An Analysis on:

Transfer of shares of an Indian Company from Non Resident to Non

Resident
CA Kamal K Arora (karoraca@gmail.com)

________________________________________________________
FEMA REGULATIONS:

The foremost question is whether such transfer of shares of an

existing Indian Company from Non Resident to another Non Resident
is permitted under the FEMA Regulations?

For this attention is drawn to Regulation 9 of the Foreign Exchange

Management (Transfer or Issue of Security by a Person Resident
Outside India) Regulations, 2000 which states as under:
Transfer of shares and convertible debentures of an Indian company by a
person resident outside India.
9. (1) Subject to the provisions of sub-regulation (2), a person resident outside
India holding the shares or debentures of an Indian company in accordance with
these Regulations, may transfer the shares or debentures so held by him, in
compliance with the conditions specified in the relevant Schedule of these
regulations.

(2)(i) A person resident outside India, not being a non-resident Indian or an

overseas corporate body, may transfer by way of sale or gift the shares or
convertible debentures held by him or it to any person resident outside India;
(ii) A non-resident Indian may transfer by way of sale or gift, the shares or
convertible debentures held by him or it to another non-resident Indian only;

(iii) A person resident outside India holding the shares or convertible debentures of
an Indian company in accordance with these Regulations,
(a) may transfer the same to a person resident in India by way of gift;

(b) may sell the same on a recognized Stock Exchange in India through a
registered broker.

The above regulation states that Non Resident Indian can only
transfer the shares of an Indian Company ONLY to another Non
Resident Indian while allowing any Non Resident to transfer the
shares to any Non Resident including Non Resident Indian.
Further, Regulation 2 and 3 places restrictions on the person as well
as on the Indian Company to transfer the shares otherwise than in
accordance with the Regulations specifically allowing such transfers
or issue of shares. The Regulations read as under:

Restriction on issue or transfer of Security by a person resident outside

India.
3. Save as otherwise provided in the Act, or rules or regulations made thereunder,
no person resident outside India shall issue or transfer any security:

Provided that a security issued prior to, and held on, the date of commencement of
these Regulations, shall be deemed to have been issued under these Regulations
and shall accordingly be governed by these Regulations :
Provided further that the Reserve Bank may, on an application made to it and for
sufficient reasons, permit a person resident outside India to issue or transfer any
security, subject to such conditions as may be considered necessary.
Restriction on an Indian entity to issue security to a person resident outside
India or to record a transfer of security from or to such a person in its books.

4. Save as otherwise provided in the Act or Rules or Regulations made thereunder,

an Indian entity shall not issue any security to a person resident outside India or
shall not record in its books any transfer of security from or to such person :
Provided that the Reserve Bank may, on an application made to it and for
sufficient reasons, permit an entity to issue any security to a person resident
outside India or to record in its books transfer of security from or to such person,
subject to such conditions as may be considered necessary.

However, the above regulations do allow Reserve Bank of India to

grant specific permission to the Person or the Indian entity to allow
such transfer subject to such conditions as RBI may impose.

Further, the Regulations governing transfer of shares from Non

Resident to another Non Resident do not prescribe for pricing
guidelines which are otherwise applicable in case of transfer of
shares from Non Resident to Resident or vice versa.

However, although the pricing guidelines may not have been

prescribed under the FEMA Regulations, never the less the same is
required under the Income Tax Act.
INCOME TAX PROVISIONS:

Now the other important aspect is to analyze the implications under

the Income Tax Act, 1961.

For any Income to be taxable in respect of Non Resident, it is

important that the same should be taxable under the provisions of
the Income Tax Act and should not be either exempt under the
provisions of the Double Tax Avoidance Agreement.

