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Kolkata Tribunal Ruling On Taxation Of Capital Gains
The Kolkata Tribunal in a recent ruling considered the issue of whether the transfer of 'controlling interest' can be identified and treated separately from the overall transaction of transfer of shares. Taxand India investigates the Tribunal in detail.
Some of the arguments raised by the Revenue and the taxpayer are similar to those raised by the parties before the Bombay High Court judgment in the case of Vodafone, and therefore require special attention.
- The Promoter Group ("also referred to as the taxpayer") of M/s Gujarat Ambuja Cements Ltd ("the Company"), a listed Indian company, transferred their shareholding to a non-resident company, Holderind Investment Limited ('the Acquirer').
- The Promoter Group held 24% of the shares in the Company and, acting in concert, enjoyed and exercised all the controlling interest rights in the Company. By virtue of the proposed transfer, the Promoter Group agreed to transfer to the Acquirer, the promoters' shares in the Company along with the controlling interest. In order to effect the transfer of the shareholding, the Promoter Group signed the following two agreements with the Acquirer -
- A Share Purchase Agreement ("SPA") dated 28 January 2006 for transfer of 14.8% shares held by the Promoter Group in the Company at a price of INR 105 per share.
- Another agreement signed on 30 January 2006 ("second agreement") which had the objective of acquiring control of the Company (including resignation of directors appointed by the Promoter Group and induction of director of the Acquirer) and the transfer of the balance shareholding of the Promoter Group, ie, 9%, in the Company. As a result of this agreement, the Acquirer made a public offer to acquire the shares of the Company at INR 90 per share.
The Tribunal held that it is a well settled principle (following Vodafone judgment) that the character of transactions entered into through a document could not be determined by the label ascribed by the parties to the transaction. While analysing a document, what is expressly written as well as the surrounding circumstances need to be considered.
Based on the above, the Tribunal held that the report of the independent valuer, determining the market value of shares, was of no relevance for determining the sale consideration (from an income tax perspective) since the principle is well settled that sale consideration has no relationship with the market value of a capital asset but is instead based upon the full value of consideration.
On the basis of the above, the Tribunal rejected the grounds of the Taxpayer and held that the consideration of INR 90 towards the sale of shares would be taxable as capital gains and the consideration of INR 15 towards the non compete undertaking would be taxable as business income.
The Tribunal ruling reiterates the principle laid down by the Bombay High Court in the Vodafone judgment regarding the interpretation of the transaction documents. However, the Tribunal has not analysed the position regarding the treatment of controlling interest in any amount of detail and has instead decided merely on the facts of the case stating that such a bifurcation of the consideration is not warranted since the consideration for the shares was in fact fixed at INR 90 per share.
Interestingly, the argument of the Revenue of treating the transfer of control as a part of the overall transfer of shares and holding that control is not a tradable right is in some ways contrary to the position sought to be taken by the Revenue in the Vodafone case.
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