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TMI Blog2020 (3) TMI 634X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, 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. - ITA No.7241/Mum/2018 - - - Dated:- 5-3-2020 - Shri Ravish Sood, Judicial Member And Shri N.K. Pradhan, Accountant Member For the Appellant : Shri Porus Kaka, Senior Advocate Shri. Manish Kanth For the Respondent : Shri G.N. Makwana, D.R ORDER PER RAVISH SOOD, JM The present appeal filed by the assessee is directed against the assessment framed by the A.O under Section 143(3) r.w.s 144C(13) of the Income-tax Act, 1961 (for short Act ), dated 15.10.2018. The assessee has assailed the impugned order by raising before us the following grounds of appeal: Based on the facts and circumstances of the case and in law, Sofina S.A. (hereinafter referred to as Appellant ), respectfully craves leave to prefer an appeal against the Assessment Order (hereinaf ter r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 5 to Section 9(1)(i) of the Act without having regard to the fact that the deeming fiction created by Explanation 5 to Section 9(1)(i) of the Act deems shares of a foreign company to be situated in India and does not deem that the company itself becomes a resident in India. 7. In the facts and circumstances of the case, the learned AO and Hon'ble DRP has erred in treating a company incorporated under the laws of Singapore as a company resident in India, without having regard to the provisions of Act, which provides for specific provisions to regard a foreign company as a resident in India and the provisions under Section 9 do not suggest changing the residential status of a company. 8. In the facts and circumstances of the case, the Hon'ble DRP has erred in holding that Accelyst Singapore shall be deemed to be situated in India as per Explanation 5 to Section 9(1)(1), as it derives substantial value from the assets located in India, without considering the fact that how a share is valued is irrelevant for determining the situs of the shares. 9. In the facts and circumstances of the case, merely because the shares of Accelyst Singapore are deemed to be situ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 13(5) of the India-Belgium Tax Treaty, by erroneously stating that: (a) shares of Accelyst Singapore form a par t of participation of the capital stock of Accelyst India, indirectly; (b) though Accelyst Singapore is not a resident of India, yet its shares are deemed to be situated in India by virtue of Explanation 5 to Section 9(1)(i). This means that shares of Accelyst Singapore are deemed to be the shares of a company resident in India; (c) when the assessee transferred 11.34% shares of Accelyst Singapore, it has in essence transferred or deemed to have transferred 11.34% shares of Accelyst India. In other words, the assessee has transferred 11.34% capital stock of Accelyst Singapore, which is forming part of a participation of shares of at least 10% of capital stock of Accelyst India. without having regard to the provisions of Article 13(5), which explicitly provides that the company whose shares are transferred should be a resident of one of the contracting states i.e. either India or Belgium. 15. In the facts and circumstances of the case, the learned AO and the Hon'ble DRP has erred in law by incorporating a deeming fiction, created by Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 3(2) without considering the context in which it was used under the India-Belgium Tax Treaty. 22. In the facts and circumstances of the case, the learned AO has erred in law in referring to Article 3 of India-Belgium Tax Treaty, without taking into consideration that Article 3 only suggests that the terms not defined under the Tax Treaty shall have the same meaning under the Act and does not suggest incorporating the deeming fictions under the Act into the Tax Treaty. 23. In the facts and circumstances of the case, the learned AO erred in relying on the provisions of Section 2(18), 2(22)(e), 2(32) and 2(47) of the Act for the purposes of the meaning of the undefined terms in the Tax Treaty i.e. 'forming part of a participation' and 'alienation'. No valid distinction between the present facts and Sanofi 24. In the facts and circumstances of the case, the Hon'ble DRP erred in law confirming the dissimilarities as pointed out by the AO between the facts of the present case and the judgment of the Hon'ble Andhra High Court in the case of Sanofi Pasteur Holdings SA Without considering the principle which has been laid down by the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation mechanism, the provision cannot be given effect. 