IN A decision that may boost the incometax department’s chances of bringing the $11.1-billion deal between Hutchison International and Vodafone into the tax net, the Authority for Advance Rulings (AAR) has held in a similar case that transaction of Indian shares between two foreign entities is liable for capital gains tax in the country. AAR is a quasijudicial authority deciding on tax disputes. AAR’s ruling on Friday pertains to dealing of shares in the Hyderabad-based Trinity Corporation. In this case, the buyer and seller of Trinity shares were both US entities. AAR ruled that the buyer of the shares will be taken as an agent’ under Section 163 of the Income-Tax Act. It also ruled that the onus of TDS is also on the buyer under Section 195 of the Act. In other words, AAR ruled that the buyer of the shares is liable to pay capital gains tax on the transfer of shares of an Indian company even if the transaction is offshore and between two non-residents. The decision, though binding only on the case that came up before it, however, has persuasive value on similar cases. Non-residents are charged long-term capital gains at the rate of 20% for off-market transactions. AAR has upheld the I-T department’s stand on the ground that since the capital gains are generated in India, they are liable to be taxed here. In the case of the Hutch-Vodafone deal, a showcause notice has been served on Vodafone Essar, asking why the company should not be treated as an agent of Vodafone under the Income-Tax Act. After this, Vodafone Essar had moved the Bombay High Court for quashing the notice. In the case of Hutchison, the company took a stand that since the transfer of shares had taken place outside India between two non-residents, the Indian tax authorities could not levy capital gains tax. According to Vodafone Essar, the shares were transferred directly from Hutchison International via CGP Investment (Holdings), which is incorporated in the Cayman Islands, to Vodafone. Besides, the companies that control Hutchison Essar (HEL) are based in Mauritius, which has a double taxation avoidance agreement (DTAA) with India. The Bombay High Court, which was hearing the case of Vodafone International, had made a curious observation on this issue. The division Bench comprising Justice FI Rebello and Justice Deodhar observed that the deal as claimed by Vodafone International is not a simple case of a transfer of shares between two foreign companies.