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Karnataka High Court Relies On The Vodafone Ruling

25 Apr 2011

The Karnataka High Court ("KHC") delivered an important ruling in the case of Richter Holding Ltd ("RHL") by relying on the principles laid down by the Bombay High Court ("BHC") in the Vodafone ruling. Taxand India examines the case concerning RHL.

Facts Of The Case
RHL was a tax resident of Cyprus. It acquired 60% of shares of Finsider International Company Ltd, a UK company ("the target") from Early Guard Ltd, another UK company ("the seller"). The remaining 40% of the shares of the target were acquired by West Globe Ltd, a company incorporated in Mauritius. The target company held 51% of the equity shares in Sesa Goa Ltd, an Indian company ("IndCo") at the time of its acquisition by RHL. The Revenue alleged that RHL had indirectly acquired 51% of the equity shares of the IndCo through the acquisition of the shares of target.

On this basis, the Revenue issued show cause notices to RHL for failure to withhold taxes under section 195 of the Income-tax Act, 1961 ("Act") from payments made to the seller at the time of acquisition of shares. Against the show cause issued by the Revenue, RHL filed a writ petition before the KHC.

The main issue put before the court was whether the Revenue has jurisdiction to issue a show cause notice alleging that the acquisition of shares of the target by RHL resulted in indirect acquisition of the shares of IndCo resulting in capital gains chargeable to tax in India for the seller.

The Ruling
The agreement provided by RHL may not be sufficient to ascertain the real nature of the transaction and it was also premature to conclude that there was no avoidance of tax obligations and that the capital gains are not chargeable to tax in India.

It may be necessary for the corporate veil to be lifted and examine the real nature of the transactions to ascertain the vital facts. It is also to be ascertained whether RHL as a majority shareholder enjoys the power by way of interest and capital in the assets of the IndCo and whether the transfer of shares includes indirect transfer of assets and interest in the company. RHL should appear before the Revenue in pursuance of the show cause notice issued and comply.

Taxand's Take

The ratio of this ruling is that it was premature for RHL to contend the validity of the show cause notice and mere filing of the agreement for sale of shares was not sufficient to conclude the aspect of capital gains. It has also indicated that the Revenue could lift the corporate veil and examine the transaction.

While this ruling only reaffirms the Vodafone ruling on the jurisdiction of the Revenue to examine the transaction, the observation of KHC relating to lifting of the corporate veil would come as a shot in the arm to the Revenue on the several cases that it is investigating on indirect transfer of shares. The verdict of the Supreme Court in the case of Vodafone is keenly awaited and would bring much awaited clarity to this issue under the Act.

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