ITAT deletes Addition since Income of Cyprus entity is not Taxable in India as per Old DTAA [Read Order]

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) has recently dismissed an appeal filed by the income tax department relying on the old Double Taxation Avoidance Agreement (DTAA) where a Cyprus entity is not chargeable to tax in India for its income.

The assessee is an Indian company engaged in the business of providing information technology-enabled services. During the relevant assessment year, the assessing officer noted that Vectex Limited, a Cyprus company has sold 416686 shares of oneUnitech Info Park Ltd to the assessee for 70 crores. According to the assessing officer, the amount constitutes capital gain, arising in the hands of the Cyprus company, on purchase of shares from it by the assessee, without deduction of tax at source,. The officer held that the assessee as the Representative assessee of the Cyprus company under Section 163(1) of the Income Tax Act, 1961 (the Act).

On the first appeal, the Commissioner of Income Tax (Appeals) held in favor of the assessee. The department, aggrieved by the said order, approached the Tribunal for relief.

Considering the question 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 the only asset, is taxable in India in view of the Double Taxation Avoidance Agreement between India and Cyprus, the Tribunal observed 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.

It was further noted that the 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.

Dismissing the appeal, the Tribunal observed that “In view of above facts, we find 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. In view of this, we dismiss ground number [1] & [2] of the appeal of the AO.”