TaxTMI 
TaxTMI 
2014 (1) TMI 34
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.... of taxing the capital gains arising out of sale of shares which it was holding and also taxability of interest received for the amount belatedly paid by the buyer. The assessee has raised the following grounds : " On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) : 1. Erred in not considering the submissions, judicial precedents submitted by the appellant and not passing a speaking order in relation to all the grounds of appeal filed by the appellant. 2. Erred in not applying the provisions of article 13(4) and 13(5) of the Double Taxation Avoidance Agreement which specifically deal with the taxation of capital gains arising on alienation of shares. 3. Erred in holding that the company owning the industrial park is nothing but an immovable property along with furniture and fixtures and that the alienation of 100 per cent. shares of such company implies that the rights to enjoy the industrial park is now vested with the purchaser, disregarding the appellant's submissions that the property of the company is n....
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....n company for Rs. 2, 24,50,00,000 to M/s. Ascendas Property Fund (India) Pte Ltd., a Singapore based company ("Ascendas" or "purchaser") and has earned long-term capital gains amounting to Rs. 156,93,64,751. The purchaser has also paid interest amounting to Rs. 49,43,750 towards delay in payment of sale consideration. The purchaser has withheld taxes amounting to Rs. 35,24,00,000 on long-term capital gains and Rs. 20,67,476 on the interest payment and remitted the same to the authorities. 5. The assessee filed its return of income on 1st November 2005 for the assessment year 2005-06 claiming a refund of the taxes withheld amounting to Rs. 35,44,67,476. In the return of income, the assessee had claimed that the long-term capital gains arising on the transaction were liable to be taxed in India. However, under the provisions of article 13 of the Double Taxation Avoidance Agreement between India and the Netherlands ("DTAA" or "tax treaty") the same is not taxable in India. Further the assessee also claimed that the interest income is not liable to tax in India as the same does not accrue or arise in India. The assessee has also mentioned that the Indian company had made an app....
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....not applicable in the present case as the project of the Indian company was not notified when the investment was made by the assessee. • that the approval of the project under section 10(23G) of the Act on the date of investment is a prerequisite to the enjoyment of the exemption benefits on such investment. • That the judgment of the Hyderabad, Income tax Appellate Tribunal in the case of VBC Ferro Alloys Ltd. v. Asst. CIT [2007] 107 ITD 367 (Hyderabad) which granted relief under section 10(23G) was against the intent of the Legislature and that the Department has filed an appeal before the hon'ble Andhra Pradesh High Court. • That in relation to taxability of the interest income, the interest income arose or accrued to the assessee through a transaction involving sale of capital asset situated in India and is hence taxable in India as the interest is deemed to accrue or arise in India as per the provisions of section 9 of the Act. 8. Aggrieved by the order passed by the Assessing Officer, the assessee filed an appeal before the Commissioner of Income-tax (Appeals)-VI. The Commissioner of Incometax (Appeals)-V issued notices from time to t....
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....e-tax (Appeals) about the taxability of the capital gains does not arise as the assessee has admitted that the capital gain is exigible to the Indian income-tax. What the assessee is claiming is relief under the Double Taxation Avoidance Agreement and also exemption under section 10(23G) in the alternate. Referring to the facts of the case, learned counsel submitted that the industrial park is the business property of the Indian company which has been leased out to various software development companies registered with the Software Technology Park, Hyderabad and they are operating their business from the industrial park. It was submitted that the shareholders of the Indian company neither occupy nor enjoy any such ownership rights in the property of the Indian company in accordance with the articles of association. It was his submission that the Indian company was claiming benefit under section 80-IA and the assessee has no right or interest in the immovable property of the company but has only interest in shares. It was further submitted that as a shareholder in the company as per the Companies Act, the rights are limited to electing directors, participating in dividends and shari....
