TaxTMI 
TaxTMI 
2019 (12) TMI 488
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.... of the India-Netherlands Double Taxation Avoidance Agreement ("DTAA") and consequently, taxing the capital gains amounting to Rs. 23,38,08,365/- as per the Income Tax Act, 1961 ("the Act") 3. To adjudicate on this appeal, only a few material facts need to be taken note of. The assessee before us is, as the Assessing Officer puts it, "a Fund established in the Netherlands and registered with the Securities Exchange Board of India (SEBI) as a sub account of ING Assets Management BV, a SEBI registered Foreign Institutional Investor (FII)". It was a case of reopened assessment. During the course of the ensuring assessment proceedings, it was noticed that, in India, the assessee had short term capital gains of Rs. 23,38,08,365 and long term capital gain of Rs. 12,60,91,050, on sale of shares. While there was no dispute about non taxability of long term capital gains, in view of exemption under section 10(38), of the Act, the short term capital gains were claimed to be treaty protected from taxation in India, under article 13 of the India Netherlands Double Taxation Avoidance Agreement [(1989) 177 ITR (Statute) 72; 'Indo-Dutch tax treaty', in short]. The case of the assessee,....
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....and therefore, the Fund should be taxed in the same manner and Mice extent as the beneficiary participant. 4. Stretching its argument, it was claimed that because all the beneficiary participant are tax resident of Netherlands and none of them hold 10% or more share of any Indian company, therefore Article 13(5) of the India Netherlands Double Taxation Avoidance Agreement is applicable and capital gains will not be taxable in India and because their Representative Assesses can be assessee in the same manner and like extent, Trustee of the Fund i.e. the assessee will also not be taxable in India. 5. In a nutshell, because the participants are tax resident companies of Netherlands eligible for benefit of Article 13(5) of the Treaty, the Fund "as custodian of the Trust" will also be not taxable for the capital gains. 6. The submissions made by the assessee was considered. There is no dispute, that the assessee is not a tax entity of Netherlands. The question is, can it be treated as Representative Assessee of the three participants and accorded the treatment in same manner and extent. The assessee has sought to equate the Fund as a Trust. It is far fetched p....
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....o this effect by the appellant. Even the judicial pronouncements, which have been relied upon by the .appellant are distinguishable on facts of the appellant's case. Hence, the same are nowhere applicable to the facts of the appellant's case. On the basis of aforesaid discussion of the facts available on record, I consider it proper and appropriate to hold that the A.O was completely justified in his action in not allowing the benefit of Article 13 of India-Netherlands tax treaty to the appellant. Accordingly, the action of the A.O stands confirmed. 5. The assessee is not satisfied and is in further appeal before us. 6. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position. 7. It is important to first understand the structure of the assessee entity. The assessee before us is a trustee of ING Emerging Markets Equity Based Funds (INGEMEF) which is registered with the Securities and Exchange Board of India as a sub account of ING Assets Management BV, a registered Foreign Institutional Investor (FII). There is no dispute that INGEMEF is a tax transparent entity, in the sense ....
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.... of treaty protection cannot be extended to INGEMEF. That's where the fallacious logic creeps in. The assessee is indeed a trustee for INGEMEF but INGEMEF per se is not the beneficiary because INGEMEF, rather than being a legal entity, is only contractual and tax transparent mechanism for collective investments by three beneficiaries shown as A, B and C in the above diagram. Obviously, if the assessee is to be taxed in its own right, there is no reason for denial of treaty protection as the assessee, in its own right, is a taxable entity in the Netherlands, which, even going by the Assessing Officer, appears to be by itself sufficient basis for treaty protection in India. It is in this backdrop that we need to examine the role and status of INGEMEF in some detail. As we have noted earlier as well, INGEMEF is an FGR. i.e. Fonds voor Gemene Rekening, which literally means funds for joint account, and this form of organization, under the Dutch law, is in the nature of a contractual arrangement between the investors, fund manager and its custodian. An FGR is, strictly speaking, not a legal entity as it is creation of an agreement and that is the reason it does not hold any assets o....
