TDS Default Quashed: Rate of 10% (Section 112) Applicable on Purchase of Unlisted Shares from Non-Resident, Not 20%

ISSUE

Whether an assessee is liable to be treated as an “assessee-in-default” under Section 201 for deducting tax at 11.54% (concessional rate) instead of 23.072% (general rate) on payments made to non-residents for the acquisition of unlisted equity shares, considering the provisions of Section 112(1)(c)(iii) read with Section 48.

FACTS

The Transaction: In the Assessment Year 2016-17, the assessee-company acquired equity shares of an Indian company from its non-resident shareholders.
The Remittance: The assessee remitted the purchase consideration after deducting TDS at the rate of 11.54% (Base rate 10% + Surcharge/Cess).
AO’s Action: The Assessing Officer (AO) treated the assessee as an “assessee-in-default” for short deduction. The AO contended that the applicable rate was 23.072% (Base rate 20%), arguing that the computation mechanism under Section 48 (First Proviso) should not lower the tax rate to the concessional slab meant for cases without indexation/forex benefits.
Assessee’s Stand: The assessee relied on Section 112(1)(c)(iii), which specifically prescribes a tax rate of 10% on long-term capital gains arising from the transfer of unlisted securities/shares by non-residents, provided the computation is done without giving effect to the first and second provisos to Section 48 (forex fluctuation and indexation).

DECISION

Rate vs. Computation: The Tribunal/Commissioner (Appeals) held that Section 112(1)(c)(iii) is a specific charging section that provides a beneficial tax rate of 10% for non-residents on unlisted shares.
Role of Section 48: The first and second provisos to Section 48 deal with the mode of computation (adjusting for forex fluctuation or inflation). They do not prescribe the rate of tax.
Correct TDS Rate: Since the assessee applied the specific rate (11.54%) prescribed by the Act for such transactions (unlisted shares sold by NR), they complied with the law. The general rate of 20% applies only when the specific concessional provision is not invoked or applicable.
Verdict: The CIT(A)’s direction to verify remittances using the 11.54% rate was upheld. [In Favour of Assessee]

KEY TAKEAWAYS

Section 112(1)(c)(iii) Benefit: This section is a goldmine for non-resident investors (PE/VC funds) exiting unlisted Indian companies. It offers a flat 10% tax rate on Long Term Capital Gains (LTCG), provided they forego indexation and forex fluctuation benefits.
TDS Obligation (Section 195): When buying shares from NRIs/Foreign entities, the buyer must deduct tax at the rates in force. If the seller qualifies for the 10% rate under Section 112, the buyer is justified in withholding at that lower rate (plus applicable surcharge/cess).
Provisos vs. Rates: Computation provisions (like indexation) cannot override specific rate schedules. If the Act says “Tax is 10% on X,” the AO cannot demand 20% just because the computation method is different.

IN THE ITAT MUMBAI BENCH ‘I’

Income-tax Officer

Godrej Agrovet Ltd.^*

Ms. Suchitra Kamble, Judicial Member
and Girish Agrawal, Accountant Member

IT Appeal No. 2026 (Mum) OF 2025
[Assessment year 2016-17]

DECEMBER 16, 2025

Krishna Kumar, Sr. DR for the Appellant. Nitesh Joshi, AR for the Respondent.

ORDER

Suchitra Kamble, Judicial Member. – This is an appeal filed against the order dated 27-12-2024 passed by CIT(A)-56, Mumbai and corrigendum to the Appeal order dated 06.01.2025.24.02.2025 for Assessment Year 2016-17.

2. The Revenue grounds of appeal are as under:-

1. “Whether on the facts and in the circumstances of the case and in law, the Hon’ble CIT(A) erred in holding that the non-resident assessee is entitled for the lower rate of taxation u/s 112(1)?”

2. “Whether on the facts and in the circumstances of the case and in law, the Hon’ble CIT(A) erred in not relying on the decision of the ITAT, Mumbai in the case of BASF Aktiengesellchaft v/s DDIT(293 ITR AT 001), wherein the ITAT has discussed and analysed in detail the issue involved.?”

3. The assessee is engaged in the business of manufacturing and marketing of high-quality animal feeds, innovative agriculture inputs and vegetable oil and allied products. During the financial year 2015-2016, the assessee acquired equity shares of Creamline Dairy Products Ltd, an unlisted Indian company, and equity shares of a listed company Astec Lifesciences Limited’ from their non-resident individual shareholders. The assessee remitted the purchase consideration to 10 non-resident individual shareholders on the following basis:

After deducting TDS @ 11.54% in terms of section 112(1)(c)(iii) from the gross purchase consideration (as against capital gains arising on transfer of shares) paid to 8 non-resident shareholders of unlisted company (CDPL).