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....ble property" to the transaction of sale of shares of a company is applicable only in case where such transaction enables shareholders of the company, the enjoyment of the property of the company. In the light of this definition, since the assessee sold the shares to another foreign company which cannot enjoy the property of the Indian company, the said definition cannot include the transaction of the assessee, nor can it be extended. It was further submitted that under the articles of the Indian company, shareholder does not have any right in the property of the Indian company and relied on the decision of the hon'ble Bombay High Court in the case of CIT v. Mahendra J. Shah [1979] 118 ITR 902 (Bom) for the definition of owner and the decision of the Income-tax Appellate Tribunal in the case of Westwind Realtors P. Ltd. v. Deputy CIT [2006] 9 SOT 572 (Mum) for the proposition that in the absence of right to use the property the opinion of the Assessing Officer does not stand. He then referred to the decision of the hon'ble Supreme Court in the case of Andhra Pradesh State Road Transport Corpn. v. ITO [1964] 52 ITR 524 (SC) wherein the hon'ble Supreme Court held that the income of t....
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....s derived by an investor out of the investment in the infrastructure projects and approved by the Central Government are exempt under the provisions of section 10(23G). 14. With reference to the controversy/opinion of the Assessing Officer that the investments made before the assessment year 2000-01 cannot fall within the provisions of the section 10(23G) learned counsel relied on the decision of the Income-tax Appellate Tribunal, Hyderabad in the case of VBC Ferro Alloys Ltd. [2007] 107 ITD 367 (Hyderabad) wherein this issue was discussed elaborately and held that investments made before June 1, 1998 are also eligible for exemption under section 10(23G). It was his submission that long-term capital gain arising to the assessee-company was also exempt under section 10(23G). He also relied on the decision of the Income-tax Appellate Tribunal in the case of Crompton Greaves Ltd. v. Joint CIT in ITA Nos. 4672/Mum/2003 and 2785/Mum/2007 that investments made earlier on any infrastructure project were also applicable even though such section was not in existence when the investments were made. 15. With reference to the issue of taxability of interest income it was submitted that t....
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....o tax the entire amount. He relied on orders of the Assessing Officer and the Commissioner of Income-tax (Appeals) affirming the taxability of capital gains and interest income. 17. We have considered the rival submissions in detail and the paper book placed on record. Even though the learned Commissioner of Income-tax (Appeals) devoted considerable part of his order in deciding the issue whether the transaction is exigible to capital gain under the Indian Incometax Act, there is no dispute with reference to that issue as the assessee itself has offered capital gain but claimed exemption by virtue of the Double Taxation Avoidance Agreement in the first instance or in the alternate by virtue of provisions of section 10(23G) which allows the exemption of longterm capital gain on investments made in infrastructure projects. It was the Assessing Officer's contention that the capital gains arising out of sale of shares in the Indian company is taxable in India as he invoked the provisions of article 13(1), whereas the assessee claims exemption by virtue of article 13(4) and article 13(5) of the Double Taxation Avoidance Agreement. In the alternate the assessee also claims exemption f....
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....of the shares of the capital stock of a company. 5. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 4, shall be taxable only in the State of which the alienator is a resident. However, gains from the alienation of shares issued by a company resident in the other State which shares form part of at least a 10 per cent. interest in the capital stock of that company, may be taxed in that other State if the alienation takes place to a resident of that other State. However, such gains shall remain taxable only in the State of which the alienator is a resident if such gains are realised in the course of a corporate organisation, re-organisation, amalgamation, division or similar transaction, and the buyer or the seller owns at least 10 percent of the capital of the other. 6. The provisions of paragraph 3 shall not affect the right of each of the States to levy according to its own law a tax on gains from the alienation of the shares or "jouissance" rights in a company, the capital of which is wholly or partly divided into shares and which under the laws of that State is a resident of that State, derived by an individual who is a reside....
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.... of whatever nature), not being a transaction by way of sale, exchange or lease of such land, building or part of a building ;" This provision is referred in section 2(47) to be applicable only with reference to sub-clauses (v) and (vi) only. Section 2(47) is as under : Section 2 (47) "(47) 'transfer', in relation to a capital asset, includes, (i) the sale, exchange or relinquishment of the asset ; or (ii) the extinguishment of any rights therein ; or (iii) the compulsory acquisition thereof under any law ; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ; or (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which h....
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....ion 2(47) is in a situation where such transactions enable the shareholder of the company or a member of the society, the enjoyment of the property. In the present case the assessee does not enjoy the property of the company which in this case is an industrial park, a business property of the Indian company. Therefore the said definition relied on by the Revenue does not apply to the facts of the case. 23. It is also to be examined whether the "immovable property" definition provided under the Income-tax Act under section 269UA(d) is the law of the State under the Double Taxation Avoidance Agreement. Even though the Income-tax Act does not define "immovable property" in section 2 of the Income-tax Act, section 269UA(d) defines immovable property for specific purposes. Even in section 2(47), the definition of immovable property has a restricted applicability. Therefore, it cannot be considered that "immovable property" as defined in section 269UA(d) has a general purpose definition under the common law. It is also to be noted that immovable property has also been defined differently under section 11(5), clause (x) of the Income-tax Act. In the case of income from property held fo....
