Treaty capital gains on foreign share transfer taxed only in Belgium where domestic deeming fiction could not override the treaty.

Treaty capital gains on the transfer of shares in a Singapore company were held outside Article 13(5) of the India-Belgium tax treaty because that provision applies only to shares in a company resident in a Contracting State and contains no see-through rule. Explanation 5 to Section 9(1)(i) could not be imported into the treaty to deem the foreign company situated in or resident in India, since a domestic deeming fiction cannot enlarge treaty text. With Article 13(5) inapplicable, Article 13(6) governed the gains and allocated taxing rights only to Belgium, deleting the capital gains addition on indirect transfer grounds.

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Issues: (i) Whether gains arising from the transfer of shares of the Singapore company were taxable in India under Article 13(5) of the India-Belgium tax treaty; (ii) whether Explanation 5 to Section 9(1)(i) of the Income-tax Act, 1961 could be read into the treaty so as to deem the foreign company to be situated in India or resident in India; (iii) whether the gains fell under the residuary Article 13(6) and were taxable only in Belgium.

Issue (i): Whether gains arising from the transfer of shares of the Singapore company were taxable in India under Article 13(5) of the India-Belgium tax treaty.

Analysis: Article 13(5) applies only where the shares transferred form part of a participation of at least 10% in the capital stock of a company which is a resident of a Contracting State. The company whose shares were transferred was resident in Singapore, not in India or Belgium. The provision did not contain a see-through mechanism permitting the transfer of a holding company's shares to be treated as a transfer of the subsidiary's shares.

Conclusion: The charge under Article 13(5) was not attracted, and the issue was answered in favour of the assessee.

Issue (ii): Whether Explanation 5 to Section 9(1)(i) of the Income-tax Act, 1961 could be read into the treaty so as to deem the foreign company to be situated in India or resident in India.

Analysis: Explanation 5 was a domestic deeming provision intended to treat certain shares of a foreign company as situated in India for capital gains purposes. It did not deem the foreign company itself to be resident in India. A unilateral amendment in domestic law cannot override or be imported into a tax treaty in the absence of an express treaty provision. The domestic provisions invoked for interpretation could not enlarge the treaty beyond its text.

Conclusion: Explanation 5 could not be applied to convert the Singapore company into an resident for treaty purposes, and this issue was decided in favour of the assessee.

Issue (iii): Whether the gains fell under the residuary Article 13(6) and were taxable only in Belgium.

Analysis: Once Article 13(5) was held inapplicable, the transaction fell within Article 13(6), which governs gains from alienation of property not covered by the earlier paragraphs. Under that provision, the taxing right belongs only to the Contracting State of which the alienator is a resident. The assessee was a resident of Belgium.

Conclusion: The gains were taxable only in Belgium and not in India, so this issue was decided in favour of the assessee.

Final Conclusion: The addition of short-term capital gains made on the footing of indirect transfer and treaty taxation was deleted, and the assessment on this aspect could not be sustained.

Ratio Decidendi: A domestic deeming fiction treating shares of a foreign company as situated in India cannot be imported into a tax treaty to alter the treaty's residence and taxing-right allocation, and where the treaty's specific charging article is inapplicable, the residuary capital gains article governs taxation exclusively in the alienator's State of residence.

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