TaxTMI 
TaxTMI 
2020 (3) TMI 634
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.... "learned AO") dated October 15, 2018 (which was received on October 31, 2018) after taking into account the directions of the Hon'ble Dispute Resolution Panel - 2, Mumbai (hereinafter referred to as the "Hon'ble DRP") dated September 27, 2018, under Section 253 of the Income-tax Act, 1961 (hereinafter referred to as the "Act") on the following grounds: General Grounds: 1. The Order of the learned AO is contrary to law, facts and circumstances of the case; 2. The Order passed by the AO has been passed in violation of the statutory provisions under the Act without compliance with the principles of natural justice, is bad in law and is liable to be set aside. 3. In the facts and circumstances of the case, the learned AO has grossly erred in law in holding that gains arising from the transfer of shares of Accelyst Singapore Pte. Ltd. ("Accelyst Singapore") is liable to tax in India under the India Belgium double taxation avoidance agreement ("Tax Treaty"). 4. In the facts and circumstances of the case, the learned AO has grossly erred in law in concluding in the show cause notice dated 22.11.2017 as well as at the beginning of the O....
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....cumstances of the case, the learned AO and the Hon'ble DRP has grossly erred by wrongly reading the deeming fiction under Explanation 5 to Section 9(1)(1) of the Act as applicable to a company rather than to shares and accordingly treating a foreign company as a company resident in India. 11. In the facts and circumstances of the case, the learned AO has grossly erred in concluding at paragraph 5.4.9 of the Order that "this deeming provision is attracted directly from the Income-tax Act, 1961, without taking recourse to the Belgium Treaty. Hence the transaction is chargeable to tax in India as per the Income-tax Act, 1961" without having regard to the provisions of Section 90 of the Act, which provides that the beneficial provisions between the Act and double taxation avoidance agreement shall be made applicable to a non-resident, which would mean that the taxation of a non-resident cannot be determined solely on the reading of the provisions of the Act. 12. In the facts and circumstances of the case, the learned A.O erred in holding that transfer of shares of Accelyst Singapore by the assessee, shall be deemed to be a transfer of assets located in In....
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....an express provision to this effect and deeming Accelyst Singapore as a resident of India and concluding that the sale of Accelyst Singapore shares is taxable under the provisions of Article 13(5) of the India Belgium Tax Treaty. 16. In the facts and circumstances of the case, the learned DRP has erred in law in treating Accelyst Singapore as a company deemed to be situated in India and transfer of its capital stock comprising more than 10% of its capital shall be covered by Article 13(5) of the India Belgium Tax Treaty without having regard to the fact that Explanation 5 to Section 9 deems shares to be situated in India and not company to be situated in India. 17. In the facts and circumstances of the case, the learned AO and the Hon'ble DRP has erred in law in not appreciating that the amendments made either retrospective or prospective to the provisions of the I.T Act cannot be read into the provisions of the Treaty, unless specific provision has been made to this effect and to observe that the provisions under the Act and India Belgium Tax Treaty is the same and has no conflict. 18. In the facts and circumstances of the case, the learned AO and th....
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....the judgment can be made applicable to the facts of the present case. 25. In the facts and circumstances of the case, the Hon'ble DRP erred in law in observing the reasons as to why the judgment of the Hon'ble Andhra High Court in the case of Sanofi Pasteur Holdings SA cannot be applied to the facts of the present case by stating that in that case the company whose shares were sold was a French company whereas in the present case was Singapore company cannot be the reasoning to reject the binding nature of the applicability of the judgement of the Hon'ble High Court. Substantive provision cannot be implemented without the procedural provisions 26. In the facts and circumstances of the case, the learned AO and the Hon'ble DRP erred in holding that explanations are clarificatory in nature and they aid and support the main section i.e. Section 9(1) and the absence of an explanation, will not render the existing section void or incapable of being administered, without taking into account that if the provision cannot be implemented in the absence of computation provisions, the income cannot be computed and charged to tax under that provision and with....