29. Without prejudice, the learned AO erred in concluding that the entire short -term capital gains income of ₹ 163,97,61,840/- arising from the indirect transfer of shares of Accelyst India is deemed to be accruing and arising in India under Section 9(1)(i) read with Explanation 5 thereto, without giving due consideration to actual income which could have been taxable in India. 2. Briefly stated, the assessee company which is a tax resident of Belgium is a venture capital investor listed on Euronext, Brussels and had invested into start ups of India like Myntra, Freecharge etc. As per the records, the assessee company had invested across nine countries in two continents. The assessee company had e-filed its return of income for Assessment Year 2015-16 on 25.09.2015, wherein it had declared its total income at Rs. Nil and claimed a refund of ₹ 70,93,60,000/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act. 3. In the course of the assessment proceedings it was observed by the A.O that the assessee had vide a share subscription agreement dated J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00,03,918/- 1.2 Series C Preference Shares 23, Dec 2014 31,34,624 26, March 2015 31,34,624 ₹ 18,97,57,921/- Total ₹ 163,97,61,840/- In the backdrop of his aforesaid observations the A.O called upon the assessee to explain as to why it had failed to offer the aforesaid amount of income from STCG on alienation of shares for tax in its return of income for the year under consideration. In reply, it was the claim of the assessee that as per Article 13(6) of the India-Belgium tax treaty which was applicable to the current fact pattern of the transaction under consideration, the gains arising from the alienation of the aforesaid shares of Accelyst Pte. Ltd., Singapore were to be taxed in the Contracting State of which the alienator was a resident. As such, it was submitted by the assessee that as it was a resident of Belgium, therefore, the taxability under Article 13(6) did arise in Belgium and not in India. In order to fortify its aforesaid claim the assessee had als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Andhra Pradesh), the A.O was of the view that the revenue had not accepted the said decision and had preferred a Special Leave Petition (SLP) before the Hon ble Supreme Court which was pending disposal. On the basis of his aforesaid observations, the A.O called upon the assessee to explain as to why the STCG from transfer of the preference shares of Accelyst Pte. Ltd., Singapore to M/s Jasper Infotech Pvt. Ltd. may not be brought to tax @40%. 5. The assessee in its reply submitted before the A.O that two fold conditions were cumulatively required to be satisfied for applicability of Article 13(5) of the India-Belgium tax treaty viz. (i). that, the transfer of shares should represent participation of at least 10% in the capital stock of the company; and (ii). that, the company whose shares are proposed to be transferred should be a resident of a Contracting state. It was submitted by the assessee that for applicability of Article 13(5) of the India-Belgium tax treaty and taxability of the transaction of transfer of shares in India, the foremost condition was that the company whose shares were transferred should be a resident of India, and such shares should represent at leas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Sec. 9(1)(i) of the Act, and were deemed to be the shares of a company resident in India. On the basis of his aforesaid observations, the A.O was of the view that as the transfer of the shares of Accelyst Pte. Ltd., Singapore was an indirect transfer of assets situated in India, the same was to be deemed to be the transfer of capital stock of a company resident of India. Accordingly, the A.O was of the view that the transaction of transfer of shares under the current fact pattern was taxable as per the Explanation 5 to Sec. 9(1)(i) of the Income-tax Act, 1961. As regards the taxability of the STCG on transfer of shares under consideration as per the India-Belgium tax treaty, the A.O referring to Article 13(5) of the tax treaty, observed, that the term forming part of a participation therein used was not defined in the treaty. Accordingly, drawing support from Article 3 of the India-Belgium tax treaty the A.O interpreted the same by borrowing the meaning of the term participate as was used in Section 2(18), Section 2(22)(e) and Sec. 2(32) of the Income-tax Act, 1961. Observing, that the term participate had been used in the context of participation in the profits of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RP did not find any infirmity in the view taken by the A.O as regards assessing of the STCG of ₹ 163,97,61,840/- on the transfer of shares of Accelyst Pte. Ltd., Singapore by the assessee company and rejected the objections filed by the assessee. 