Treaty residence rule for share-sale gains: Cyprus taxing rights prevail and no Indian withholding applied.

Under the India-Cyprus DTAA then in force, capital gains from a Cyprus resident's transfer of shares in an Indian company did not fall within the treaty rules for immovable property, business property connected with a permanent establishment or fixed base, or ships and aircraft. The gain therefore fell within the residual article for other property, under which such gains are taxable only in the State of residence of the alienator. On that basis, the gains were taxable only in Cyprus, not in India, and the Indian purchaser was not required to deduct tax at source under section 195 on the sale consideration.

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Issues: Whether capital gains arising to a Cyprus resident from the transfer of shares of an Indian company were taxable in India under the applicable India-Cyprus Double Taxation Avoidance Agreement, and whether the Indian purchaser was required to deduct tax at source under section 195 of the Income-tax Act, 1961.

Analysis: The applicable treaty for the assessment year was the India-Cyprus Double Taxation Avoidance Agreement then in force. Article 14(1) dealt with gains from alienation of immovable property, Article 14(2) with gains from property connected with a permanent establishment or fixed base, and Article 14(3) with ships, aircraft, and related property. The transfer in question was of shares of an Indian company by a Cyprus resident, and it did not fall within those categories. It therefore fell within Article 14(4), under which gains from the alienation of property other than that covered by paragraphs 1 to 3 are taxable only in the State of residence of the alienator.

Conclusion: The capital gains were taxable only in Cyprus and not in India, and no tax was required to be withheld in India on the remittance of the sale consideration. The challenge to the deletion of the addition failed.

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