The relevant provisions for determining the taxability of Non

Resident are Section 4, 5, 6 and 9 of the Income Tax Act,1961. While
Section 4 of the Act is the charging provision, Section 5 lays down the
scope of Income chargeable to tax in case of Residents, Not Ordinary
Residents and Non residents elaborating that in case of Non
Residents, what is chargeable to tax is Income received or deemed to
be received in India or Income arising or accruing or deemed to be
arising or accruing in India. Section 6 lays down the definition of
Residents and Non Residents.
Section 9 of the Act lays down the deeming fiction for taxability of
certain Incomes of Non Residents deemed to be received or arising
or accruing in India.
As per Section 9, all incomes arising, whether directly or indirectly,
through the transfer of Capital Assets situate in India would be

deemed to be arising in India. It therefore, envisages taxability of

capital gains that may otherwise arise outside India due to transfer
taking place outside India but is still deemed to be arising in India if
the capital Asset transferred is situated in India. Also in the matter of
Triniti Corporation v. Commissioner of Income Tax decided by
Authority for Advance Rulings New Delhi, (A.A.R. No. 740 of 2006, on
16.11.2007), it was held that: In simple words, even if the
transaction relating to a capital assets takes place outside India but if
the capital asset is situated in India, the profits or gains thereon, is
accruing or arising in India in consonance with the provisions of
Section 9(1)(i) of the Act and is thus assessable under the head
'Capital gains' under the relevant provisions of IT Act. Thus any
capital gain arising out of transfer of shares from Non Resident to
another Non Resident would still be chargeable to tax in India.

However, taxability of Income on the basis of provisions contained

under the Income Tax Act, 1961 is further subject to the Articles as
contained under the Double Tax Avoidance Agreements (DTAA). It is
a settled law that the provisions under DTAA override the provisions
under the Income Tax Act. Further, in light of the provisions under
Section 90(2) of the Act, Central Board of Direct Taxes (CBDT)
circular No. 333 dated April 2,1982 and the decision in the case of
Vishakhapatnam Port Trust (144 TR 146), in case the provisions
under the Act are more beneficial, the same must apply.

Article 13 of the DTAAs usually contains scope of taxability on Capital

Gains as per the OECD and UN models. The model usually provide
right of the Country of Residence to impose tax on capital gains
arising out of alienation of the assets i.e. the Country of which the
person is a tax resident. However, for some assets, country of source
is given the right to tax the capital gains i.e. the country in which the
assets is located (situs of the asset).

DTAAs with countries like Mauritius, Singapore, Cyprus provide for

taxability of Capital Gains in the Country of Residence. Depending
upon the tax laws of the Country of Residence whereby no capital
gains tax is levied, there may not be any capital gains tax implication
at all. However, one may still have to be cautious as the Tax
Authorities may try to strike down the neutrality of tax by bringing
about a case of Treaty shopping and lack of commercial substance in
the other country. Although CBDT in its Circular No. 789 stated that
wherever a Tax Residency Certificate is issued by the Mauritian
Revenue Authorities, it will be sufficient evidence for residence and
beneficial ownership for applying the provisions of the DTAA. The
Supreme Court in Union of India vs. Azadi Bachao Andolan (2003)
263 ITR 706 (SC) upheld the validity of this circular. But however, The
Bombay High Court in the case of Aditya Birla Nuvo Ltd vs DDIT 342
ITR 308 (Bom) held that, based on the facts of the case, even though
the Mauritian company was the registered owner of the Indian
company's shares, it could not be regarded as the legal/beneficial
owner of the income accruing thereon. The Court further held that
both the circular and the Supreme Court decision in Azadi Bachao
Andolan are not applicable to the facts of the case as the gains may
not have arisen to a Mauritius taxpayer.
In some of the DTAAs such as with UK and USA, it is provided that
each country can tax capital gains based on the domestic laws of the
respective countries.
If India derives the right to tax capital gains based on the DTAAs then
the tax will be determined in accordance with the provisions
contained in the Income Tax Act,1961.

Having ascertained that in view of the provisions under the Income

Tax Act, 1961 and in consonance with the applicable Double Tax
Avoidance Agreement, the Capital Gains arising on account of
transfer of shares from Non Resident to another Non Resident would
be taxable in India, the other important aspect would be the value to

be considered for such transaction for the purpose of working out

the Capital Gains Tax.