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....f Series B Preference shares of Accelyst Pte Ltd., a company which was a tax resident of Singapore. Further, the assessee company had vide a share subscription agreement dated December 12, 2014 agreed to subscribe to 31,34,624 (Nos.) of Series C Preference shares of Accelyst Pte. Ltd. Post subscription of Series C Preference shares the assessee had a stake holding of 11.34% in Accelyst Pte. Ltd., Singapore. On a perusal of the records, it was noticed by the A.O that Accelyst Pte Ltd., Singapore was holding 99.99% of the shares of M/s Accelyst Solutions Pvt. Ltd., an Indian company. 4. During the year under consideration the assessee had sold its entire 11.34% stake holding in Accelyst Pte Ltd., Singapore to M/s Jasper Infotech Pvt. Ltd., an Indian company, for a total consideration of USD 4,73,62,724. M/s Jasper Infotech Pvt. Ltd. while making the payment of the consideration for acquiring the shares of Accelyst Pte Ltd., Singapore to the assessee company had deducted TDS of Rs. 70,93,60,990/- under Sec. 195 of the Act. It was observed by the A.O that the assessee company had returned its income for the year under consideration at Rs. Nil and had claimed a refund of the entire a....
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.... India, and was in fact conditional and applicable only where the other sub-clauses of Article 13 were not attracted. Observing, that the gains from the alienation of the shares under consideration were liable to be assessed in India as per Article 13(5) of the India-Belgium tax treaty, the A.O called upon the assessee to put forth an explanation as regards the same. Also, the A.O observed that Accelyst Pte Ltd., Singapore did not have any other asset except for its investments in Accelyst Solutions Pvt. Ltd whose businesses were located and carried out in India. As such, the A.O was of the view that as the shares of Accelyst Pte Ltd., Singapore derived their value substantially from the assets of Accelyst Solutions Pvt. Ltd., therefore, as per 'Explanation 5' to Sec. 9(1)(i) of the Act, the preference shares of Accelyst Pte Ltd., Singapore sold by the assessee were to be deemed to be situated in India. It was observed by the A.O that transfer/alienation of the preference shares of Accelyst Pte. Ltd., Singapore was an indirect transfer of shares of Accelyst Solutions Pvt. Ltd. Also, the A.O was of the view that though Accelyst Pte. Ltd., Singapore may be a resident of Singapore,....
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....if any, on transfer of shares of Accelyst Pte. Ltd., Singapore by the assessee company would be regulated by the residuary provision viz. Article 13(6) of the India-Belgium tax treaty. Adverting to Article 13(6) of the India- Belgium tax treaty, it was submitted by the assessee that the same provided that the gains derived from alienation of any property would be taxed in the Contracting state of which the alienator was a resident. As such, it was submitted by the assessee that as the assessee company i.e the alienator was a resident of Belgium, therefore, the taxability of the gains on the transfer of the shares, if any, would arise only in Belgium and not in India. In order to buttress its aforesaid claim, the assessee once again relied on the judgment of the Hon'ble High Court of Andhra Pradesh in Sanofi Pasteur Holding SA Vs. Department of Revenue, Ministry of Finance (2013) 30 taxmann.com 222 (Andhra Pradesh). It was submitted by the assessee that the Hon'ble High Court in its aforesaid judgment while interpreting Article 14(5) of the India- France tax treaty which was similarly worded as Article 13(5) of India-Belgium tax treaty, had observed, that the same did not permit a '....
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....fer" as envisaged in 'Explanation' to Sec. 2(47) of the Act [as was inserted by the Finance Act, 2012 w.r.e.f 01.04.1962]. On the basis of his aforesaid deliberations, the A.O concluded that the right to tax the transaction of transfer of shares under consideration was allocated to India under Article 13(5) of the India-Belgium tax treaty. Accordingly, the A.O observed that by reading Article 3 of the India-Belgium tax treaty with 'Explanation 5' of Sec. 9(1)(i) of the Act, even for the purposes of the India-Belgium tax treaty the shares of Accelyst Pte. Ltd., Singapore were to be deemed to be the shares of a company resident in India. It was thus observed by the A.O that as the transfer transaction of 11.34% shares of Accelyst Pte. Ltd., Singapore by the assessee company formed (indirectly) part of a participation of the capital stock of Accelyst Solutions Pvt. Ltd., therefore, the same was taxable in India as per Article 13(5) of the India-Belgium tax treaty. Also, the A.O as per his observations recorded in the assessment order declined to subscribe to the reliance placed by the assessee on the judgment of the Hon'ble High Court of Andhra Pradesh in Sanofi Pasteur Holding SA ....
