2024 (10) TMI 72 - AT - Income Tax

Income deemed to accrue or arise in India - Taxability of gains on foreign exchange transactions under the India-Spain DTAA - reasons for bringing the LTCG to tax in India is that as per Article-14(4) the share of immovable property is more than 50% of the total assets of the assessee company and that any gain from alienation of shares of the company whose property consists principally immovable property, is taxable in India HELD THAT - As per Article-14(4) the gains from alienation of shares of the capital stock of a company (the assessee in this case) the property of which consists, directly or indirectly principally of immovable property situated in a contracting state (India) may be taxed in that State (India). Therefore, the revenue is contending that the immovable property owned by the assessee is more than 50% and therefore, the gain arising on the transfer of shares would result in capital gain in India. Revenue in this regard rejected the valuation report submitted by the assessee and also the valuation done with regard to the overall other assets owned by the assessee. From the table extracted in the earlier part of this order, we notice that the value of immovable property as a percentage of total assets of the assessee does not exceed 50% either based on book value or as per the Fair Market Value. Therefore, we see merit in the submission of the AR that Article-14(4) of India-Spain DTAA cannot be applied in assessee's case on this count. It is an undisputed fact that assessee is holding only 9.65% of the shares indirectly in IMI Investments Two Ltd and therefore applying the ratio of the above decision it cannot be said that such holding is towards any controlling interest. As also relevant to mention here that as per UN Model Convention commentary, the provisions of Article 14(4) come into effect to prevent the case of indirect transfer of ownership of immovable property by transfer of shares owning these properties. There is merit in the submission of AR that Article 14(4) of DTAA between India and Spain cannot be applied in assessee's case. We hold that Article-14(4) of the DTAA between India and Spain cannot be applied in assessee's case and therefore, the capital gain arising out of transfer of shares of the IMI Investments Two Ltd. cannot be taxed in India. Accordingly, we direct the AO to delete the addition made in this regard. Assessee appeal allowed.

Summary

Issues Involved:
1. Validity of the assessment order under section 143(3) of the Income Tax Act, 1961.
2. Non-communication of the speaking order under section 197.
3. Classification of data center equipment as immovable property.
4. Non-issuance of refund due to the absence of a bank account in India.
5. Rejection of the valuation reports submitted by the assessee.
6. Applicability of Article-14(4) of the India-Spain DTAA on capital gains.

Issue-wise Detailed Analysis:

1. Validity of the assessment order under section 143(3) of the Income Tax Act, 1961:
The assessee argued that the assessment order passed by the AO was "bad in law" and based on an incorrect appreciation of facts. The Tribunal examined the procedural aspects and found that the AO had followed due process in issuing statutory notices and conducting scrutiny. However, the Tribunal did not find substantial merit in this ground alone to invalidate the order.

2. Non-communication of the speaking order under section 197:
The assessee contended that the AO did not share his reservations mentioned in the speaking order under section 197, which was crucial for the assessee to counter the findings. The Tribunal noted that the DRP also failed to acknowledge this lapse. The Tribunal emphasized that the absence of communication of the speaking order hindered the assessee's ability to address the issues effectively.

3. Classification of data center equipment as immovable property:
The AO classified the data center equipment as immovable property, which the assessee disputed. The Tribunal examined the nature of the assets and concluded that the AO's classification was erroneous. The data center equipment did not meet the criteria for immovable property.

4. Non-issuance of refund due to the absence of a bank account in India:
The assessee argued that no refund was issued due to the absence of a bank account in India. The Tribunal acknowledged this fact and directed the AO to address the issue of refund issuance appropriately.

5. Rejection of the valuation reports submitted by the assessee:
The assessee submitted a valuation report from Jones Lang Lasalle Property Consultant (I) Pvt. Ltd. (JLL), which the AO and DRP rejected. The Tribunal reviewed the valuation methodology and found it to be scientific and reliable. The Tribunal held that the lower authorities were incorrect in rejecting the JLL valuation report without providing a counter-valuation.

6. Applicability of Article-14(4) of the India-Spain DTAA on capital gains:
The primary issue was whether the gains from the alienation of shares were taxable in India under Article-14(4) of the India-Spain DTAA. The AO contended that the immovable property constituted more than 50% of the total assets, making the gains taxable in India. The assessee argued that the value of immovable property was less than 50%, supported by the JLL valuation report. The Tribunal examined the capital structure and valuation details and concluded that the value of immovable property did not exceed 50% of the total assets. The Tribunal cited a precedent (JCIT Vs. Merrill Lynch Capital Market Espana SA SV) to support its decision that Article-14(4) was not applicable. Consequently, the capital gains were not taxable in India.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the AO to delete the addition made concerning the capital gains. The Tribunal emphasized that the provisions of Article-14(4) of the India-Spain DTAA could not be applied in this case, and the capital gains arising from the transfer of shares were not taxable in India. The order was pronounced in the open court on 27-08-2024.