The Mumbai Bench of Income Tax Appellate Tribunal in the case of Sofina S.A. v ACIT held that unilateral amendment brought via ‘Explanation 5’ to Sec. 9(1)(i) of the I.T. Act cannot be read into the India Belgium Tax Treaty.
Assessee, an investment company is registered in Belgium. On scrutiny assessment of the assessee, it has been found that the assessee acquired shares of a Singapore company to the extent of 11.34%, which in turn held 100% shares in an Indian company. The entire shareholding of the assessee in the Singapore company was bought by ‘B’, an Indian company which deducted taxes at the rate of 43.26% on the capital gains. The assessee was questioned for filing its return of income claiming a refund of the taxes deducted under Article 13(6) of the India Belgium DTAA for the said transaction.
The Assessing Officer (AO) was of the view that the assessee by transferring the shares of the Singapore company carried out an indirect transfer of shares of its subsidiary Indian company and the same were liable to the assessed in the hands of the assessee as Short Term Capital Gain. Being aggrieved by the orders of AO and Dispute Resolution panel, the assessee is in appeal before the ITAT.
The issue before the Tribunal is that whether the gain from transfer of shares of Singapore company by the assessee to ‘B’ shall be taxable under Article 13(5) of the India Belgium tax treaty and ‘Explanation 5’ to Sec. 9(1)(i) of the Act or shall be taxable in Belgium and not in India.
The assessee submitted that since the assessee company was a resident of Belgium, the taxability under Article 13(6) had arisen in Belgium and not in India.
The Divisional Bench constituting of Accountant member, N.K. Pradhan and Judicial member, Ravish Sood by elaborating the two-fold test for application of Article 13(5) held that the application of Article 13(5) shall stand excluded for the reason that the shares transferred are of Singapore company i.e. the pre-condition that the shares transferred should form part of the capital stock of a resident company of contracting state is not fulfilled. The Tribunal further held that Article 13(6) of the DTAA shall be applicable to the present set of facts.
Additionally, the Tribunal stated “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, Article 13(5) of the India-Belgium tax treaty does not permit a see-through 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 of shares of Accelyst Pte. Ltd., Singapore cannot be regarded as a transfer of shares of its Indian subsidiary viz. Accelyst Solutions Pvt. Ltd.”Subscribe Taxscan AdFree to view the Judgment