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....d by the ld. A.R that the assessee had acquired a total stake holding of 11.34% in Accelyst Pte. Ltd., Singapore. It was submitted by the ld. A.R that the fact that Accelyst Pte. Ltd., was a resident of Singapore was admitted by the A.O at Page 22 - Para 5.4.7 of the assessment order. Also, the DRP at Page 20 - Para 12.13 of its order had accepted that Accelyst Pte. Ltd. was a Singapore based company. It was submitted by the ld. A.R that the assesse had vide an agreement dated March 26, 2015 transferred its entire 11.34% share holding of Accelyst Pte. Ltd., Singapore to M/s Jasper Infotech Pvt. Ltd., New Delhi for a total consideration of USD 4,73,62,724. It was averred by the ld. A.R, that as in view of Article 13(6) of the India-Belgium tax treaty the aforesaid transaction of sale of shares of Accelyst Pte. Ltd., Singapore by the assessee to M/s Jasper Infotech Pvt. Ltd. was not taxable in India, therefore, the assessee had filed its return of income for the year under consideration declaring Nil income and had claimed the refund of the entire amount of TDS of Rs. 70,93,60,990/- that was deducted under Sec. 195 of the Act by M/s Jasper Infotech Pvt. Ltd. while making the payment ....
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....resident of India. In fact, it was averred by the ld. A.R, that despite 'Explanation 5' to Sec. 9(1)(i) of the Act, a foreign company could not be treated as a company resident in India even under the I.T Act, leave alone the tax treaty. It was submitted by the ld. A.R that backed by his aforesaid erroneous and illogical interpretation the A.O had wrongly concluded that since 11.34% shares of Accelyst Pte. Ltd., Singapore being transferred (which were more than 10% shares prescribed in the tax treaty) were forming (indirectly) part of a participation of capital stock of Accelyst Solutions Pvt. Ltd., i.e the Indian company, therefore, the alienation of such shares would be taxable as per Article 13(5) of the India-Belgium tax treaty. It was submitted by the ld. A.R, that the A.O had in effect erroneously read the deeming provisions of the I.T Act pertaining to indirect transfer of shares into the India-Belgium tax treaty, and had failed to appreciate that in the absence of any amendment to the provisions of the said tax treaty, an amendment in the I.T Act could not have been read into the same. As such, it was averred by the ld. A.R that the A.O by adopting the aforesaid interpretat....
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....ransaction of transfer of shares of the said company. It was vehemently submitted by the ld. A.R that the claim of the revenue that the investments outside India of Belgium companies are taxable in India was absurd, illogical and contrary to the India-Belgium tax treaty. Further, it was submitted by the ld. A.R, that in case the aforesaid view of the revenue was to be accepted, then the same would render Article 13(5) and Article 13(6) of the India-Belgium tax treaty as infructuous. Also, it was averred by the ld. A.R that subscribing to the aforesaid view of the revenue would also render the DTAA between Singapore and Belgium as infructuous. In order to drive home his aforesaid claim, it was submitted by the ld. A.R that if the claim of the revenue deeming Accelyst Pte. Ltd., Singapore to be a resident of India or deeming its shares to be situated in India was accepted, then the protocol signed with respect to India-Singapore tax treaty on Articles relating to Capital gains would be rendered as redundant. Elaborating on his aforesaid contention, it was submitted by the ld. A.R that under the protocol between India and Singapore, it was specifically provided to the contrary, tha....