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.... the building for the beneficial use thereof, must be deemed to be a part of the building and for the beneficial use thereof, must be deemed to be a part of the building and the land on which the building is situated." 26. Under the General Clauses Act 1897, section 3(26) defines "immovable property" which "shall include land, benefits to arise out of land and things attached to the earth, or permanently fastened to anything attached to the earth". Section 2(6) of the Registration Act, 1908 defines immovable property "includes land, building, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land and things attached to the earth or permanently fastened to anything which is attached to the earth but not standing timber, growing crops nor grass". Therefore, it is clear from the above definitions that immovable property include land, building or any rights pertains to that but, share in a company cannot be considered as immovable property. What the assessee had sold was shares in an Indian company. 27. In the case of Andhra Pradesh State Road Transport Corpn. v. ITO [1964] 52 ITR 524 (SC) the hon'ble Supreme Court held th....
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....e holding company (See Gramophone and Typewriter Ltd. v. Stanley [1908-10] All ER 833 at 837)." 29. Thus, it is an established view that a share held by a company cannot be considered as "immovable property". Unless the conditions prescribed in article 6 applies, the same cannot be considered as immovable property under article 13(1) of the Double Taxation Avoidance Agreement. 30. Article 13 was subject to elaborate discussion and the interplay between article 13(1), 13(4) and 13(5) was elaborately discussed in the order by the Authority for Advance Rulings in the case of VNU International B. V., In re [2011] 334 ITR 56 (AAR) in reference No. 871 of 2010 dated March 28, 2011. In that case also the issue was on the transfer of shares of ORG.IMS whether capital gain earned by VNU International would be liable to tax as per the provisions of India-Netherlands treaty. The issue was elaborately discussed vide paras 6 to 8 in the said order as under: "6. The learned advocate contended that as the shares of ORGIMS are not immovable property or movable property forming part of the business property of a permanent establi....
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....V., In re [2010] 322 ITR 696 (AAR), Authority for Advance Rulings No. 818 of 2009 dated February 25, 2010, the Authority for Advance Rulings analysed article 13 to hold as under (page 701 ) : "3.1. It is the case of the applicant that the exception provided in the second part of paragraph 5 is not attracted in a case of transfer of shares to a non-resident. Therefore, even if the quantum of shares transferred exceed 10 per cent. of the capital stock of PG India, the second condition for triggering the exception, namely, the alienation to a resident of India, is not satisfied. Thus, according to the applicant, the substantive part of article 5 governs the present case. We find substance in the plea taken by the applicant. 3.2. It is beyond dispute that the applicant is a resident of the Netherlands within the meaning of article 4(1) of the treaty. The applicant is entitled to invoke the benefit of the provisions in the treaty notwithstanding the provisions of the Income-tax Act, 1961 on the same subject. Section 90(2) of the Income-tax Act recognises this principle. It lays down that in relation to the assessee to wh....
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....te of in this context is that the applicant which was incorporated towards the end of 2008 made significant investments in the Indian company. It is stated that from September 2009 onwards, it invested nearly 17 million Euros (Rs. 110 crores) in Pierburg India. It is seen from the facts stated by the applicant that the applicant had initially acquired the shares of the Indian company from Pierburg GMBH at a price determined as per the evaluation guidelines prescribed under the Foreign Exchange Management Act, 1999. The substantial investments it has made was with a view to broaden the capital base of the Indian company, as stated by the applicant. The implied suggestion of the Revenue that the applicant is a sham entity or a conduit company deliberately set-up to avoid the tax liability relating to capital gains is wholly misconceived. It would be presumptuous to predicate that the gains accruing to the applicant by the transfer of shares held in the Indian company would not enure to the benefit of the applicant or will not enter into the profit and loss account of the applicant or that the gains will be just passed on to the ultimate holding company (i.e., German company), dictate....
