India: Madras High Court: Indian Company Is Not An Agent For Transfer Of Its Own Shares

Last Updated: 25 September 2018
Article by Shashwat Sharma and Shipra Padhi
  • An Indian company cannot be considered as an agent of its non-resident shareholders in relation to the overseas transfer of its shares.
  • Show cause notice on the Indian target entity as a representative assesse of a non-resident seller held to be without jurisdiction.
  • The availability of alternate remedies such as the right of reply to a show cause notice will not be a bar to the High Court exercising its writ jurisdiction in such cases.

Recently, the High Court of Madras (the "High Court"), in WABCO India Ltd v. Deputy Commissioner of Income Tax, Chennai1, held that an Indian company has no role to play in the transfer of shares which took place outside the territorial limits of India. Accordingly, such Indian company could not be treated as an agent or representative assessee of the non-resident taxpayer for the purposes of the Income Tax Act, 1961 ("ITA").


The taxpayer in this case (the "Taxpayer") is engaged in the business of designing, manufacturing and marketing conventional braking products, advance braking systems and other related air assisted products and systems. 75% of the shares of the Taxpayer were held by a holding company based in the United Kingdom, ("Hold Co.") and balance being held by the public. In 2014, Clayton transferred its entire shareholding in the Taxpayer to a group company in Singapore ("Singapore Co.").

A share transfer agreement was entered into between both the parties. In exchange for shares of the Taxpayer, Hold Co. received 50,55,05,000 shares of Singapore Co. as a sale consideration (the "Transaction"). These shares of Singapore Co. were valued at approximately INR 2347 Crores leading to capital gains to the tune of INR 2147 Crores (approx.) in the hands of Hold Co. The Deputy Commissioner of Income Tax had furnished a certificate under Section 197 of ITA to Hold Co. contemplating 'NIL' withholding of taxes.

A show-cause notice ("SCN") was issued under Section 163 (c) of the ITA,2 seeking a reply in writing from the Taxpayer as to why it shouldn't be treated as agent of Hold Co. in terms of the provision of Section 160 to 163 of the ITA in respect of the Transaction. In the SCN, it was alleged that during scrutiny assessment of Hold Co., that the place of effective management of Hold Co. was found to be the United Kingdom but Hold Co. had created a paper transaction to obtain the benefits of the India-Netherlands Double Taxation Avoidance Agreement. On this basis, it was argued by the tax authorities that the Transaction had resulted in a tax liability amounting to around INR 429 Crores (approx.) in the hands of Hold Co. and a draft assessment order was issued to this effect. The tax authorities took a position that these capital gains had directly arisen as a result of the consideration received from the Taxpayer.

The Taxpayer had filed a writ petition under Article 226 of the constitution of India before a Single Bench of the High Court which was dismissed on the ground that the Taxpayer had a right to reply to the SCN and no order had been passed by the revenue authorities up to that point. The Taxpayer was directed to reply to the SCN within 6 months of the dismissal of this writ petition. The Taxpayer filed an intra-court appeal against the order of dismissal of this writ petition.


Whether the SCN issued by the tax authorities could be set aside by the High Court in exercise of its writ jurisdiction?


Power of High Court to quash SCN:

The High Court observed that while it is true that typically, a High Court should not exercise its writ jurisdiction in cases where an alternate remedy exists, it has been consistently held by the Supreme Court that this bar will not operate in at least the below three situations:

  1. where the writ petition has been filed for the enforcement of a fundamental right;
  2. where there has been a violation of principle of natural justice; and
  3. where an order or alternatively proceedings are without jurisdiction or the constitutional vires of an Act is under challenge.3

The High Court agreed that a SCN is not ordinarily interfered with in proceedings under Article 226 of the Constitution of India. However, it also observed that in cases where a SCN is issued without jurisdiction or where the pre-requisite conditions for its issue have not been satisfied or where acts alleged in the SCN do not disclose any case for action against the notice, the High court may intervene and quash such a SCN.

The High Court noted that it was settled law that no authority, especially a quasi-judicial authority (such as the revenue authorities) can confer jurisdiction on itself by deciding a question of its jurisdiction erroneously.4 In view of the same, it disagreed with the approach of the Single Bench of the High Court and held that the Taxpayer's writ petition ought not to be dismissed merely because the Taxpayer had a right to reply to the SCN and the Single Bench should have satisfied itself on the question of jurisdictional facts which lead to the issue of the SCN.

