. It was also submitted that the petitioner No.1 is not and had never been a direct shareholder of respondent No.4 and therefore, question of any income accruing or arising to the petitioner, which is chargeable to tax in India would not arise.
On the basis of information collected during TDS proceedings and also information available in public domain, a prima facie belief was form that as per the provisions of Section 9(1)(i) of the Act, the income arising from these transactions, which otherwise was taxable in India but had not been offered to tax. The official respondents have maintained in the counter affidavit that conditions stipulated in Section 163 of the Act are satisfied and therefore, impugned show cause notice being perfectly valid, has rightly been issued.
“Section 163 of the Act has to be read in conjunction with Section 161, which provides that the specified person can be treated as assessee “…as regards the income in respect of which he is a representative-assessee…” Therefore, an agent can only be a representative-assessee as regards the income in respect of which the alleged agent has business connection and/or from or through directly and/or indirectly the income was received.”
The respondent No.4 has business connection with the petitioner No.1 as explained by the official respondents on the basis of business relation between them reflected through the transactions entered into between the petitioner No.1 and respondent No.4 over a period of time. Therefore, conditions prescribed in Clause (b) of sub-section (1) of Section 163 can be treated to have been, prima facie, fulfilled. Thus, respondent No.4 can be treated as “an agent in relation to the petitioner No.1 – a non-resident”. As an agent respondent No.4 would be the representative assessee within the meaning of Section 161(1) of the Act. The question before us is as to whether in its capacity as representative assessee of the petitioner No.1, liability of the respondent No.4 arises within the meaning of Section 161 of the Act and it would be assessed in that representative capacity. To put it otherwise, whether the purported income earned by the petitioner No.1 through transfer of shares can be treated as the income in respect of which he is a representative assessee. It is because of the reason that Section 161 makes him liable only as regards that particular income.
High Court agree with the submission of the learned Senior counsel appearing for the assessee, that a harmonious reading of Sections 160, 161, 162 and 163 would show that:
(i) In order to become liable as a representative assessee, a person must be situated such as to fall within the definition of a representative assessee;
(ii) The income must be such as is taxable under Section 9;
(iii) The income must be such in respect of which such a person can be treated as a representative assessee;
(iv) The representative assessee has a statutory right to withhold sums towards a potential tax liability;
(v) Since the liability of a representative assessee is limited to the profit representative assessee, there can be multiple representative assessees in respect of a single non-resident entity – each being taxed on the profits or gain relateable to such representative assessee.
The scheme underlying the aforesaid provisions is explained with clarity and precision in the commentary on Section 163 of the Act in “The Law and Practice of Income Tax (Kanga and Palkhivala at page No.1280, English Edition), the relevant extract is reproduced:
“…Thus Section 163 really provides only the machinery for giving effect to Sections 160 and 161, and the mere appointment of an agent under Section 163 would be of no consequence unless there is income in respect of which the agent can be held to be a representative-assessee under Section 160 and can be assessed as such under Section 161 of the Act. In other words, any person appointed an agent under Section 163 is not necessarily assessable as a representative assessee in respect of the non-resident’s income; it is only in relation to the income covered by Section 160 that the status of representative assessee emerges and the liability to be assessed under Section 161 arises. For instance, though there may be a business connection between a resident and non-resident company, where there is no evidence to show that any profits accrued to the non-resident company through the business connection, no assessment can be made on the resident company as the agent of the non-resident company and the mere appointment of the resident company as such agent under this section would be of no avail.”
Even when we examine the case treating the allegations made by the Department as correct, we find no such live link of income earned by the first petitioner and the respondent No.4 in respect of the transaction which is sought to be taxed. As already held by us that Section 163 has to be read in conjunction with Section 161 which provides that the specified person can be treated as assessed “……..as regards the income in respect of which he is a representative – assessee……….” Therefore, an agent can only be a representative – assessee as regards the income in respect of which the alleged agent has business connection and/or from or through directly and/or indirectly the income was received.
Merely because those shares relate to the respondent No.4 company, that would not make respondent No.4 as agent qua deemed capital gain purportedly earned by the petitioner.
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