8. The A.O after receiving the order passed by the DRP under Sec. 144C(5) of the Act, dated 27.09.2018, therein gave effect to the same and vide his order passed under Sec. 143(3) r.w.s 144C(13), dated 15.10.2018 brought the STCG of ₹ 163,97,61,840/- on the transfer of shares of Acelyst Pte. Ltd., Singapore to tax in the hands of the assessee company @ 43.26%. 9. The assessee being aggrieved with the assessment framed by the A.O under Sec. 143(3) r.w.s 144C(13), dated 15.10.2018, has carried the matter in appeal before us. The ld. Authorised representative (for short A.R ) for the assessee Shri. Porus Kaka, Senior Advocate took us through the facts of the case. It was submitted by the ld. A.R that the assessee company which was a venture capital investor listed on Euronext, Brussels was admittedly a tax resident of Belgium. In order to buttress the claim of residency of the assessee the ld. A.R took us through the Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.O/DRP had accepted that Accelyst Pte. Ltd., Singapore was not a resident of India, yet its shares were deemed to be situated in India by virtue of Explanation 5 to Sec. 9(1)(i) of the Act, despite the fact that there was no corresponding provision to so infer either in the India-Belgium tax treaty or India-Singapore tax treaty. Apart from that, it was the claim of the ld. A.R that the A.O/DRP had erroneously extended the applicability of the deeming Explanation 5 to Sec. 9(1)(i) of the Act, and had arrived at an absolutely baseless conclusion that Accelyst Pte. Ltd., Singapore was to be deemed to be a company resident in India, despite accepting that it was a resident of Singapore. Objecting to the view taken by the lower authorities, it was submitted by the ld. A.R that both of the lower authorities had failed to appreciate that a unilateral amendment in the domestic law could not override the provisions of the DTAA. As such, it was the claim of the ld. A.R, that the A.O/DRP by drawing support from the Explanation 5 to Sec. 9(1)(i) of the Act, had most whimsically treated Accelyst Pte. Ltd., a Singapore based company as a resident of India, despite the fact that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Director of Income-tax Vs. New Skies Satellite BV (2016) 382 ITR 114 (Delhi) and that of the Hon ble High Court of Bombay in CIT Vs. Siemens Aktiongesellschaft (2009) 310 ITR 320 (Bom). Apart from that, the ld. A.R in order to fortify his claim that the Explanation 5 to Sec. 9(1)(i) of the Act cannot override the provisions of the DTAA, therein drew support from the speech of the Finance Minister, dated May 7, 2012, as regards the introduction of the provisions relating to indirect transfer of shares that was made available on the statute vide the Finance Bill, 2012. The ld. A.R took us through the relevant extract of the aforesaid speech of the Finance Minister, wherein the latter explaining the intent and the reasoning behind introducing the indirect transfer provisions in the statute, had stated, that the same would not override the provisions of DTAA which India had with 82 countries. The ld. A.R by placing reliance on the judgment of the Hon ble Supreme Court in the case of K.P Varghese Vs. ITO (1981) 7 Taxman 13 (SC), submitted, that the Hon ble Apex Court had observed that the speech made by the mover of the bill explaining the reason for introduction of the Bill c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of shares of Accelyst Pte. Ltd., Singapore clearly militated against the India-Singapore tax treaty. As regards the support drawn by the A.O/DRP from Explanation 5 to Sec. 9(1)(i) of the I.T Act to conclude that Accelyst Pte. Ltd., Singapore was a resident of India, it was submitted by the ld. A.R that though the Explanation 5 to Sec. 9(1)(i) of the I.T Act only deemed the shares to be situated in India, if such company derives its value substantially from the assets located in India, but the same did not deem a foreign company to become a resident in India, which was a pre-condition for invoking Article 13(5) of the India-Belgium tax treaty. It was vehemently submitted by the ld. A.R that the Explanation 5 to Sec. 9(1)(i) of the I.T Act did not define the residence of a person but only deemed shares to be located in India. It was submitted by the ld. A.R that