In the absence of PAN of one shareholder, remittance to the non-resident shareholder was made after deducting TDS at 23.07% in terms of section 206AA r.w.s. 195 of the Income-tax Act from the gross purchase consideration (as against capital gains on transfer of shares).

In the case of 1 non-resident shareholder Mr. Suresh Vishwanath Hiremath, TDS has been deducted @ 11.54% in terms of first proviso to section 112 on the capital gains of Rs. 31,20,00,000 (purchase consideration Rs.31,35,00,000 minus cost of acquisition Rs.15,00,000).

The AO passed order u/s 201(1) on 22.03.2021 holding the appellant in default u/s 201(1). The AO computed the default u/s 201(1) at Rs. 1,25,15,614/- and computed interest u/s 201(1A) at Rs. 1,12,64,053/-. Thus, the total demand payable was worked out by the AO of Rs.2,37,79,667/-.

4. Aggrieved by the order of the AO u/s 201 of the Act, the assessee filed appeal before the CIT(A). The CIT(A) allowed the appeal of the assessee.

5. The Ld. DR submitted that the assessee has deducted TDS on the remittances at different rates. It has deducted @23.072% on remittances at Sr. No. 2 & Sr. No. 7 and on the remaining all nine remittances it has deducted TDS @ 11.54%. The assessee has not been able to justify the rate of 11.54% adopted by the assessee. The DR pointed out that for the rate of 10% as prescribed in Section 112(1)(c)(iii) of the Act, the first and second proviso to Section 48 are not considered. Further, the Ld. DR submitted that the assessee did not able to justify the said TDS rate adopted by it in respect of the said nine transactions. The assessee has provided evidence of deposit of TDS in respect of only six remittances namely transaction at Sr. No. 3, 4, 6, 7, 8 and 10 (Page 1 & 2 chart indicated in assessment order). In respect of remaining five transactions the assessee failed to provide the evidence of deposit of TDS. Further, in respect of its claim of error in Form 15CA in Sr. No. 2, the assessee was required to provide copy of bank statement evidencing that there was no transaction carried out corresponding to that reported in Sr. No. 2 of the table reported in notice under Section 133(6). Thus, the Ld. DR submitted that the assessee despite giving opportunities has not submitted bank statement at the time of assessment proceedings. The Ld. DR submitted that the Assessing Officer rightly held that the assessee should have deducted TDS at the rate of 23.072% for each transaction under Section 195 of the Act. The assessee also failed to furnish evidence of deposit of the said tax. Thus, the Ld. DR submitted that the CIT(A) was erred in law for holding that the first proviso below Section 112(1) of Income Tax Act applies to long term capital gains accruing to non-resident shareholders from sale of shares of listed company. The assessee was not right in deducting TDS @ 11.54% on the capital gains of Rs. 31,20,00,000/- accruing to Suresh Hiremath on sale of equity shares of Astec Lifesciences Ltd., as listed company, in terms of first proviso below Section 112(1). The Ld. DR further submitted that the direction given by the CIT(A) to the Assessing Officer to do the necessary verification in accordance with the provisions of law, and to re-compute these TDS raised demands in respect of eight remittances to the shareholders of Creamline Dairy Products Ltd. and one shareholder of Astec Lifesciences Ltd. are uncalled for and totally against provisions of Income Tax Act.