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....), that would result to taxability of their global income, which being extra territorial operation of the IT Act and contrary to the provisions of law would render the provision itself unconstitutional. It was the claim of the ld. A.R that as the applicability of Article 13(5) stood clearly excluded to the current fact pattern of the transaction of transfer of shares under consideration, therefore, the taxation of the capital gains under the India-Belgium tax treaty, as rightly claimed by the assessee was regulated by Article 13(6) i.e the residuary provisions of the tax treaty. It was further averred by the ld. A.R that unlike Article 13(4) of the India-Belgium tax treaty no "seethrough" approach was provided for in Article 13(5). Also, the ld. A.R stressed on the fact that though the Hon'ble High Court of Andhra Pradesh in the case of Sanofi Pasteur Holding SA Vs. Department of Revenue, Ministry of Finance (2013) 30 taxmann.com 222 (Andhra Pradesh), had observed, in context of a similarly worded Article 14(5) of the India-France DTAA that the same did not permit a "see-through" approach, whereby if the shares of a holding company are transferred, such transfer cannot be regarded ....
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....pany. As regards the reliance placed by the assessee on the judgment of the Hon'ble High Court of Andhra Pradesh in the case of Sanofi Pasetur Holding SA Vs. Dept. Of Revenue, Ministry of Finance (2013) 345 ITR 316 (AP), it was averred by the ld. D.R that as the same was distinguishable on facts, therefore, the A.O had rightly declined to follow the same. Apart from that, it was submitted by the ld. D.R that the revenue had not accepted the aforesaid judgment of the Hon'ble High Court and had preferred a SLP with the Hon'ble Supreme Court. The ld. D.R had also placed on our record his "Written submissions", dated 20.09.2019. 11. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. As observed by us at length hereinabove, the assessee company which is a tax resident of Belgium is a venture capital investor listed on Euronext, Brussels and had invested into start ups of India like Myntra, Freecharge etc. As is discernible from the records, the assessee company had vide a share subscription agreement, dated June 9,2014 agreed....
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....e assessee to M/s Jasper Infotech Pvt. Ltd. is exigible to tax in India as per Article 13(5) of India-Belgium tax treaty and 'Explanation 5' to Sec. 9(1)(i) of the Act, as claimed by the revenue, or is regulated by Article 13(6) of the tax treaty and is chargeable to tax only in Belgium, as is the claim of the assessee. 13. Before proceeding any further, it would be relevant to cull out Article 13 of the India- Belgium tax treaty, which reads as under: "Article 13 Capital Gains 1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be fixed in that other State. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole....
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.... term "Contracting State", which is defined under Article 3(1)(c) of the India-Belgium tax treaty, and reads as under : "In this Agreement, unless the context otherwise requires: (a). .......................................................................................................................................................... (b). ......................................................................................................................................................... (c) the terms "a Contracting State" and "the other Contracting State" mean India or Belgium as the context requires." On a perusal of the aforesaid definition of the term "Contracting state", it can safely or rather inescapably be gathered that the same in context of India-Belgium tax treaty would take within the sweep of its meaning either "India" or "Belgium". 14. For the purpose of applying Article 13(5) of the India-Belgium tax treaty two fold conditions are required to be cumulatively satisfied viz. (i). that, the transfer of shares should represent participation of at least 10% in the capital stock of company; and (ii). that, the company whose sh....
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....dhra Pradesh while adjudicating upon the scope of applicability of Article 14(5) of India France tax treaty (similarly worded as Article 13(5) of India-Belgium tax treaty), had ruled out a see-through approach in Article 14(5) of the India-France tax treaty, and had concluded that transfer of shares of the holding company could not be regarded as a transfer of shares of its subsidiary entity, observing as under : "Qua Art.14(5), where shares of a company which is a resident of France are transferred, representing a participation (shareholding - see Vodafone) of more than 10 percent in such entity, the resultant capital gain is taxable only in France. Even where the underlying value of such shares is located in the jurisdiction of the other contracting State (India), this fact is irrelevant under DTAA provisions; except where the alienation is of shares of a company the property of which consists principally (whether directly or indirectly) of immovable property and in the later circumstance the entitlement to tax stands allocated u/Art. 14(4) to the contracting State within whose jurisdiction such property is situate. To reiterate, the fact that the value of the shares ali....