if a foreign company was to be deemed to be a resident in India on the basis of its underlying assets situated in India, then an amendment was required to the definition of resident in Sec. 6(3) of the I.T Act and Article 4 of the India-Belgium tax treaty, neither of which was however made available. It was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted by the ld. D.R that on transfer by the assessee company of its entire 11.34 % shareholding of Accelyst Pte Ltd., Singapore to M/s Jasper Infotech Pvt. Ltd., the A.O taking cognizance of the fact that the shares derived their value substantially from the shares of its Indian subsidiary i.e Accelyst Solutions Pvt. Ltd had invoked the Explanation 5 to Sec. 9(1)(i) of the Act, and taxed the STCG arising from the sale of such shares in India. It was averred by the ld. D.R that the gain on transfer of the shares of Accelyst Pte. Ltd., Singapore had rightly been brought to tax as per Article 13(5) of the India-Belgium tax treaty. In order to drive home his aforesaid claim, it was submitted by the ld. D.R that the current fact pattern of the transaction of transfer of shares by the assessee company clearly brought the taxability of the gains arising therefrom to tax as per Article 13(5) of the India-Belgium tax treaty. Adverting to the term forming part of a participation used in Article 13(5) of the India-Belgium tax treaty, it was submitted by the ld. D.R that the term participation was to be construed as the interest that one company enjoyed by way of share in another co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any. The assesee company had during the year under consideration sold its entire 11.34% stake holding in Accelyst Pte. Ltd., Singapore to M/s Jasper Infotech Pvt. Ltd., an Indian company, for a total consideration of USD 4,73,62,724. M/s Jasper Infotech Pvt. Ltd. while making the payment of the consideration for acquiring the shares of Accelyst Pte Ltd., Singapore to the assessee company had deducted TDS of ₹ 70,93,60,990/- under Sec. 195 of the Act. As the assessee company was of the view that as per Article 13(6) of the India-Belgium tax treaty which was applicable to the current fact pattern of the transaction of transfer of shares under consideration, the gains, if any, arising therefrom were exigible to tax only in Belgium, had thus filed its return of income declaring Nil income and claimed the refund of the entire amount of TDS of ₹ 70,93,60,990/-. On the contrary, the 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 tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns from the alienation of shares other than those mentioned in paragraph 4, forming part of a participation of at least 10 per cent of the capital stock of a company which is a resident of a Contracting State may be taxed in that State. 6. Gains from the alienation of any property other than that mentioned in paragraphs 1, 2, 3, 4 and 5 shall be taxable only in the Contracting State of which the alienator is a resident. Admittedly, the provisions of Article 13(1), Article 13(2) and Article 13(3) of the India-Belgium tax treaty have no relevance to the facts of the present case, as the issue herein involved pertains to gains from alienation of shares. Article 13(4) is also not applicable, as the gains in the present case are from the alienation of preference shares of a company which is a tax resident of Singapore viz. Accelyst Pte. Ltd., the property of which does not consists directly or indirectly principally of immovable property situated in India. At this stage, we may herein observe that Article 13(4) envisages a see-through provision, which however, is limited only in relation to immovable property. Controversy involved in the present case hinges around the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. At this stage, it would be relevant to point out that as per the indirect transfer of shares provisions contemplated in the Explanation 5 to Sec. 9(1)(i) of the Act, a see-through approach has been incorporated i.e if a person holds shares outside India, which derives its value substantially from the assets located in India, the legislation allows a see-through approach to deem such shares outside India to be located in India. On the contrary, the Article 13(5) of the India-Belgium tax treaty does not permit a seethrough 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall now advert to the observations of the lower authorities on the basis of which they had concluded that the gain arising from the transfer of shares of Accelyst Pte. Ltd., Singapore by the assessee would be taxable in