Delhi High Court holds proceedings on representative assessee invalid when principal taxpayer ceases to exist

This tax alert summarizes a recent ruling of the Delhi High Court (HC) in the case of Cairnhill CIPEF Ltd.  (Taxpayer). In this case, the issue before the HC was whether a person can be treated as a Representative Assessee (RA) of a non-resident (NR) for the purpose of tax recovery under the Indian Tax Laws (ITL) if the said non-resident had ceased to exist.

In this case, Taxpayer (BuyerCo) had purchased shares of an Indian listed company from a Mauritian Entity (SellerCo) in tax year 2015-16. Capital gains arising on such transfer were claimed to be exempt from taxation in India under the India-Mauritius Tax Treaty by SellerCo and such claim was also accepted by the tax authority in the original assessment carried out in the hands of SellerCo. Subsequently, SellerCo was liquidated and had ceased to exist. Later, the Commissioner of Income Tax (CIT) had passed orders to treat BuyerCo as an RA of SellerCo and revised the original assessment order to levy tax on BuyerCo on the said capital gains by denying treaty benefit.

On BuyerCo challenging the order of CIT, the HC held that BuyerCo cannot be regarded as an RA as the SellerCo was not in existence on the date when revisionary proceedings were initiated. The expression “agent” in the ITL suggests that there is a principal in existence, on whose behalf the agent acts, which is not fulfilled in the present case.