Once it is ascertained that the transfer of shares attracts capital gains

tax, the provisions contained under the Income Tax Act,1961 would
become applicable for the purpose of calculation of capital gains tax
including determining the valuation to be adopted. Section 48 of the
Income Tax Act provides for the mode of computation which reads
as under:
The income chargeable under the head "Capital gains" shall be
computed, by deducting from the full value of the consideration
received or accruing as a result of the transfer of the capital asset the
following amounts, namely :
(i) expenditure incurred wholly and exclusively in connection with
such transfer;
(ii) the cost of acquisition of the asset and the cost of any
improvement thereto:
Provided that in the case of an assessee, who is a non-resident,
capital gains arising from the transfer of a capital asset being shares
in, or debentures of, an Indian company shall be computed by
converting the cost of acquisition, expenditure incurred wholly and
exclusively in connection with such transfer and the full value of the
consideration received or accruing as a result of the transfer of the
capital asset into the same foreign currency as was initially utilised in
the purchase of the shares or debentures, and the capital gains so
computed in such foreign currency shall be reconverted into Indian
currency, so, however, that the aforesaid manner of computation of
capital gains shall be applicable in respect of capital gains accruing or
arising from every reinvestment thereafter in, and sale of, shares in,
or debentures of, an Indian company :
Provided further that where long-term capital gain arises from the
transfer of a long-term capital asset, other than capital gain arising to
a non-resident from the transfer of shares in, or debentures of, an

Indian company referred to in the first proviso, the provisions of

clause (ii) shall have effect as if for the words "cost of acquisition"
and "cost of any improvement", the words "indexed cost of
acquisition" and "indexed cost of any improvement" had respectively
been substituted:
Provided also that nothing contained in the second proviso shall
apply to the long-term capital gain arising from the transfer of a longterm capital asset being bond or debenture other than capital
indexed bonds issued by the Government:
Provided also that where shares, debentures or warrants referred to
in the proviso to clause (iii) of section 47 are transferred under a gift
or an irrevocable trust, the market value on the date of such transfer
shall be deemed to be the full value of consideration received or
accruing as a result of transfer for the purposes of this section;

On perusal of the above section, it is noticed that Capital Gains is to

be computed with reference to the FULL VALUE OF
CONSIDERATION RECEIVED OR ACCRUING. Although in
respect of certain capital assets like immovable property, provisions
have been made u/s 50C of the Income Tax Act to adopt the value as
per stamp duty and also for adoption of Fair Market Value in
circumstances specified u/s 45(1A), 45(2) and 45(4) of the Income
Tax Act,1961 but there is no specific provision for substitution of any
other value other than what is agreed upon between the transferor and
transferee in case of transfer of shares under sale. The Honble
Supreme Court had in the past in the matter of George Henderson &
Co.Ltd.(66 ITR 622) had discussed the principles of fair market value
and full consideration as under :
"The expression full value of the consideration for which the sale,
exchange or transfer of the capital asset is made, appearing in section
12B(2) of the Indian Income-tax Act, 1922, does not mean the market
value of the asset transferred, but the price bargained for by the
parties to the sale, etc. The consideration for the transfer of a capital
asset is what the transferor receives in lieu of the asset he parts with,
viz., money or money's worth, and therefore the very asset transferred

or parted with cannot be the consideration for the transfer. The

expression full consideration in the main part of section
12B(2) cannot be construed as having a reference to the market value
of the asset transferred but the expression only means the full value of
the thing received by the transferor in exchange for the capital asset
transferred by him. The main part of section 12B(2) provides that the
amount of capital gain shall be computed after making certain
deductions from the full value of the consideration for which the sale,
exchange or transfer of the capital asset is made. In the case of a sale,
the full value of the consideration is the full sale price actually paid."
Similarly, in the case of Gillanders Arbuthnot and Co. (87 ITR 407)
issue of determining the full value of consideration on sale of shares
had arisen. Hon'ble Apex Court had decided the issue as under:

"...the transaction in question was a sale and not an exchange or a

mere readjustment. Clause 1 of the agreement in specific terms said
that the existing partners shall sell and the company shall purchase the
shares and securities for Rs. 75 lakhs. Clause 3 merely provided a
mode of satisfaction of the sale price. The sale price fixed by the
parties was the sum of Rs. 75 lakhs and no more and the fact that the
assessee-firm obtained considerable profits as a result of the allotment
of the shares in the company did not alter the nature of the transaction
or convert the sale into an exchange....That in the case of a sale for a
price, there was no question of any market value, unlike in the case of
an exchange. Therefore, in cases of sales to which the first proviso
to section 12B(2)was not attracted, all that one had to see was what
was the consideration bargained for."
Similar view was held by the ITAT (Mumbai) in the case of ACIT
Vs. B. Arun Kumar & Co. and ITAT (Ahmedabad) in the case of ITO
Vs. Newton Investment Co. Pvt. Ltd.