India as per Article 13(5) of the India-Belgium tax treaty and Explanation 5 to Sec. 9(1)(i) of the Act. On a perusal of the orders of the lower authorities, we find that the A.O/DRP had concluded that though Accelyst Pte. Ltd. is a company resident in Singapore, yet its shares were to be deemed to be situated in India by virtue of Explanation 5 to Sec. 9(1)(i) of the Act. Apart from that, they had further extended the deeming Explanation 5 to Sec. 9(1)(i) of the Act to conclude that Accelyst Pte. Ltd., Singapore was to be deemed to be a company resident in India. We have given a thoughtful consideration to the aforesaid observations of the lower authorities and are unable to persuade ourselves to subscribe to the same. Admittedly, the Explanation 5 to Sec. 9(1)(i) had been made available in the Income-tax Act, 1961 by the legislature vide the Finance Act, 2012 w.r.e.f 01.04.1962 for creating a deeming fiction, whereby for the purposes of taxation of capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... countries. It would impact those cases where the transaction has been routed through low tax or no tax countries with whom India does not have a DTAA. On the basis of our aforesaid observations, we are of the considered view that the 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. 16. We shall now advert to the observations of the lower authorities, wherein despite accepting that Accelyst Pte. Ltd. was a company resident in Singapore, they had on the basis of the Explanation 5 to Sec. 9(1)(i) of the I.T Act concluded that it was to be deemed to be a company resident in India. We have deliberated at length on the issue under consideration and find that the aforesaid view taken by the revenue is absolutely incorrect and fallacious. As observed by us hereinabove, the Explanation 5 to Sec. 9(1)(i) had been made available in the Income-tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... independent of that we still find it to be quite strange and absolutely beyond comprehension that neither of the lower authorities had explained, as to how the word resident which is defined under both domestic laws and the DTAA gets amended by the Explanation 5 to Sec. 9(1)(i) of the Act. On the basis of our aforesaid deliberations, we are of the considered view that as the assessee had transferred the shares of Accelyst Pte. Ltd., a company which is a resident of Singapore, therefore, one of the pre-condition for applying Article 13(5) of the India-Belgium tax treaty i.e the company whose shares are transferred should be a resident of a contracting state i.e India or Belgium, is not found to have been satisfied. 17. We shall now advert to the interpretative exercise carried out by the A.O/DRP for construing the term forming part of participation as is envisaged in Article 13(5) of the India- Belgium tax treaty. On a perusal of the assessment order, we find that as the term forming part of a participation used in Article 13(5) of the India-Belgium tax treaty was not defined in the tax treaty, therefore, the A.O with the aid of Article 3(1) of the tax treaty had attem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reaty, and to allow a see-through approach for rendering Article 13(5) workable in the current fact pattern of the transaction of transfer of shares under consideration. We are unable to accept the aforesaid approach adopted by the A.O/DRP. Accordingly, as observed by us hereinabove, as the term forming part of participation had been used in context of a company which is resident of either of the Contracting State, and the term resident is a defined term, hence there was no requirement on the part of the A.O for reference to the domestic law. 18. In the backdrop of our aforesaid observations, we are of the considered view that Article 13(5) of the India-Belgium tax treaty would also not be workable to the current pattern of the transaction of transfer of shares of Accelyst Pte. Ltd., Singapore by the assessee company. Accordingly, the gain, if any, from the transfer of the aforesaid shares would be taxable under the residuary provisions i.e Article 13(6) of the India-Belgium tax treaty, which reads as under: 6. Gains from the alienation of any property other than that mentioned in paragraphs 1, 2, 3, 4 and 5 shall be taxable only in the Contracting State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res 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 of ₹ 163,97,61,840/- made in the hands of the assessee. 19. Resultantly, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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