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....x net in the said treaty partner jurisdiction. The FGR for which the assessee is trustee is not a taxable entity in the Netherlands, on account of its being tax transparent as a closed FGR, and yet, as is the claim of the revenue, this FGR, represented through the trustee, is taxable in India. A specific confirmation, issued by the International Tax Policy and Legislation Directorate, Ministry Of Finance, Government of Netherlands, to the effect that the ING EMEF, being a closed FGR and a tax transparent entity, is not a taxable entity in the Netherlands, is also placed before us. In the situation of this kind of an asymmetrical taxation, as is the legal position set out by the coordinate bench's decision in the case of Linklaters (supra), as long as the said income is liable to tax in the treaty partner jurisdiction, whether in the hands of the assessee or in the hands of its constituents when it's a tax transparent entity in the treaty partner jurisdiction, the said income cannot be declined treaty protection in India. The conceptual support for this approach, as noted in the said coordinate bench decision, is summarized as follows: Interpretation of statutes-Tax....
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....f taxability there, which should govern whether or not the source country should extend treaty benefits with the Contracting State in which that person has fiscal domicile-Thus, even when a partnership firm is taxable in respect of its profits not in its own right but in the hands of the partners, treaty benefits cannot be declined as long as entire income of the partnership firm is taxed in the residence country-Further, it is sufficient that under the assignment or distributive rules of the treaty, the residence State has a right to tax the income of the partnership firm, irrespective of the fact whether or not such a right is actually exercised by the residence State-Therefore, assessee, a UK based partnership firm, is eligible to the benefits of India-UK tax treaty as long as the entire profits of the firm are taxed in UK, whether in the hands of the firm or in the hands of the partners directly Held: In terms of art. 1(1), the India-UK tax treaty "shall apply to persons who are residents of one or both of the Contracting States". As to what are the connotations of expression "resident of a Contracting State", art. 4(1) of the treaty provides that, for the pur....
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....t person should be subjected to residence type taxation, on account of some locality related attachment, in that Contracting State.-Dy. CIT v. General Electric Co. Plc. [2001] 71 TTJ (Cal) 973 followed. (Paras 52, 53 & 55) Modalities or mechanism of taxation may vary from jurisdiction to jurisdiction, as domestic law is a sovereign function and a bilateral tax treaty, or even the need of uniformity in entity classification approach-no matter how desirable someone may consider it to be, does not dictate such modalities of taxation being legislated. The fact of taxation, however, can be decided in an objective and uniform manner. From a country perspective, what really matters is whether the income, in respect of which treaty protection is being sought, is taxed in the treaty partner country or not. That is the clearly the underlying principle based on which residence definition is modeled. It would, therefore, seem logical that it is the event of taxability in the residence State, rather than the mode of taxability there, which should be a decisive factor for determining whether the person should be treated as eligible for treaty benefits of the Contracting State in whic....
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....d to have been satisfied. Of course, the other possible approach to such a situation is that as long as the tax jurisdiction has the right to tax the entire income of the person resident there, whether or not such a right is exercised, the test of fiscal domicile should be satisfied. Viewed thus, all that matters is whether that tax jurisdiction has a right to tax or not; the actual levy of tax by the tax jurisdiction cannot govern whether a person has fiscal domicile in that jurisdiction or not. This line of reasoning is diametrically opposed to the stand taken by the OECD in the matter, but, having carefully considered the stand of the OECD on this issue, the Tribunal is not persuaded by the OECD stand on the matter, nor the Indian judicial precedents support that position. As a matter of fact, even the Government of India's approach to the tax treaties does not entirely approve that school of thought either.-Asstt. Director of IT v. Green Emirate Shipping & Travels [2006] 99 TTJ (Mumbai) 988 : (2006) 100 ITD 203 (Mumbai) relied on. (Paras 72 & 75) The amendment in the definition of resident of UAE vide Notification No. 282 of 2007, dt. 28th Nov., 2007, accepts th....
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....ing a representative assessee of a tax transparent entity, as discussed above, requires the beneficiaries or constituents of the tax transparent entity being looked at. The assessee is indeed a trustee of INGEMEF but then INGEMEF is only a contractual arrangement for common investments by three investors and it cannot be treated as a beneficiary as it is not even a legal entity, it's a tax transparent conduit contractual arrangement for the purpose of collective investments. It is to be looked through so far as trust beneficiaries are concerned. The beneficiaries are thus clearly taxable entities in Netherlands. What essentially follows is like this. If the assessee is to be taxed in its own right, which is not even the case of the revenue, there cannot be any dispute that the assessee is a taxable entity in the Netherlands, and, for this reason, the assessee is liable for treaty protection. If the assessee is to be taxed as a trustee in representative capacity, in our considered opinion, on the facts of this case clearly the beneficiaries are the three investors all of which are taxable entities in the Netherlands, and not the INGEMEF per se. Whichever way we look at it, thus,....