The applicable tax rates on capital gains by Non Resident is

determined under Section 111A, Section 112 and the 'rates in force' as
prescribed under the Finance Act. Surcharge and education cess, as
applicable, are added to these rates.

Section 111A provides applicable rates on short term capital gains

@15% whereby Security transaction tax(STT) has been levied else
applicable tax rates shall be rates in force as per the relevant Finance
Act. Section 112(1)(c) provides for applicable tax rates for Non
Residents on long term capital gains whereby it prescribes for 10% in
case of transfer of listed securities where STT is not paid and without
claiming the benefits of indexation. Further, it prescribes for tax @
10% in case of transfer of unlisted securities and shares of Private
Companies (with effect from AY 2017-18) without claiming the
benefits of indexation and foreign exchange (first and second proviso
to section 48). In all other cases, applicable tax rates shall be @ 20%.

However, there is another angle to it in terms of tax payable by the

transferee under section 56(2)(vii)/(viia) of the Income Tax Act, 1961.
The relevant Section reads as under:
(vii) Where an individual or a Hindu undivided family receives, in
any previous year, from any person or persons on or after the 1st
day of October, 2009,
(c) any property, other than immovable property,
(i) without consideration, the aggregate fair market value
of which exceeds fifty thousand rupees, the whole of
the aggregate fair market value of such property;
(ii) for a consideration which is less than the aggregate
fair market value of the property by an amount
exceeding fifty thousand rupees, the aggregate fair
market value of such property as exceeds such
consideration :
(viia) where a firm or a company not being a company in which the
public are substantially interested, receives, in any previous year,
from any person or persons, on or after the 1st day of June, 2010,
any property, being shares of a company not being a company in
which the public are substantially interested,
(i) without consideration, the aggregate fair market value of
which exceeds fifty thousand rupees, the whole of the
aggregate fair market value of such property;

(ii) for a consideration which is less than the aggregate fair

market value of the property by an amount exceeding fifty
thousand rupees, the aggregate fair market value of such
property as exceeds such consideration :
As for determining the fair market value of shares in terms of Section
56(2)(vii)/(viia), Rule 11UA have been notified for the purpose. The
Rules broadly prescribe for working out the fair market value as
under:
in case of listed shares if the transaction is carried out through a stock
exchange then at transaction value and in case the transaction is not
carried out through the stock exchange, then at lowest quoted rate on
the exchange on the transaction date;
in case of unquoted shares, at break- up value (NAV); and
in case of other unquoted securities, at a price that would be fetched
in the open market as determined by the Merchant Banker or a
Chartered Accountant.
The above provisions are applicable to individuals, HUF, firms and
closely held Companies be it resident or non-resident. The purpose of
this provision is to bring to tax any income on account of
property(shares) received either without consideration or at a
consideration which is lower than the fair market value worked out in
terms of the Rule notified for the purpose. The income arising on
account of the above provisions is taxable in the hands of the
transferee as Income from other sources and thus normal rates of
taxation shall apply.
But however, as non residents can always seek solace under the
Double Tax Avoidance Agreement, the taxability under Section
56(2)(vii)/(viia) will be determined as per the provisions of domestic
laws or relevant DTAAs, whichever is more beneficial.
Under the DTAAs, such income may be governed by the Article
dealing with 'Other Income'.

Most of the DTAAs entered into by India provide that 'Other Income'
earned by a resident of a Country may be taxable in both the
Countries. However, India's DTAAs with some countries like

Mauritius, Germany, Hungary, Czech Republic provide for right of

the Country of Residence only to tax items of other Income.

However, one must be cautious here too in claiming the benefits

under DTAA with regard to Income envisaged under section
56(2)(vii)/(viia) as the relevant Article under DTAAs refer to items of
other income arising in a State and arising may not encompass
within its meaning deemed Income as envisaged under Section
56(2)(vii)/(viia).
If India derives the right to tax Other Income either due to non
existence of DTAA or where the DTAA does not provide for "Other
Income' to be taxed in resident country alone, then the provisions of
sections 56(2)(vii) and 56(2)(viia) would apply and income earned by
such non-residents would be subject to tax in India.

