HC ruling in Cairn - Is FDI back to centrestage?


Recently, Delhi HC in the case of Cairn UK [TS-510-HC-2013(DEL)] held that a non-resident seller is eligible for lower rate of 10% on capital gains, on off-market sale of listed shares, as per proviso to Sec 112(1). In arriving at this decision, the HC followed  AAR ruling in Timken France SAS, which was also relied on by the  Authority in six other cases. However the immediately preceding AAR Chairman took an opposite view, which was  reversed by the High Court. Referring to SC ruling in Vodafone International Holding [TS-23-SC-2012], HC observed that there should be consistency and uniformity in interpretation of provisions as uncertainties can disable and harm governance of tax laws.

This once again brings to forefront the debate on whether there is indeed an interplay between FDI inflows and stability in tax regime. Should foreign investment be one of the criteria while deciding tax cases, or should Courts only strictly interpret the taxing provisions?


“Hon’ble Delhi High Court’s Judgment in the case of Cairn UK Holdings Limited, is first of its kind High Court judgment which affirms availability of concessional tax rate of 10% on capital gains on sale of listed shares in off market mode to non-resident investors. This judgment has overturned AAR’s only unfavorable ruling on this issue. AAR in similar cases (Timken France, Fujitsu Services etc) in the past held that that concessional rate of 10% is available to non-resident and this was considered to be settled position of law on this issue.


Hon’ble Court stated that legal position approved and adopted in the issue at hand in the case of Timken Franceshould be accepted. Ruling in the case of Timken France was negated by the AAR in case of Cairn UK Holdings Limited. Hon’ble Court has also discussed legislative intent and rules for interpreting law while arriving at this Judgment.


While like any other High Court Judgment on an income-tax issue, here also, question of law has been debated and rules of interpreting law have been discussed, but Hon’ble Court also emphasized on the fact that how certainty and stability forms the basis of foundation of any fiscal laws and tax policy...

View more

Mr. K R Sekar
Partner/,Tax,Deloitte Haskins & Sells
• The Delhi HC has held that non-resident is entitled to the lower rate of 10% is not based only on the Supreme Court observation in Vodafone relating to Foreign Investment flow. It is more based on the interpretation of Section 112 and based on the interplay between proviso to Section 48 and 112. The Delhi HC has concluded that the petitioner is not availing indexation benefit under section 48. Further the courts have relied upon the rulings of the AAR and in particular in Timken. The ruling in Timken which is followed by Delhi HC is correct interpretation considering the provisions of Section 112 and section 48. Hence in my view the ruling of Delhi HC is not purely based on interplay between FDI inflows and stability in tax regime. However having said that it is essential that tax laws should be certain and the approach in interpretation should be uniform. • Certainly one of the important issues affecting the country and tax environment is aggressive and narrow interpretation of tax laws defeating the object of the provisions. Hence the purposeful interpretation and objective interpretation should be followed. • The rulings of SC in Vodafone is absolutely relevant and the observations of SC is...

View more

Mr. Krishan Malhotra
head – taxation,Amarchand & Mangaldas & Suresh A. Shroff & Co.
The decision of the Hon’ble Delhi High Court in of Cairn UK Holdings Ltd. v. DIT , is welcome as it recognizes ‘certainty ’ as a vital pillar of a healthy fiscal system. The Hon’ble Delhi High Court has simply observed that the decision in Timken France SAS was followed by the Authority of Advance Rulings (‘AAR’) for three to four years. Therefore, absent any change in facts or law, there was no compelling justification to deviate from precedents and disturb the certainty in the law. This is also in conformity with the common law doctrine of stare decisis, which enforces judicial discipline by ensuring that precedents are valued to secure certainty in law. Courts have rightly held that certainty and stability are integral to the rule of law and form the foundation of any fiscal law. Currently, Indian policymakers are forced to address India’s present challenges of a current account deficit, depreciating Indian rupee and rising inflation by looking at policy initiatives that will attract foreign investment. FDI inflows infuse the necessary funds that propel a country’s economic growth and development. Although, foreign investors are willing to pay Indian taxes in accordance with the law, they appreciate...

View more

Mr. Rajendra Nayak
Partner, International Tax Services, EY
The question of availability of concessional rate of 10% on capital gains to a non-resident who pays tax on capital gains by adopting the applicable exchange rate has been a contentious issue. The view emerging from the earlier rulings [which includes rulings of the Authority for Advance Ruling (AAR) and the Income Tax Appelllate Tribunal had largely been favorable to taxpayers. The AAR ruling in the case of Cairn UK unsettled this position by taking a divergent view from its earlier ruling in the case of Timken France. The High Court ruling which overturns the ruling of the AAR and holds that the concessional rate of 10% applies to a non-resident taxpayer is a welcome decision which settles the controversy in favor of the Taxpayer. In doing so, the High Court referred to earlier favorable rulings of the AAR where a view in favor of the concessional rate was taken. The High Court held that benefit of concessional rate of tax would be available to the non-resident in respect of capital gains which is determined in the currency in which the shares were initially acquired. In the High Court’s view, the benefit of concessional rate was supported by the clear...

View more