2020 (6) TMI 166 - AT - Income Tax

Income accrued in India - Capital gain chargeable to tax in India - income of the Cyprus entity chargeable to tax in India - whether the sale of shares by a Cyprus company to the assessee of an Indian company, who was holding a technology Park immovable property as only asset, is taxable in India in view of the Double Taxation Avoidance Agreement between India and Cyprus? - HELD THAT - There is no dispute that the seller of the share is a resident of Cyprus, holding necessary tax residency certificate, therefore, the recipient of the income is entitled to take the benefit of the Double Taxation Avoidance Agreement between India and Cyprus. AO and the assessee both agree that under the Indian income tax act, the transaction is taxable in India by virtue of the provisions of section 5 (2) and 9, but taxability is to be determined as per DTAA. The Cyprus Company has sold the shares of an Indian company. The impugned asset sold by the assessee does not fall under the article 6 (2) of the Double Taxation Avoidance Agreement as immovable property , therefore article 14 (1) does not apply to the transaction. Further, as the Cyprus entity does not have any permanent establishment or fixed base, the provisions of article 14 (2) does not apply. Further it is not the alienation of any ship or aircraft or movable property pertaining to that, therefore article 14 (3) also do not apply. For this reason that the transaction falls under article 14 (4) of the double taxation avoidance agreement as the impugned property from which the capital gain has arose is shares of an Indian company. Therefore any gain arising from the alienation of property i.e. shares of an Indian company, shall be chargeable to tax only in the contracting state in which the alienator is resident. Here the alienator is a Cyprus resident. Therefore such gain is chargeable to tax only in Cyprus. Thus, the new double taxation avoidance agreement has come into force much letter then the transaction took the place. In the new double taxation, avoidance agreement there is a provision as per article 13 (4) wherein now such transaction, probably is chargeable to tax in India. However, as the amended double taxation avoidance agreement is subsequent to the date of transaction it does not apply. No infirmity in the order of the learned that CIT A in holding that the income of the Cyprus resident seller is not chargeable to tax in India, as per the double taxation avoidance agreement prevailing at that time, no tax was required to be withheld by the assessee. - Decided against revenue As already held that the income of the Cyprus entity is not chargeable to tax in India, applicability of the provisions of section 163 of the income tax act becomes merely academic in nature

Issues Involved:
1. Taxability of capital gains arising from the sale of shares by a Cyprus company to an Indian company.
2. Obligation to deduct tax at source under Section 195 of the Income Tax Act.
3. Applicability of Section 163(1) of the Income Tax Act regarding the assessee being treated as a representative assessee.
4. Validity of the assessment order without a separate order under Section 163(2).

Detailed Analysis:

1. Taxability of Capital Gains:
The primary issue revolves around whether the capital gains arising from the sale of shares by a Cyprus company to an Indian company are taxable in India. The shares in question derive their value from immovable property situated in India. The Assessing Officer (AO) argued that the capital gains are taxable in India under Article 14 of the Indo-Cyprus Double Taxation Avoidance Agreement (DTAA) and Sections 5(2) and 9(1) of the Income Tax Act. The AO contended that the transfer of shares effectively resulted in the transfer of rights over the land, thus making the gains taxable in India.

The assessee countered this by stating that the seller is a tax resident of Cyprus without a permanent establishment in India, and as per Article 14(4) of the DTAA, the gains should be taxed in Cyprus. The CIT (Appeals) upheld the assessee's view, stating that the capital gains are not chargeable to tax in India under the DTAA applicable at the time of the transaction. The Tribunal concurred, noting that the DTAA in force during the relevant assessment year (2010-11) did not provide for the taxation of capital gains from the sale of shares in India if the seller is a resident of Cyprus.

2. Obligation to Deduct Tax at Source:
The AO held that the assessee was required to deduct tax at source under Section 195 of the Income Tax Act while making payments to the Cyprus company, as the transaction was chargeable to tax in India. The assessee argued that no tax was required to be deducted as per the DTAA, which the CIT (Appeals) accepted. The Tribunal agreed, stating that since the capital gains were not taxable in India under the DTAA, there was no obligation on the assessee to deduct tax at source.

3. Applicability of Section 163(1):
The AO considered the assessee as an agent of the Cyprus company under Section 163(1) of the Income Tax Act, thus holding it responsible for the tax liability. The assessee contested this, arguing that a separate order under Section 163(2) is mandatory before treating someone as a representative assessee. The CIT (Appeals) supported the assessee's view, citing judicial precedents that emphasize the necessity of such an order. The Tribunal found this issue to be academic, given its decision that the capital gains were not taxable in India.

4. Validity of the Assessment Order:
The assessee argued that the assessment order was invalid as it was made without a separate order under Section 163(2) declaring the assessee as a representative assessee. The Tribunal agreed with the CIT (Appeals) that the absence of such an order rendered the proceedings void ab initio. The Tribunal also noted that the assessment should have been made separately for the non-resident's income, treating the assessee as a representative assessee, which was not done.

Conclusion:
The Tribunal upheld the CIT (Appeals) decision, confirming that the capital gains from the sale of shares by the Cyprus company were not taxable in India under the DTAA applicable at the time. Consequently, the assessee was not required to deduct tax at source, and the assessment order was invalid due to the lack of a separate order under Section 163(2). The appeal by the AO was dismissed on all grounds.

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