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2020 (3) TMI 634 - AT - Income TaxIncome accrued in India - transaction of transfer of shares under consideration - addition of STCG India-Belgium tax treaty - A.O held a conviction that as the assessee by transferring the shares of the aforesaid company viz. Accelyst Pte Ltd, Singapore, had indirectly transferred the shares of its subsidiary Indian company viz. M/s Accelyst Solutions Pvt., therefore, the gain arising from the said fact pattern of transaction of transfer of shares was exigible to tax in India, both as per Explanation 5 to Sec. 9(1)(i) of the Act and also Article 13(5) of the India-Belgium tax treaty - HELD THAT - 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 . 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 shares are transferred should be a resident of a contracting state. Accordingly, for the purpose of applying Article 13(5) of the tax treaty, one of the pre-condition that has to be satisfied is that the company whose shares are transferred should be a resident of a Contracting State viz. India or Belgium. As such, it is only if the shares transferred are of a company which is a resident of India and the same forms part of a participation of at least 10 per cent of the capital stock of the company, that the gains arising from alienation of such shares would be taxable in India as per Article 13(5) of the tax treaty. However, as the shares transferred by the assessee in the present case are of Accelyst Pte. Ltd., i.e a Singapore based company, therefore, in the absence of satisfaction of the pre-condition that the shares transferred should form part of the capital stock of a company which is a resident of a Contracting State, the application of Article 13(5) stands excluded to the current fact pattern of the transaction of transfer of shares under consideration. Article 13(5) of the India-Belgium tax treaty does not permit a see through approach. Unlike Article 13(4) which is the only provision in the Article 13 of India- Belgium tax treaty that provides for a see-through approach, the Article 13(5) of the tax treaty in the absence of usage of words directly or indirectly does not provide for a see-through approach. Accordingly, in the absence of a see-through approach in Article 13(5), the transfer of shares of Accelyst Pte. Ltd., Singapore cannot be regarded as a transfer of shares of its Indian subsidiary viz. Accelyst Solutions Pvt. Ltd. Our aforesaid view is supported by the judgment of Sanofi Pasteur Holding SA 2013 (2) TMI 589 - HIGH COURT OF ANDHRA 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. Unilateral amendment made available in the I.T Act as Explanation 5 to Sec. 9(1)(i) of the Act, cannot be read into the India-Belgium tax treaty. Accordingly, in the absence of any such corresponding provision in the India-Belgium tax treaty, both the A.O/DRP were in error in concluding that the shares of Accelyst Pte. Ltd., Singapore were to be deemed to be situated in India. Both the A.O and the DRP are in error in concluding that the gains on the transfer of the shares of Accelyst Pte. Ltd., Singapore by the assessee company would be exigible to tax in India as per Article 13(5) of the India-Belgium tax treaty. As observed by us hereinabove, as the current fact pattern of the transaction of transfer of shares is assessable under the residuary provisions i.e Article 13(6) of the India-Belgium tax treaty, therefore, the gain, if any arising therefrom would only be taxable in Belgium i.e the Contracting State of which the alienator of the shares i.e the assessee company is a resident of. Before parting, we may herein observe that as we have concluded that the gains arising from the transaction of transfer of shares of Accelyst Pte. Ltd., Singapore by the assessee company are not chargeable to tax in India as per the India-Belgium tax treaty, therefore, we refrain from adverting to chargeability of the same under the provisions of the Income-tax Act, 1961, which having been rendered as academic in nature are thus left open. Accordingly, we set aside the order passed by the A.O under Sec. 143(3) r.w.s 144C(13), dated 15.10.2018 and vacate the addition of STCG made in the hands of the assessee. - Decided in favour of assessee.
Issues Involved:
1. Whether the gains from the transfer of shares of Accelyst Pte. Ltd., Singapore are taxable in India under Article 13(5) of the India-Belgium Tax Treaty and Explanation 5 to Section 9(1)(i) of the Income-tax Act, 1961. 2. Applicability of the deeming provisions of Explanation 5 to Section 9(1)(i) of the Income-tax Act, 1961 to the India-Belgium Tax Treaty. 3. Whether Accelyst Pte. Ltd., Singapore can be deemed a resident of India for tax purposes. 4. Interpretation of the term "forming part of a participation" in the context of Article 13(5) of the India-Belgium Tax Treaty. 5. Applicability of the judgment in Sanofi Pasteur Holding SA Vs. Department of Revenue, Ministry of Finance. Issue-wise Analysis: 1. Taxability of Gains under Article 13(5) of the India-Belgium Tax Treaty and Explanation 5 to Section 9(1)(i): The primary issue was whether the gains from the transfer of shares of Accelyst Pte. Ltd., Singapore by the assessee to M/s Jasper Infotech Pvt. Ltd. are taxable in India. The assessee argued that the gains should be taxed in Belgium under Article 13(6) of the India-Belgium Tax Treaty, as the alienator is a resident of Belgium. The AO, however, contended that the gains are taxable in India under Article 13(5) of the treaty, as the shares derive substantial value from assets located in India, invoking Explanation 5 to Section 9(1)(i) of the Income-tax Act. 2. Applicability of Explanation 5 to Section 9(1)(i) to the Tax Treaty: The Tribunal noted that Explanation 5 to Section 9(1)(i) of the Income-tax Act creates a deeming fiction for the purposes of domestic tax law, whereby shares of a foreign company deriving substantial value from assets in India are deemed situated in India. However, this deeming provision cannot override the provisions of the tax treaty. Amendments to domestic law cannot be read into the provisions of a tax treaty unless specifically provided for in the treaty itself. 3. Deeming Accelyst Pte. Ltd., Singapore as a Resident of India: The AO's conclusion that Accelyst Pte. Ltd., Singapore should be deemed a resident of India was found to be erroneous. The Tribunal clarified that Explanation 5 to Section 9(1)(i) does not deem a foreign company itself to be a resident of India but only deems its shares to be situated in India for capital gains taxation purposes. Thus, Accelyst Pte. Ltd., Singapore remains a resident of Singapore, and its shares cannot be treated as shares of a company resident in India. 4. Interpretation of "Forming Part of a Participation": The term "forming part of a participation" used in Article 13(5) of the India-Belgium Tax Treaty was interpreted by the AO by borrowing meanings from the domestic law. However, the Tribunal held that such an interpretative exercise was unwarranted as the term "resident" is already defined in the tax treaty. The term "forming part of a participation" should be understood in the context of shareholding in a company resident of either India or Belgium, not by indirect participation through another company. 5. Applicability of Sanofi Pasteur Holding SA Judgment: The Tribunal found that the lower authorities erred in not following the judgment of the Andhra Pradesh High Court in Sanofi Pasteur Holding SA, which ruled out a see-through approach in Article 14(5) of the India-France Tax Treaty (similar to Article 13(5) of the India-Belgium Tax Treaty). The judgment clarified that transfer of shares of a holding company cannot be regarded as a transfer of shares of its subsidiary entity. The Tribunal concluded that the gains from the transfer of shares of Accelyst Pte. Ltd., Singapore should be taxed in Belgium under Article 13(6) of the India-Belgium Tax Treaty. Conclusion: The Tribunal set aside the AO's order and vacated the addition of short-term capital gains of ?163,97,61,840/- in the hands of the assessee, holding that the gains from the transfer of shares of Accelyst Pte. Ltd., Singapore are not chargeable to tax in India as per the India-Belgium Tax Treaty. The appeal filed by the assessee was allowed.
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