XYZ Co., an Indian company, is engaged in the business of manufacture of packaging material having its manufacturing facility in India. XYZ Co. is a…

CA Final · Direct Tax Laws and International Taxation · MTP · May 2024
XYZ Co., an Indian company, is engaged in the business of manufacture of packaging material having its manufacturing facility in India. XYZ Co. is a wholly owned subsidiary of Flix Inc., a company incorporated in Country M. Angelo and James, citizens and residents of the Country N, each of them hold 50% of the share capital of Flix Inc. Angelo and James, each had invested equivalent to INR 100 crores in Flix Inc. in April 2015. On 1st June 2023, Angelo and James, having received an offer which they believe was fair, sold their entire stake in Flix Inc. to Ishaan, resident of Country N for amount equivalent to INR 350 crores each. The accounting period of Flix Inc. is January to December, the relevant extract of the balance sheet of Flix Inc. as on 31st December 2022,1st June 2023 and 31st December 2023 are as follows: Particulars As on 31st December 2022 (in INR crores) As on 1st June 2023 (in INR crores) As on 31st December 2023 (in INR crores) Details regarding Flix Inc. Book value of assets 1,000 1,300 1,500 Liabilities 300 250 350 Fair Market Value of assets (without reduction of liabilities) 800 1100 950 Details regarding investment in XYZ Co. Cost of acquisition 150 150 150 Book value of assets in balance sheet of XYZ Co. 350 550 480 Liabilities 150 200 250 Fair market value of assets in balance sheet of XYZ Co. (without reduction of liabilities) 350 600 600 Determine whether the income arising from transfer of shares of Flix Co. chargeable to tax in India in the hands of Angelo and James for the A.Y. 2024-25. Assume there is no DTAA between India-Country M and between India-Country N.

Suggested Answer and Working Notes:

Capital gain arising in the hands of Angelo and James from transfer of a capital asset situated in India would be deemed to accrue or arise in India. Shares of Flix Inc., Country M, shall be deemed to be situated in India if those shares derive directly or indirectly, its value substantially from assets located in India. Shares of Flix Inc. would be deemed to derive its value substantially from the assets located in India, if on the specified date, the fair market value of Indian assets (without reduction of liabilities) i.e., fair market value of assets of XYZ Co. – exceeds 10crores; andrepresents at least 50% of the value of all the assets owned by the Flix Inc. Specified date would be the date of transfer i.e., 1.6.2023 since book value of the assets of Flix Inc. on the date of transfer i.e.,1,300 crores exceed the book value of the assets as on the last balance sheet date preceding the date of transfer i.e.,1,000 crores by at least 15%. Shares of Flix Inc. derives its value substantially from assets located in India since the fair market value of assets located in India (without reduction of liabilities) on 1.6.2023, being the specified date i.e.,600 crores exceed 10crores and represents more than 50% i.e., 54.545% of the fair market value of assets of Flix Inc. i.e.,1,100 crores. Hence, the shares of Flix Inc. would be deemed to be a capital asset situated in India and the capital gains from the transfer of shares of Flix Inc. by Angelo and James would be deemed to accrue or arise in India. Accordingly, the capital gains arising from transfer of shares of Flix Inc. would be taxable in the hands of Angelo and James in India as per Income-tax Act, 1961.

Topics: Non-Resident Taxation

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