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2017 (6) TMI 1159 - HC - Income TaxExemption claimed under the DTAA - Whether the transaction in question, i.e., sale of shares of Indian Subsidiary to the Singapore based company was in principle taxable in India or not? - Held that - Tribunal disagreed with the opinion of the AO and the CIT(A) in this regard. The Tribunal found that Section 9(1)(v) of the Act had no applicability and therefore, the interest could not be said to have accrued or arisen or deemed to have accrued or arisen in India. The Tribunal accordingly held that the interest paid by the non-resident to the assessee company abroad was ineligible to be brought to tax under Section 9 of the Act. The opinion of the AO that this interest was paid on account of a transaction involving the sale of a capital asset in India was not accepted by the Tribunal as the said interest was paid by Ascendas to compensate for the delay in remitting the sale consideration and it could not be considered to be part of the sale consideration. The Tribunal further opined that even if it were to be considered as part of the sale consideration, it would be exempt under the DTAA and therefore, either way, the interest received by the assessee company abroad from the non-resident could not be brought to tax in India. Whether applicability of Article 13(4) of the DTAA was raised before the CIT(A) or the Tribunal ? - Held that - The fact remains that the AO, having initially opined that the inclusive clause in Article 13(4) of the DTAA would be applicable to the transaction thereby making it taxable in India, thereafter accepted the plea of the assessee company that it was not applicable. This acceptance by the AO is explicit from the assessment order. Having agreed with the assessee company on this aspect, the AO held that Article 13(1) of the DTAA would be applicable to the transaction. This finding, which was confirmed in appeal by the CIT(A), is now sought to be discarded by the revenue. The learned senior standing counsel fairly concedes that Article 13(1) was wrongly applied by the authorities to the transaction and contends that it is Article 13(4) which would have application, as the exclusionary clause therein would not apply. The record however reflects that this issue was never raised by the revenue before the Tribunal. Without a factual finding as to whether the immovable property of VITP Limited was property in which its business was carried on, the question of applying one or the other parts of Article 13(4) at this stage would not arise. In consequence, the contention of the learned senior standing counsel that interpretation of Article 13(4) of the DTAA is purely a question of law does not merit acceptance. Therefore, the issue of applicability of Article 13(4) of the DTAA to the subject transaction, so as to make it taxable in India, cannot be permitted to be raised at this late stage. Whether the interest paid to the assessee company by Ascendas is taxable in India? - Held that - agreement contemplated extension of the closing date by the parties. It appears that the closing date, which could be mutually extended, was so extended as recorded in the letter dated 15.02.2005 addressed by Ascendas to the assessee company. As consideration for such extension of the closing date, Ascendas undertook to pay interest at 7% per annum on the sale consideration, payment of which stood deferred consequent to the extension of the closing date. In effect, payment of the said interest did not partake the nature of penalty charges as it was not penal in character, in any manner. Therefore, Article 11(1) of the DTAA applied on all fours, and irrespective of whether such interest accrued or arose or is deemed to have accrued or arisen in India under Section 9(1)(i) of the Act, it stood exempted from taxation in India under the DTAA. The finding of the Tribunal to this effect therefore does not warrant interference.
Issues Involved:
1. Taxability of capital gains under the DTAA. 2. Applicability of Section 10(23G) of the Income Tax Act, 1961. 3. Taxability of interest income under Section 9(1)(v) of the Income Tax Act, 1961. Detailed Analysis: 1. Taxability of Capital Gains under the DTAA: The primary issue was whether the capital gains arising from the sale of shares by the assessee company (a resident of Netherlands) in an Indian company (VITP Limited) to Ascendas were taxable in India under the DTAA between India and Netherlands. The Assessing Officer (AO) initially contended that Article 13(1) of the DTAA, which pertains to gains from the alienation of immovable property, was applicable. The AO argued that the shares of VITP Limited partook the character of immovable property under Indian law (Section 2(47) and Section 269UA(d) of the Income Tax Act). However, the Tribunal found this interpretation unsustainable, holding that the definitions of 'immovable property' under various provisions of the Act differed and that a share in a company could not be considered immovable property as per the Supreme Court's ruling in Vodafone International Holdings B.V. v. Union of India. The Tribunal concluded that Article 13(1) of the DTAA was inapplicable and that Article 13(5) was applicable, which states that gains from the alienation of any property other than those referred to in paragraphs 1, 2, 3, and 4 shall be taxable only in the State where the alienator is a resident. Consequently, the capital gains were held to be taxable in the Netherlands and not in India. 2. Applicability of Section 10(23G) of the Income Tax Act, 1961: The assessee company alternatively claimed exemption under Section 10(23G) of the Income Tax Act, which provides for exemption of income by way of dividends or long-term capital gains from investments in infrastructure companies. The AO rejected this claim, stating that the investments were made prior to the approval and notification of VITP Limited under Section 10(23G) and that the exemption was applicable only for 'further investments.' The Tribunal, however, disagreed, stating that the Act did not limit the exemption to 'further investments' and that the investment by the assessee company qualified for exemption under Section 10(23G). 3. Taxability of Interest Income under Section 9(1)(v) of the Income Tax Act, 1961: The AO held that the interest paid by Ascendas to the assessee company for the delayed payment of sale consideration was taxable in India under Section 9(1)(v) of the Act, which deems income by way of interest payable by a non-resident to be income accruing or arising in India if it is payable in respect of any debt incurred or moneys borrowed for business purposes in India. The Tribunal disagreed, holding that Section 9(1)(v) had no applicability as the interest was not in respect of any debt incurred or moneys borrowed for business purposes in India. The Tribunal further held that the interest was not penal in nature but was paid as consideration for the deferred closing date of the transaction, making Article 11 of the DTAA applicable, which exempts such interest from taxation in India. Conclusion: The High Court upheld the Tribunal's findings that: - The capital gains were exempt from taxation in India under Article 13(5) of the DTAA. - The assessee company was entitled to exemption under Section 10(23G) of the Act. - The interest paid by Ascendas to the assessee company was not taxable in India under Section 9(1)(v) of the Act and was exempt under Article 11 of the DTAA. The appeals by the revenue were dismissed, and the revenue was directed to refund the amount payable to the assessee company.
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