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....oresaid observations of the A.O/DRP are sustainable, it would be relevant and pertinent to point out that a unilateral amendment in the domestic law cannot be allowed to override the provisions of a tax treaty. As per the settled position of law, amendments made either retrospectively or prospectively to the provisions of the I.T Act cannot be read into the provisions of a tax treaty. Also, the provisions of the I.T Act do not operate to modify or subject the provisions of the tax treaty to the provisions of the I.T Act. Our aforesaid view is fortified by the judgment of the Hon'ble High Court of Delhi in Director of Income-tax Vs. New Skies Satellite BV (2016) 382 ITR 0114 (Delhi) and that of the Hon'ble High Court of Bombay in CIT Vs. Siemens Aktiongesellschaft (2009) 310 ITR 0320 (Bom). Be that as it may, drawing force from the judgment of the Hon'ble Apex Court in the case of K.P Varghese Vs. ITO (1981) 7 taxman 13 (SC) that the speech of the mover of the bill can certainly be used as a tool for understanding the legislative intent and also the mischief sought to be rectified by the legislation, the fact that the aforesaid clarificatory amendment made available in the I.T Act a....
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.... company to be situated in India, if it derived substantial value from India, for the purpose of taxation of capital gains under the I.T Act, and not for treating the foreign company itself as a resident of India. In our considered view, even under the I.T Act a foreign company despite 'Explanation 5' to Sec. 9(1)(i) of the I.T Act is not to be treated as a company resident in India. As observed by us hereinabove, the limited purpose of incorporating the deeming fiction i.e 'Explanation 5' to Sec. 9(1)(i) in the I.T Act is to deem the shares of a foreign company to be situated in India, if it derived substantial value from India, for the purpose of taxation of capital gains. In sum and substance, the 'Explanation 5' to Sec. 9(1)(i) of the I.T Act does not define residence of a person and only deems shares of a foreign company to be located in India. We are in agreement with the claim of the ld. A.R that if the view taken by the A.O/DRP was to be accepted and a foreign company was to be deemed to be a resident in India on the basis of its underlying assets situated in India, then an amendment to Sec. 6(3) of the I.T Act and Article 4 of the tax treaty would have been undertaken, whi....
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..../DRP and are unable to subscribe to the same. Admittedly, as per Article 3(1) of the India-Belgium tax treaty, any term not defined shall, unless the context otherwise requires, have the meaning which it has under the law of the State concerning the taxes to which the agreement applies. As such, the domestic law interpretation cannot be resorted to "unless the context otherwise requires", which means that neither the same can be resorted to in the first instance nor to tax contrary to the provisions of the tax treaty. In sum and substance, if a term is not defined in the tax treaty, the meaning of the same can be borrowed from the domestic law, only if the same is defined in the same context as that of the tax treaty and not otherwise. Article 13(5) of the India-Belgium tax treaty is applicable only if the company is resident of either of the contracting states. As the term "resident" and "Contracting State" are defined in the India-Belgium tax treaty, therefore, reference to the domestic law under Article 3(1) of the tax treaty did not arise. AS such, now when the term "forming part of participation" had been used in context of a company which is resident of either of the Contract....
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....t this stage, we may herein observe that involving identical facts the Hon'ble High Court of Andhra Pradesh in the case of Sanofi Pasteur Holding SA Vs. Department of Revenue, Ministry of Finance (2013) 30 taxmann.com 222 (Andhra Pradesh), had concluded that the transfer transaction of shares was exigible to tax as per Article 14(6) of the India-France tax treaty (similarly worded as Article 13(6) of the India-Belgium tax treaty). It was observed by the Hon'ble High Court, as under: "On the above analyses, considering the interplay between Article 14(4) and (5), gain from alienation of ShanH shares (by MA/GIMD) to Sanofi, if construed as falling beyond the contours of paragraphs (4) and (5) (paragraphs 1,2 and 3 being admittedly and clearly inapplicable) would fall within provisions of the residuary Article 14(6) and be clearly taxable only in France, wher at MA/GIMD is (are) resident." At this stage, we may herein observe that we are unable to persuade ourselves to subscribe to the view taken by the lower authorities that the order of the Hon'ble High Court of Andhra Pradesh in the case of Sanofi Pasteur Holding SA Vs. Department of Revenue, Ministry of Finance (2013) ....