Capital gain exemption by virtue of article 13(4)

Recently ITAT bench held that, Article 13(1) cannot be made applicable to the transfer of shares as assessee has not sold the immovable property or any rights directly attached to the immovable property.

Assessee is a company incorporated under the laws of Netherlands and is a tax resident of Netherlands. Assessee has sold its 100% share holding in the Indian Company for Rs.224,50,00,000 to M/s. Ascendas Property Fund (India) Pte Limited, 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.

Assessee filed its return of income on 1st November 2005 for the AY 2005-06 claiming a refund of the taxes withheld amounting to Rs.35,44,67,476. In the return of income 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 Netherlands ('DTAA' or 'tax treaty') the same is not taxable in India. Further assessee also claimed that the interest income is not liable to tax in India as the same does not accrue or arise in India. Assessee has also mentioned that the Indian Company had madean application under section 10(23G) of the Act before the Central Government, which once approved and notified, exempts the long term capital gains.

AO had passed an assessment order under section 143(3) of the Act dated February 25, 2008, denying the benefit of the tax treaty and also the benefit of exemption under section 10(23G) of the Act. On appeal before CIT(A) also upheld the order of AO. CIT(A) has held that the long term capital gains derived by assessee on the sale of shares is taxable in India after analyzing the applicability of the DTAA to the present case. He approved the contention of AO about the applicability of Article 13(1) of the DTAA to the transaction of sale of shares, thereby rejecting the applicability of Article 13(4) and Article 13(5) of the DTAA to the present case. The Ld CIT(A) has stated that the industrial park is nothing but an immovable property along with furniture and fixtures and that the alienation of 100% shares implies that the rights to enjoy the industrial park now vested with the purchaser. The Ld CIT(A) also upheld the AO's contention that the provision of section 10(23G) of the Act, which exempts from tax, long term capital gain arising on transfer of investment in a notified project, is not applicable in the present case as the project of the Indian Company was not notified when the investment was made by the assessee. The CIT(A) held that the judgment of the Hyderabad Income tax Appellate Tribunal in the case of VBC Ferro Alloys Ltd which granted relief under section 10(23G) to the said Company was not applicable to the Appellant since the judgment does not relate to the specific facts of the present case. In relation to taxability of the interest income, the CIT(A) has held that, the interest income is inextricably linked to the 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.

Assessee appeal before ITAT

Whether the transaction is exigible to capital gain under the Indian Income Tax Act. Whether Ld. CIT(A) was erred to upheld the order passed by AO on applicability of Article 13(1) of the DTAA to the transaction of sale of shares, thereby rejecting the applicability of Article 13(4) and Article 13(5) of the DTAA and also by stating that stated that the industrial park is nothing but an immovable property along with furniture and fixtures and that the alienation of 100% shares implies that the rights to enjoy the industrial park now vested with the purchaser.

Ld. Counsel on behalf of Assessee, referring to the arguments of AO that the sale of shares by assessee is equivalent to the sale of immovable property, it was the submission that under Article-6 of the DTAA, immovable property was defined to have the meaning which it has under the law of the State in which the property in question is situated. The definition of immovable property does not include any rights in the shares of a company. It was submitted that under the general law in India, immovable property does not include shares. AO mainly relied on the definition provided under the Income Tax Act under section 269UA, the definition of which is limited for the purpose of that section and not for the entire Act. He then referred to the definition of ‘transfer’ in section 2(47) and Explanation 1 to submit that the definition of immovable property as defined under section 269UA, clause-d is only for the purpose of sub-clause-v and vi of section 2(47) and cannot be extended beyond that. Since there is no definition of immovable property under the Act, AO was wrong in relying on the definition given under section 269UA to extend the logic to assessee’s transfer of shares in Indian Company. He then referred to the provisions of section 269UA (d) and Board Circular No.495 dated 22nd September, 1997 explaining the introduction of sub clause v & vi in section 2(47) to submit that applicability of the above definition of ‘immovable 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 this light of this definition, since 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 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.

