Capital Gains of Spanish Investor from Sale of Shares of Real Estate Companies Not Taxable in India under India-Spain DTAA: ITAT in Merrill Lynch Case [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) held that capital gains of a Spanish investor from sale of shares of real estate companies are not taxable in India under the India-Spain DTAA, as such gains fall under the residuary provision and are taxable only in the country of residence.

Merrill Lynch Capital Markets España SA, the assessee, is a company based in Spain and registered as a Foreign Institutional Investor (FII) with SEBI. For Assessment Years 2016-17 and 2017-18, the assessee had invested in shares of Indian companies, including real estate companies.

It incurred short-term capital loss in one year and earned short-term capital gains in another year, and claimed that such gains were not taxable in India under Article 14(6) of the India-Spain DTAA.

The Assessing Officer completed the assessment by holding that the gains and losses arising from sale of shares of real estate companies are taxable in India under Article 14(4) of the DTAA, on the ground that the value of such shares is derived from immovable property situated in India.

The assessee filed an appeal before the Commissioner of Income Tax (Appeals) who allowed the claim and held that the gains were not taxable in India. Aggrieved by this, the Revenue filed appeals before the Tribunal.

The revenue counsel argued that since the shares sold were of companies engaged in real estate development, the gains are covered under Article 14(4) and taxable in India. It was also argued that the Commissioner (Appeals) erred in granting relief and in relying on earlier decisions.

The assessee’s counsel argued that the assessee is a tax resident of Spain and entitled to benefits under the DTAA. It was argued that the assessee’s shareholding in the real estate companies was very small and did not give any right over the immovable properties held by those companies. The counsel also argued that the issue is already covered in favour of the assessee by earlier decisions of the Tribunal in its own case.

The two-member bench comprising Beena Pillai (Judicial Member) and Bijayananda Pruseth (Accountant Member) observed that Article 14 of the India-Spain DTAA provides specific categories where capital gains can be taxed in the source country, and the residuary clause under Article 14(6) applies to cases not covered under earlier clauses. The tribunal observed that for Article 14(4) to apply, the gains must, in substance, arise from immovable property situated in India.

The tribunal observed that the assessee’s shareholding in the real estate companies was minuscule and did not give any right of control or enjoyment over the immovable properties held by those companies. It explained that merely because the companies are engaged in real estate business, the gains from sale of their shares cannot automatically be treated as gains from immovable property.

The tribunal further observed that the issue had already been decided in favour of the assessee in earlier years and there was no change in facts or law. It pointed out that the gains would fall under Article 14(6) and would be taxable only in the country of residence of the assessee.

The tribunal held that the gains from sale of shares of real estate companies are not taxable in India under Article 14(4) and upheld the order of the Commissioner (Appeals). The tribunal dismissed the appeals filed by the Revenue.

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