6. The Ld.AR submitted that the assessee has furnished confirmation letter from Tripuraneni Krishna confirming that there was only transaction was entered into that the assessee that of sale of Rs.70,600/- equity shares at sale price of Rs.457 per share and which was produce before the CIT(A) on which the Assessing Officer has give its remand report. The Ld.AR further submitted the bank statement of Kotak Mahindra Account held by assessee-company for the month of December 2015 reflects the payment made to Tripuraneni Krishna was also submitted. From the perusal of the bank statement only one payment of Rs.2,48,20,206/-(Purchase consideration of Rs.3,22,64,200 – TDS of Rs.74,43,996/- was made by the assessee to Tripuraneni Krishna on 28.12.2015. The payment of Rs.21,998.93 to Tripuraneni Krishna as the bank charges incurred for transfer of sale consideration to the party. The additional evidence submitted by the assessee during the appellate proceedings before the CIT(A) and the remand report has categorically mentioned that Tripuraneni Krishna has sold 70,600 equity shares Creamline Diary Products to Godrej Agrovat Limited at price of Rs.457/- per equity share of face value of Rs.10/-. The sales of shares were transferred by Tripuraneni Krishna to the assessee’s DP account maintained with ICICI Bank Limited in December 2015. On receipt of equity shares in the DP account of the assessee, the consideration for the same was wired/transferred to Tripuraneni Krishna by the assessee after withholding the taxes prevailing at that time. There is only one transaction of Rs.24,820,203/- made to Krishna Tripuraneni on 28.12.2015. The said transaction was confirmed by the Krishna Tripuraneni and there was no other transaction with the assessee in that year or any subsequent years. The Ld.AR further submitted that this remand report categorically mentioned that the assessee has given all the details related to the parties which was stated by the Assessing Officer that TDS was deducted at the time of payment and there was no further comment that the TDS deducted was not justify in the remand report. Thus, the Ld.AR submitted that the CIT(A) has rightly taken stand and directed the Assessing Officer for verification in accordance with the provision of law and to re-compute the TDS raised demand in respect of 8 remittances to the share holders of Creameline Dairy Products Ltd. and one shareholder of Astec Lifesciences Ltd. This corrigendum has categorically given the details and accordingly the Ld.AR relied upon the order of CIT(A) dated 27.12.2024 and the corrigendum dated 06.01.2025. The Ld. AR also relied on various judicial precedents as follows:

BASF Aktiengesellschaft v. Dy. DIT, International Taxation [2007] 12 SOT 451/293 ITR(AT) I (Mum-Trib).

ii.

Legatum Ventures Ltd. v. Asstt. CIT (International Taxation) (Mum-Trib).

iii.

Asstt. DIT (IT) v. Abbott Capital India Ltd SOT 121 (Mum-Trib) (URO).

iv.

CIT (IT) v. Honda Motor Co. Ltd. [WP (C) No.18 of 2018 & CM Appl. 34693 of 2018, dated 28-8-2018]

Cairn UK Holdings Ltd. v. DIT ITR 268 (Delhi).

vi.

CIT v. Mitsubishi Motors Corporation [IT Appeal No. 741 of 2016, dated 22-11-2016].

7. We have heard both the parties and perused all the relevant materials available on record. It is pertinent to note that the Ld.DR pointed out that the Assessing officer has rightly given the findings that the remaining 9 remittances, the TDS adopted was not justifiable at the rate of 10% prescribed in section 112(1)(c)(iii), the first and second proviso to section 48 was taken into account by the assessee. Thus, the Assessing Officer held that TDS rate adopted by the assessee is not justifiable in respect of 9 parties/transactions. Thus, the Assessing Officer held that assessee was in default u/s.201 of the Act and the Assessing Officer computed the default at Rs.1,25,15,614 and interest u/s.201(1A) computed at Rs.1,12,64,053/-.

8. From the perusal to first and second proviso to section 48 it can be seen that in the case of an assessee which is a non resident, capital gain arising from the transfer of capital asset being the share in Indian company shall be computed by 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 capital asset into the same foreign currency as was initially utilized for the purchase of 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 accruing or arising from the transfer of shares in any Indian company. Refer to 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. In the present case the contention of the Ld.DR that the first proviso and the second proviso to section 48 should have been taken into consideration by the assessee will not be justify that the assessee in fact has adopted the TDS at rate of 11.54% in consonance with the rate prescribed in section 112(1)(c)(iii) of the Act, in fact section 48 was considered by both the authorities but the Assessing Officer has totally ignored the conditions of section 48 prescribed. In fact the first and second proviso is in respect of mode of computation in respect of capital gain by deducting default value of the consideration or accruing in respect of income chargeable under the head and to that effect the TDS rate applied by the assessee has taken into account under the provisions of section 48 of the Act as well. All these aspect are categorically governed u/s. 112(1)(iii) of the Act. In the said provisions it is categorically mentioned that the rate of 10% for any transfer or tax place before 23^rd day of July 2024 should be adopted. In case of non-resident not being a company or a foreign company and exactly the same has been adopted by the assessee. The CIT(A) has categorically given direction to the Assessing Officer in light of section 112(1)(c)(iii) of the Act and the same is in consonance with the governing section in respect of TDS deduction as well and therefore directed the Assessing Officer to verify the remittances of the remaining parties at the rate of 11.54 % Therefore, we are of the considered view that there is no need to interfere with the order of the CIT(A) and Corrigendum dated 27.12.2024 and 06.01.2025. In fact the case laws relied upon by the Ld. AR also categorically supports the case of the assessee. Thus, the appeal of the Revenue is dismissed

9. In the result, the appeal of the Revenue is dismissed.