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....and not in India. 33. The following circumstances could be envisaged for transfer of shares and treatment of capital gains thereon : "(i) alienation of shares forming part of substantial interest in the Indian company-value of which is principally derived from immovable property ; (ii) alienation of shares forming part of substantial interest in the Indian company-value of which is principally derived from immovable property other than property in which the business of the company was carried on ; (iii) alienation of shares which forms part of at least 10 per cent. interest in the share capital of the Indian company ; (iv) alienation of shares which forms part of at least 10 per cent. interest in the share capital of the Indian company-alienated to a resident of India ; and (v) other case of alienation of shares." 34. The provisions of the Double Taxation Avoidance Agreement would be determining the tax jurisdiction of income. The first two circumstances enumerated above are covered under the provisions of paragraph (4) of article 13 as per which, in the first circumstance above, the capital gain arising on alienation of shares would be liable to tax in India ;....
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....ld be applicable only for further investment. If the benefit of exemption under the provisions of section 10(23G) of the Act is made applicable only for further investments, then this would not promote significant investments into infrastructure projects for which the benefit is granted since it requires huge initial investment and very minimal further investment. Accordingly, the contention of the Assessing Officer that the benefit of exemption is available only for further investment into existing projects is not correct. The memorandum explaining the provisions of section 10(23G) states "in order to attract further investment in this sector an urgent need has been felt for providing more tax incentive to investors". The Assessing Officer failed to appreciate that the provision is an extended benefit to investments made into the infrastructure sector and not for attracting further investment into existing old infrastructure projects/undertakings. 38. The Assessing Officer mentioned that the industrial park was not considered as infrastructure facility for the purpose of section 10(23G) of the Act till financial year 1999-2000. In this regard, the assessee claimed that the indu....
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..... Subsequently, the Finance Act, 1999 introduced Explanation 2 to section 10(23G) stating that long-term capital gain arising from investment made before June 1, 1998 shall not be included (in the total income, i.e., exempt from tax) and the provisions of this clause as it stood immediately before its amendment shall apply to such income. 41. In view of the above provision and the Central Board of Direct Taxes circular, it is clear that the investments made prior to June 1, 1998 would be eligible for exemption from capital gains if other conditions mentioned in the said clause are satisfied. The basic purpose and intention of section 10(23G) is to provide exemption on income from long-term capital gains/interest income/dividend and is more focused on the results of the investments made and not focused on the investment per se. This is also brought out by the fact that interest income in the hands of the lenders is also provided with the benefit although loans do not constitute the eligible investments. 42. The above view has also been upheld by the Hyderabad Bench of the Income-tax Appellate Tribunal in the case of VBC Ferro Alloys Ltd. [2007] 107 TTJ (Hyd.) 925. In the said ....
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....lous to hold that the generation should start on or after 1993 but the investment should be made on or after April 1, 1998. Looking at the issue from another angle, if a long-term capital gain has to arise in 1997, as contemplated by the Act, then the investment must necessarily be made much before that date. For these reasons, the argument of the counsel for the assessee that as the investment in question was made prior to June 1, 1998, Explanation 2 is squarely applicable to the case of the assessee is sustainable. CIT v. Nestle India Ltd. [2005] 275 ITR 1 (Delhi), Vikrant Tyres Ltd. v. First ITO [2001] 247 ITR 821 (SC) and Kerala Finance Corporation v. CIT [1994] 210 ITR 129 (SC) relied on. The next question is as to which are the provisions of the Act that are applicable to the assessee's case as the investment in question was made prior to the 1st day of June, 1998. A plain reading of Explanation 2 introduced by the Finance Act, 1999, shows that the provision as it stood immediately before its amendment by the Finance (No. 2) Act, 1998 shall apply to such income. The term 'immediately before' means provision existing in the F....
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.... against not allowing exemption under section 10(23G) in respect of capital gain of Rs. 20,49,33,542 arising on the shares of M/s. Skycell Communication Ltd. The facts apropos this ground are that the assessee sold shares of M/s. Skycell Communication Ltd., which secured cellular phone operator licence for the city of Chennai, in the year under consideration and claimed such capital gain to be exempt under section 10(23G). On being called upon to furnish the details in this regard the assessee filed the following details showing date of investment, assessment year in which investment was made, number of shares, cost of shares, total cost, sale of shares Date of investment Assessment year of investment No. of shares (crores) Cost (crores) (Rs.) 31-01-1996 1996-97 0.84 8.4 23-12-1997 1998-99 0.84 8.4 8-3-1998 1998-99 0.84 8.4 Total cost 2.52 25.2 Sale consideration 2.52 123.09 Gain on sale of shares 97.89 37. It was also made clear that the assessee-company was co-promoter of M/s....