Relying on the Hon'ble Supreme Court in the case reported in 52 ITR 524, wherein the Hon'ble Supreme Court held that the income of the Corporation is not the income of the State to submit that owning shares in an Indian Company is not equivalent to owning the property of the Indian company as contemplated by AO, further also relied on the decision of the Hon'ble Supreme Court in the case reported in (2012) TaxCorp (INTL) 3988 (SC)  to support the contention that the shares in the Indian Company cannot be equated to the property of the company.

Futher learned Counsel submits that the sale of shares in the infrastructure company is exempt under section 10(23G). He then referred to the approval of the Indian Company by the CBDT under section 10(23G) and consequently the investments made by assessee in the said company by way of shares are exempt from the Indian Income Tax Act when they are sold to another person.

On the issue of taxability of interest income it was submitted that the interest was paid for the delayed payment of sale consideration by the Singapore Company and was arising out of the contractual obligations imposed on the purchaser for delay in payment of sale consideration. section 9 of the Income Tax Act cannot be invoked as debt was not incurred or moneys borrowed and used for the purpose of business or profession carried on in India. Since the interest payment was received outside India and was made by a non resident, neither in relation to any debt incurred or moneys borrowed the interest income thereon is not taxable under the Income Tax Act. He also submitted that there is no need to go to the treaty for the above as section 9 itself is not applicable but even otherwise Article 11 of the Netherlands-India treaty also does not allow the tax to be paid in India. He then referred to the Article 11 to submit that interest received by assessee is not taxable in India.

Ld DR referred to the definition of the ‘immovable property’ as provided in section 269UA to submit that assessee owns ownership of Indian Infrastructure Company which is not a listed company and so any transfer of shares is virtually transfer of the undertaking as such and so the findings of AO and the CIT (A) that assessee has transferred the immovable property is to be upheld. He also referred to the orders of AO and the CIT (A) to submit that Article 13(1) will apply to the facts of the case and since assessee having transferred the immovable property in India even though in the form of shares, the same is taxable in India. He then referred to the contention with reference to section 10(23G) and applicability of the said exempt provision to submit that assessee has invested in the company long back whereas the approval was received just before the sale of shares, therefore, the same cannot be applied to the facts of the case. He also referred to the Explanation 1 of Section 2(47) to submit that the definition under section 269UA has to be invoked and therefore, AO and the CIT (A) are correct in bringing to tax the entire amount. He relied on orders of AO and CIT(A) affirming the taxability of capital gains and interest income.

ITAT observed that applicability of the above definition of section 269UA(d) with reference to section 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 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 Revenue does not apply to the facts of the case. The contention of the Revenue that the definition of ‘immovable property’ as defined under section 269UA(d) is a general definition applicable under the DTAA cannot be accepted.

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 assessee had sold was shares in an Indian Company.

ITAT relied on judgment reported in 52 ITR 524 were Supreme Court established that the shareholder is different from the property of the company. Similarly judgment in (2012) TaxCorp (INTL) 3988 (SC), Supreme Court while dealing with the issue of share sales and assets sale held that it is a share sale but not an asset sale in that case.

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 can not be considered as immovable property under Article 13(1) of DTAA.

Further ITAT bench observed that 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 AAR in the case reported in (2011) TaxCorp (INTL) 3448 (AAR) and (2010) TaxCorp (INTL) 3143 (AAR). Relied on these ruling ITAT held that Article 13(1) cannot be made applicable to the transfer of shares as assessee has not sold the immovable property or any rights directly attached to the immovable property. Therefore, in our view Article 13(1) of DTAA is not applicable. There are specific provisions on sale of shares, the value of which was primarily derived from the inherent immovable property thereon. In such a case since the assets of the Indian Company are immovable property but, are used in the business of the Indian Company, Article 13(4) cannot be invoked. The only provision which can be invoked in the circumstances is the Article 13(5) which allows the capital gains to be taxed in Netherlands and not in India.

ITAT also held that interest paid for delay in sale consideration was not taxable in India.

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Rupesh Srivastava

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