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2022 (11) TMI 1390 - AT - Income TaxIncome taxable in India - Taxability of short term capital gain arising on sale of shares - Gains derived by a resident of one of the States from the alienation of shares (other than shares quoted on an approved stock exchange) - HELD THAT - A careful reading of Article 13(4) makes it clear that the source State has the authority to tax the capital gain, only if, the value of shares sold is derived principally from immovable property situated in the source State, other than, property in which the business of the company whose shares were sold was carried out. In case of JCIT Vs. Merrill Lynch Capital Market Espana SA SV 2019 (10) TMI 1163 - ITAT MUMBAI while dealing with an identical provision under India Spain DTAA has held that the onus is entirely on the AO to prove that the value of shares is derived principally from immovable property situated in the source country. In other words, it has to be proved that the Indian company in which the assessee had invested the money towards equity was principally holding immovable property. Neither any such allegation has been made by the Assessing Officer in the assessment order before invoking Article 13(4) of India Netherlands Tax Treaty, nor in course of the proceeding before DRP or even the Tribunal any material has been brought on record by Revenue to demonstrate that the condition of Article 13(4) of India Netherlands Tax Treaty is satisfied. Thus the short term capital gain will not be taxable even under Article 13(4) of the India Netherlands Tax Treaty. Thus, seen from any angle, the short-term capital gain arising on sale of shares is not taxable in India. In view of the aforesaid, we delete the addition made by the AO. Appeal of assessee allowed.
Issues Involved:
1. Taxability of short-term capital gain on the sale of shares. 2. Application of India-Mauritius Double Taxation Avoidance Agreement (DTAA). 3. Determination of the beneficial owner of the capital gain. 4. Applicability of India-Netherlands DTAA. 5. Impact of the Multilateral Instrument (MLI) on the tax treaty. Issue-wise Detailed Analysis: 1. Taxability of Short-term Capital Gain on Sale of Shares: The core issue in the appeal was the taxability of a short-term capital gain of Rs. 4,77,44,375/- arising from the sale of shares of Citrus Payments Solutions Pvt. Ltd. by the assessee, a non-resident corporate entity incorporated in Mauritius. The assessee claimed the gain as exempt under Article 13(4) of the India-Mauritius DTAA. 2. Application of India-Mauritius Double Taxation Avoidance Agreement (DTAA): The assessee, holding a valid Tax Residency Certificate (TRC) issued by Mauritian Tax Authorities, claimed the benefit under the India-Mauritius DTAA. The Assessing Officer (AO) rejected this claim, arguing that the assessee was a conduit entity with no economic or commercial substance, used solely to obtain tax advantages under the treaty. The AO applied the doctrine of substance over form and concluded that the beneficial owner of the capital gain was the holding company in the Netherlands, thus invoking the India-Netherlands DTAA instead. 3. Determination of the Beneficial Owner of the Capital Gain: The AO asserted that the assessee lacked financial strength, and the entire investment in Citrus India shares was funded through loans from its holding company, PayU Global B.V., Netherlands. The AO contended that the effective control and management of the assessee lay with the holding company, making it the beneficial owner of the capital gain. The AO also referenced the protocol to the India-Mauritius Tax Treaty effective from 01.04.2017 and the potential impact of the MLI. 4. Applicability of India-Netherlands DTAA: The assessee argued that even if the India-Mauritius DTAA was not applicable, the short-term capital gain would not be taxable under the India-Netherlands DTAA. Article 13(4) of the India-Netherlands DTAA stipulates that gains derived from the sale of shares can be taxed in India only if the value of such shares is derived principally from immovable property situated in India. The AO failed to establish this condition. 5. Impact of the Multilateral Instrument (MLI) on the Tax Treaty: The AO speculated that the MLI, once signed by Mauritius and implemented, would alter the legal position established in the case of Azadi Bachao Andolan, impacting the applicability of the India-Mauritius DTAA. However, the Tribunal found this reasoning speculative and not grounded in the current legal framework. Tribunal's Findings: The Tribunal observed that the assessee, incorporated in Mauritius in 2006, had been engaged in investment activities and held a valid TRC. The Tribunal relied on the CBDT Circular No. 789, dated 13.04.2000, and the Supreme Court's decision in Azadi Bachao Andolan, which upheld the validity of the TRC for claiming treaty benefits. The Tribunal rejected the AO's contention that the assessee was a mere conduit, noting that the assessee had substantial investments and proposed further investments in India. The Tribunal concluded that the short-term capital gain was not taxable in India under the pre-amended Article 13(4) of the India-Mauritius DTAA. Even considering the AO's reasoning, the Tribunal found that the gain would not be taxable under the India-Netherlands DTAA, as the AO failed to establish that the value of the shares was derived principally from immovable property in India. Conclusion: The Tribunal allowed the appeal, holding that the short-term capital gain arising from the sale of shares by the assessee was not taxable in India under the India-Mauritius DTAA. The addition made by the AO was deleted, and the appeal was decided in favor of the assessee.
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