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....e, 1998. Doubts had been expressed in different quarters about the continuance of exemption available under section 10(23G) in respect of investments made prior to 1st June, 1998 for the assessment year 1999-2000 and onwards. The Central Board of Direct Taxes have clarified by way of a press release that the exemption available under the provisions of section 10(23G), prior to its amendment by the Act, will continue to govern the investments made prior to 1st June, 1998. The Rules and Forms in this regard have since been notified vide notification No. S.O. 897(E) dated 12th October, 1998 ([1998] 234 ITR (St) 11)." 39. Accordingly the Finance Act, 1998 introduced Explanation 2 providing as under : 'Explanation 2.-For the removal of doubts, it is hereby declared that any income by way of dividends, interest or long-term capital gains of an infrastructure capital fund or an infrastructure capital company from investments made before the 1st day of June, 1998 by way of shares or long-term finance in any enterprise carrying on the business of developing, maintaining and operating any infrastructure facility shall not be ....
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....of other shares acquired in 1997/1998, in our considered opinion, there is no logic in denying the exemption under section 10(23G) in respect of the shares which were purchased on January 31, 1996. We have noticed above that the exemption under this provision is available on income resulting from the transfer of shares and not from the purchase of shares. If the eligible shares as sold in the relevant period, exemption cannot be denied simply on the ground that such shares were purchased in 1996. Our view is fortified by the order passed by the Hyderabad Bench of the Tribunal in the case of VBC Ferro Alloys Ltd. [2007] 107 ITD 367 (Hyderabad) for the assessment years 2000-01 and 2001-02 in which it has been categorically held that section 10(23G) inserted by the Finance Act, 1999 is declaratory and hence retrospective in operation. In this case also, the assessee has been entitled to exemption under section 10(23G) on long-term capital gain arising on infrastructure capital fund investment before June 1, 1998. The reliance of the learned Departmental representative on the judgment of the hon'ble Supreme Court in the case of Reliance Jute and Industries Ltd. v. CIT [1979] 120 ITR 92....
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....ion 10(23G) are satisfied, we are of the opinion that the sale of shares of an infrastructural company is eligible for exemption as provided under section 10(23G). Therefore, on both the counts, i.e., by virtue of the Double Taxation Avoidance Agreement as well as by virtue of section 10(23G), the assessee's claim of exemption from capital gain is to be upheld. Therefore, the grounds raised by the assessee on this issue are allowed. The Assessing Officer is directed to treat the amount as exempt from tax under the income-tax provisions. 45. Next issue for consideration is the issue of interest received on delayed payment of sale consideration paid by the buyer. There is no dispute to the fact that the buyer is a non-resident Singapore company and the recipient is a non-resident Netherland Co. The assessee received an amount of Rs. 49,43,750 from M/s. Ascendas Ltd., Singapore for delay in making payment at 7 per cent. per annum for the 15 days delay in payment thereof. It was the contention of the assessee that the payment and receipt of the interest was in Singapore and the Netherlands respectively and does not accrue or arise through or any property in India or through from any....
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....aser is carrying on any business in India nor the interest is payable in respect of any debt incurred or moneys borrowed and used for the purpose of business. It is clear that the interest payment received by the assessee was received outside India and the payment was made by a non-resident neither in relation to any debt incurred or moneys borrowed nor used for the purpose of business or profession in India. Therefore, the above interest income cannot be considered as received or deemed to have received or accrued or arising or deemed to have accrued or arise as provided by section 9 of the Act. Therefore, by virtue of the provisions of section 5 interest income received abroad and paid by a nonresident cannot be brought to tax under the Income-tax Act. The argument of the Assessing Officer that interest is on account of transaction involving of sale of capital asset in India cannot be accepted as interest was paid by the purchaser to compensate the delay in discharging the consideration and cannot be considered as part of consideration. If it were to be considered as part of consideration, then it becomes part of the sale consideration which was already considered as exempt ....