In Director of Income Tax v. Vanenburg Facilities BV, Andhra Pradesh High Court has held that gains arising from a Dutch company’s sale of shares of an Indian immovable property company to a Singapore company do not amount to a sale of immovable property situated in India since India-Netherlands tax treaty exempts such transaction.
The factual settings of the case are that The assessee, Vanenburg Facilities BV, a Dutch BV company has a subsidiary Company in India called, Vanenburg IT Park Limited. The Subsidiary Company is engaged in the business of development, operation, and maintenance of an industrial park constructed on the land, and owned land in Hyderabad.
The assessee sold its entire shareholding in VITPL to the Ascendas Property (Fund) India Pte Limited, a private company incorporated in Singapore. A certain amount of interest was also paid to the taxpayer due to delayed payment of the sale consideration.
Thereafter, assesse made an application to the Indian tax department for a nil withholding tax certificate on the sale consideration and interest. However, the AO rejected the application and passed an order directing the buyer to withhold tax on the sale consideration and interest. The AO was of the view that the gains arising from the transfer of shares of VITPL were taxable in India since the shares of VITPL constituted ‘immovable property’ under India’s domestic tax laws, and therefore, Article 13(1) of the India-Netherlands tax treaty would apply. The provision specifically provides that gains arising from the transfer of ‘immovable property’ situated in India may be taxed in India.
On appeal, Assessee claimed a refund of the entire tax withheld on the sale consideration and interest.
The ITAT, however, concluded the issue in favour of the assesse.
Upholding the Tribunal’s ruling, the High Court held that Article 13(5) of the Dutch treaty would be applicable to the gains arising from the sale of shares of VITPL and therefore the gains were not taxable in India.
Justice Sanjay Kumar and Justice Durga Prasad Rao upheld the legal principle that a company is a separate legal entity from its shareholders and the fact that all its shares may be owned by one person has nothing to do with its separate legal existence.
The bench further rejected the contention of the department that the definition of immovable property under India’s domestic tax law should be regarded as “law of the State” under Article 6 of the India-Netherlands tax treaty, favoring a more traditional definition of immovable property (such as that under India’s Transfer of Property Act).
It further clarified that Article 13(4) of the Dutch tax treaty cannot be applied to the transaction by raising a new argument that the immovable property of VITPL was not actually immovable property in which the business of VITPL was carried on since the tax authorities had failed to raise these arguments either before the CIT(A) or the Tribunal.
Read the full text of the Judgment below.