Delhi HC renders landmark judgement on applicable rate of tax on capital gains arising to non residents
The High Court settled the debate on conflicting decisions rendered by the Advance ruling authority in relation to applicable rate of tax on capital gains arising to non residents. Reiterating the principle laid down by the AAR in Timken France SAS case in August 2011, the HC giving an harmonious interpretation to provision 2 and 3 of section 48 read together with Section 112 concluded that the rate of tax should be 10% and not 20 as held by the AAR. This puts to rest the controversy and uncertainty arising out of conflicts in the advance rulings.
In coming to the conclusion, the. HC held that the proviso to section 112 gives a beneficial option to all tax payers on transfer of long terms capital asset by way of listed securities and it should not be read as restricting the benefit of such concessional tax rate to tax payers other than the ones who avail of indexation benefit under proviso 2 to section 48. Further, non residents under the first proviso to section 48 are entitled to neutralize exchange rate fluctuation by computing the gains in foreign currency and such Computation of capital gains in foreign currency didn’t entail passing the benefit of indexation.
The HC taking note of apparent conflicts in the AAR rulings highlighted SC observation in Vodafone’s case wherein it was held that certainty is integral to rule of law and that it forms the basic foundation on any fiscal law. FDI flows in locations with strong governance which included enforcement of law and how well the legal system works.
The HC observed that the AAR should follow their earlier view, unless there are strong grounds and reasons to take a contrary view and that in the case ( Cairn India) before the court there was no compelling justification and reason to override and disturb the earlier view ( taken in Sanofi’s case ). Similar were the view expressed by the SC in Columbia sports case which emphasized upon the importance of rules of consistency in statutory interpretation of law.
The decision was rendered by Justice Sanjiv Khanna and Justice Sanjeev Sachdeva in response to a writ petition no 6752/2912 filed by Cairn UK against order of the advance ruling authority.