Delhi High Court has granted interim stay on Income Tax demand of over ₹3,000 crore from Sumitomo Mitsui Financial Group (SMFG). The issue is related with the company acquiring Fullerton India Credit Company.

“In our view, the matter requires examination,” a Division Bench of Justices Rajiv Shakdher and Tara Vitasta Ganju said in its recent order, while adding that the operation of the orders and notices (by Income Tax Department) shall remain stayed till further directions of the Court. Now the matter has been listed on April 26. Notice has also been issued to the Income Tax Department. Earlier this month, the deal hogged the headline on the demand for capital gain tax and then Sumitomo Mitsui moved the court.

The transaction in issue pertains to a Share Purchase Agreement dated July 6, 2021 for acquisition of 74.9 per cent equity stake by the Sumitomo Mitsui in an Indian company Fullerton India Credit Company Ltd from two Singapore-based companies — Angelica Investments Pte Ltd and Fullerton Financial Holdings Pte Ltd. It was submitted by the petitioner that all statutory approvals were taken both before and after the subject transaction was entered into and referd to the approval granted by Reserve Bank of India (RBI) and Competition Commission of India (CCI).

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Tax disputes

According to reports, Sumitomo Mitsui had held back only $170 million for paying the tax. Post assessment, order dated November 28, 2022 was passed and demand notice issued by the Income Tax Department asking the company to pay capital gain tax. Tax experts termed this matter similar to Vodafone and Cairn tax disputes.  It may be noted that the Supreme Court in 2012 had given a verdict that gains arising from the indirect transfer of Indian assets are not taxable under the extant provisions of the Act. But the provisions of the Income Tax Act, 1961, were mended by the Finance Act, 2012, with retrospective effect. This was used by the UPA government to impose tax demands on companies such as Cairn Energy and Vodafone.

However, last year the NDA government brought a Bill in the Lok Sabha to withdraw all tax demands in a bid to assuage foreign investor concerns. According to experts, this, however, has not relaxed the need to pay capital gains tax for deals done after 2012. In SMFG’s case, the question will be about the quantum of tax to be paid for the 2021 deal.

Commenting on the latest development, Amit Maheshwari, Tax Partner, AkM Global, a tax and consulting firm, says the case in question is about a transaction of share purchase of an Indian company by the foreign companies which has already been executed after the requisite approvals from various regulators. Interestingly, PAN of the taxpayer is registered in Mumbai and the notices for being assessee-in-default were issued by the AO of Delhi jurisdiction along with the demand notice against which two writ petitions were filed by the taxpayer against the CIT’s orders and AO’s orders. “The relief in the form of interim stay on the tax demands shows a pragmatic approach of the court while dealing with such cases practically. However, the final outcome is yet to be seen as of now since it is stayed till further directions from the court,” he said.