2019 (12) TMI 488 - AT - Income Tax

Income accrued in India - turstee of a trust - representative assessee - short term capital gains - Benefit of Indo Dutch Tax Treaty (DTAA) - India-Netherlands Double Taxation Avoidance Agreement - Determining treaty protection - HELD THAT - When an assessee is a representative assessee of a tax transparent entity, it is the status of beneficiaries or constituents of tax transparent entities which is relevant for the purpose of determining treaty protection. Viewed thus, this is beyond doubt that the income in question has actually accrued to the taxable entities on the Netherlands, which, according to the approach adopted by the AO, is sine qua non for tax treaty protection. It would thus appear that the treaty protection has indeed been wrongly declined to the assessee. The reservation on treaty protection has arises only on account of INGEMEF, a tax transparent entity which is in the nature of contractual arrangement, being in the picture, but then the assessee being a representative assessee of a tax transparent entity 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. 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, the assessee is entitled to treaty protection. Once that is found to be the position, article 13(5) clearly provides that the gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 4 shall be taxable only in the State of which the alienator is a resident . So far as sale on gains of shares are concerned, only article 13(4) can come into play and that too is not applicable on the facts of this case and it is not even the case of the revenue that the gains are on sale of unlisted shares which form part of substantial interest in the capital stock or are of the companies which hold principally immovable properties, other than the property in which the business is carried out. In any case, article 13(5) lays down the broad principle and article 13(1) to 13(4) set out the exceptions. It is not even the case of the AO, and rightly so, that these exception clauses come into play on the facts of this case. This being the position, the capital gains, on sale of shares, in the hands of the assessee, and the investors it represents as trustee, are treaty protected from taxation in India. As we hold so, we may add that we are dealing with pre 1st April 2013 legal position and the requirements of Tax Residency Certificate (TRC) do not, therefore, come into play - direct the Assessing Officer to grant the benefit of Indo Dutch tax treaty on the facts of this case. Decided in favour of assessee.

Issues Involved:
1. Denial of benefit under Article 13 of the India-Netherlands Double Taxation Avoidance Agreement (DTAA).
2. Taxability of short-term capital gains in India.
3. Status and taxability of the assessee as a representative entity.
4. Interpretation of tax treaties concerning tax transparent entities.

Issue-wise Detailed Analysis:

1. Denial of benefit under Article 13 of the India-Netherlands Double Taxation Avoidance Agreement (DTAA):
The primary grievance of the assessee was the denial of the benefit of Article 13 of the India-Netherlands DTAA by the CIT(A) and the Assessing Officer (A.O.). The assessee argued that it should be entitled to treaty protection as per Article 13(5), which exempts capital gains from taxation in India if the entity is a resident of the Netherlands. The A.O. and CIT(A) rejected this claim, stating that the assessee, being a tax transparent entity and not a taxable entity in the Netherlands, could not avail of the treaty benefits.

2. Taxability of short-term capital gains in India:
The assessee reported short-term capital gains of ?23,38,08,365 and long-term capital gains of ?12,60,91,050 on the sale of shares. While the long-term capital gains were exempt under section 10(38) of the Income Tax Act, 1961, the short-term capital gains were claimed to be protected from Indian taxation under the DTAA. The A.O. assessed the short-term capital gains as taxable in India, rejecting the treaty protection claim.

3. Status and taxability of the assessee as a representative entity:
The assessee, a trustee of ING Emerging Markets Equity Based Funds (INGEMEF), argued that it should be treated as a representative assessee of the fund’s participants, who are tax residents of the Netherlands. The A.O. and CIT(A) rejected this argument, stating that the assessee could not be treated as a representative assessee of the participants and that the income was assessable in the hands of the assessee as an Association of Persons (AOP).

4. Interpretation of tax treaties concerning tax transparent entities:
The Tribunal emphasized the importance of understanding the structure of the assessee entity, which is a tax transparent entity under Dutch law. The Tribunal noted that INGEMEF is not a legal entity but a contractual arrangement for collective investments by three participants, all of whom are tax residents of the Netherlands. The Tribunal highlighted that the income should be considered as accruing to the participants, who are taxable entities in the Netherlands, thus entitling the assessee to treaty protection.

Conclusion:
The Tribunal concluded that the assessee, as a trustee of a tax transparent entity, is entitled to the benefit of the Indo-Dutch tax treaty. The Tribunal held that the income in question belongs to the tax residents of the Netherlands, and the treaty protection cannot be denied. The Tribunal directed the A.O. to grant the benefit of the Indo-Dutch tax treaty to the assessee, allowing the appeal in favor of the assessee. The Tribunal emphasized that the interpretation of tax treaties should consider the ordinary meanings of the terms in the context of the treaty’s objectives and purposes, rather than their literal meanings.

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