Lack of Jurisdiction

The Taxpayer argued that the SCN lacked jurisdiction as the pre-requisite conditions for issuance of notice under Section 163 (1)(c) of the ITA had not been satisfied. In the instant case, the non-resident seller, i.e., Hold Co., was not in receipt of any money from the Taxpayer which is required under Section 163 (1)(c) of the ITA. The High Court relied on the judgment of the Supreme Court of India in the case of Clagget Brachi Co. Ltd. v. CIT,5 where it was held that it was open to an Income Tax Officer to assess either a non-resident taxpayer or to assess the agent of such non-resident taxpayer. However, once an assessment had been made on one, there could be no assessment on the other. In the instant case, a draft assessment order had already been issued to Hold Co. regarding its capital gains tax liability arising from the Transaction, and subsequently, a SCN was issued to the Taxpayer in respect of the same tax liability in its capacity as an agent of Hold Co. The High Court was further informed that this draft assessment order had been finalized and a final assessment order had been issued user Section 143(3) read with Section 144C of the ITA.

The High Court placed reliance on a judgment of the Delhi High Court in the case of General Electric Co. and another v. Deputy Director of Income-Tax and Others,6 involving strikingly similar facts. In this case through a series of transfers, the shares of an Indian company were ultimately transferred to a Luxembourg company. A show cause notice was issued to the Indian company alleging that the income arising to the foreign company from the sale of its direct/indirect stake in the Indian company was liable to tax in India in view of the deeming provisions in Section 9(1)(i) of the ITA. It was, thus, proposed to treat the Indian company as the representative assesse or agent of the non-resident taxpayer. The writ petition by the taxpayer challenged this show cause notice. The Revenue contended that the matter was still at the show cause notice stage and hence, the writ petition was premature.

The Delhi High Court had stressed on a harmonious reading of Sections 160 to 163 the ITA and struck down the show cause notice on the basis that the Indian entity / taxpayer cannot be a representative assesse of the transferor. The conclusion was based on the fact that (a) the transaction involved a transfer of shares to a third party situated outside India; (b) the Indian company had no role in the transfer and (c) merely because those shares related to the Indian company, that would not make the Indian company as agent of the foreign company which had made the capital gains.

The High Court found itself in complete agreement with the Delhi High Court and dismissed the argument of the tax authorities that the decision should not be relied upon as the revenue had appealed against it. Accordingly, the High Court allowed the appeal and set-aside the impugned order of the Single Bench as well as the SCN.


The judgment of the High Court is a welcome one for taxpayers as it clearly holds that the tax authorities may not issue a show cause notice in the absence of a clear case against the noticee. This will especially bring relief to taxpayers where the tax department seeks to issue multiple proceedings on multiple parties in the same transaction, without cause.

The decision of the High Court also re-affirms the well-established principle that a notice cannot be issued without jurisdiction, and such a notice can still be struck down by the High Court under its writ jurisdiction, even though there may in fact be an alternate remedy.

The contention of the revenue department that it was not open to taxpayers to "pre-maturely" challenge a show cause notice in the absence of orders being passed by the revenue department was dismissed. This approach followed by the High Court in this case will save taxpayers from harassment by way of getting embroiled in unwarranted tax litigation on account of frivolous notices.


1 W.A. No. 884 of 2018.

2 163. (1) For the purposes of this Act, "agent", in relation to a non-resident, 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 non-resident, has acquired by means of a transfer, a capital asset in India....

3 State of U.P. v. Mohd. Nooh A.I.R. 1958 S.C. 86; A.V. Venkateswaran, Collector of Customs vs. Ramchand Sobhraj
AIR 1961 SC 1506; Calcutta Discount Co. Ltd v. ITO Companies Distt. I., A.I.R. 1961 S.C. 372; Whirlpool Corporation vs. Registrar of Trade Marks (1998) 8 SCC 1.

4 Raza Textiles Ltd. v. Income Tax Officer (1973) 1 S.C.C. 633.

5 (1989) 44 Taxman 186 (SC).

6 (2012) 347 I.T.R. 60 (Del.).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Shashwat Sharma
In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions