Different take on share transfer gains

In a recent decision, the Punjab and Haryana High Court held that the gains arising on transfer of shares is taxable as business income. The assessee transferred shares in an Indian company through a Share Purchase Agreement, which specifically provided for a non-compete clause, transfer of management rights, handing over of employee data base, customer proposal pipeline, product database, contracts, and so on, without any identified consideration for each of the above-mentioned components.

The High Court dismissed the assessee’s argument that the above transfer would qualify as a transfer of capital asset, and held that the said rights would, in any case, get subsumed as part of the share transfer. Further, there was no consideration paid for the above rights.

The High Court did not consider the Apex Court’s ruling in the case of Vodafone, which stated that the transfer of shares cannot be broken up into individual components such as non-compete, as shares also constitute a bundle of rights. Further, the aforesaid judgment may have an impact on acquisitions, which generally provide the above rights to the buyer. Such transfers could result in litigation.

More PF handouts from employers

A recent ruling by the Delhi High Court ruling is likely to increase employers’ contributions to their employees’ Provident Fund (PF).

An establishment was a paying a canteen allowance in lieu of a subsidised canteen facility. Since this represented the cash value of a food concession, it was liable to be included as part of the ‘dearness allowance’ and, consequently, the establishment was asked to pay PF contributions on such allowance.

The above ruling would impact establishments that make PF contributions only on their employees’ basic salaries. It is to be noted that there are cases pending with the Apex Court on similar issues. Ruling on these cases could provide more clarity on this matter.

Relief for non-resident investors

In a recent ruling, the Delhi High Court held that long-term capital gains arising on an off-market transfer of listed securities (not executed on the stock exchange) by non-residents is to be taxed at a beneficial rate of 10 per cent, and not 20 per cent.

The Income-tax Act provides for provisions to neutralise the foreign exchange risk for acquisition/ sale of capital assets. Further, it provides for indexation benefits only for investment made by residents. Revenue authorities argued that the lower tax rate is applicable only to taxpayers who are eligible for indexation benefits, and chose to apply the 10 per cent-rate.

The High Court reversed an earlier ruling by the Authority for Advanced Ruling (AAR), and held that the benefit of lower tax rate cannot be denied on the basis that non-residents are not eligible for indexation benefits. The AAR itself had deviated from its earlier view, without providing any strong arguments or a convincing explanation.

The High Court’s ruling comes as a relief to non-resident investors and provides certainty on an issue that has been met with differing views in the Courts.

Counting on employment for residency

An Indian citizen who leaves India for employment purposes qualifies as a non-resident if his stay during the fiscal year concerned exceeds 181 days. Interpretation of the term ‘for employment purposes’ is often debated.

One view is that a person should not be employed at the time of leaving India. If employed, determination of residency should be based on the alternate residency test of being in India for at least 60 days with cumulative stay of at least 365 days in the previous four years. The other view is to be more liberal and include travel for any purpose of employment, such as secondment.

In a recent ruling, the Delhi Income Tax Appellate Tribunal clarified that the requirement of law is not leaving India for employment, but leaving India for purposes of employment in another country. Therefore, an individual need not be employed when he leaves India for employment outside the country.

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