Before making payment on account of transfer of shares, one must

pay attention to provisions of withholding tax as required under
section 195 of the Income Tax Act,1961 which requires that any
person responsible for paying to non-resident any interest or other
sums chargeable to tax except salaries shall, at the time of payment or
credit, whichever is earlier, deduct income tax thereon at the rates in
force.
Explanation 2 makes it amply clear that the obligation cast by virtue
of this provision shall apply to non-resident as well whether or not the
non- resident has any residence, place of business, connection or any
other presence whatsoever in India.
The liability to deduct tax is only on that portion of income which is
chargeable to tax and not on the whole gross amount. The Honble
Supreme Court in the case of GE India Technology Cen. (P.) Ltd. vs.
CIT [2010] 193 TAXMAN 234 (SC) has held that The obligation to
deduct tax at source is, however, limited to the appropriate proportion
of income chargeable under the Act forming part of the gross sum of
money payable to the non- resident.

One of the other requirements under Section 206AA of the Income

Tax Act, 1961 in respect of Tax Deducted at Source is to furnish PAN
number by the payee or else the statute requires to deduct tax at

source @ 20% in case the rates prescribed under the Act or the rates
in force are lower than 20%. The Section enumerates as under:

206AA. (1) Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income
or amount, on which tax is deductible under Chapter XVIIB (hereafter
referred to as deductee) shall furnish his Permanent Account Number
to the person responsible for deducting such tax (hereafter referred to
as deductor), failing which tax shall be deducted at the higher of the
following rates, namely:
(i) at the rate specified in the relevant provision of this Act; or
(ii) at the rate or rates in force; or
(iii) at the rate of twenty per cent.
The provisions u/s 206AA of the Income Tax Act,1961 may not be
attracted in case there is no tax payable either under the Income Tax
Act or under the DTAA as it specifies that it is applicable on amount
on which tax is deductible under Chapter XVIIB.

Although Section 206AA is an overriding section by virtue of it

beginning with Non obstante clause but yet it has been held by ITAT
Pune in the case of DDIT vs. Serum Institute of India Limited (ITAT
Pune) 2015 56 Taxmann 1that it cannot override the provisions under
DTAA. It was held that where the tax has been deducted on the
strength of the beneficial provisions of section DTAAs, the provisions
of section 206AA of the Act cannot be invoked by the Assessing
Officer to insist on the tax deduction @ 20%, having regard to the
overriding nature of the provisions of section 90(2) of the Act.
Further one must also take note of provisions under section 160 and
163 of the Income Tax Act,1961whereby the vicarious liability to tax
may be attached to some other person(Representative Assessee) by
treating the other person as agent of the Non-resident. The relevant
extract of Section 163 of the Income Tax Act,1961 reads as under:

(1) For the purposes of this Act, "agent", in relation to a nonresident, includes any person in India
(a) who is employed by or on behalf of the non-resident; or

(b) who has any business connection with the non-resident; or

(c) from or through whom the non-resident is in receipt of any
income, whether directly or indirectly; or
(d) who is the trustee of the non-resident;
and includes also any other person who, whether a resident or nonresident, has acquired by means of a transfer, a capital asset in India :

Although Section 163 provides for inclusive clause, it was held in the
case of Triniti Corporation (165 Taxman 272) AAR that A close
look into the extract of Section 163 of the Act, as against the facts of
the case, reveals that as per the 'inclusive clause' of the aforesaid
section, where the income in question is capital gains arising to the
non-resident by reason of his having transferred a capital asset
situated in India, the transferee (the applicant) may be assessed as a
representative assessee of the transferor; he (the 'transferee') is a
person who has purchased the asset and has also paid the saleconsideration. Such transferee, as the inclusive provision of
the Section 163 of the Act stipulates, may either be a resident or a
non-resident.
Apart from the above, other aspects such as payment of stamp duty,
provisions under Companies Act,2013 for effecting transfer of shares
etc should also be considered in a transaction involving transfer of
shares from Non Resident to another Non Resident of an Indian
Company .