Absence Of Controlling Interest Renders Sale Of Shares By Spanish Entity Not Taxable In India As Per Indo-Spain DTAA: Mumbai ITAT
The Mumbai ITAT held that capital gain arising out of transfer of shares of an Indian entity cannot be taxed at hands of foreign entity in India, if foreign entity has less than 10% shareholding in such Indian entity.
The ITAT held so while referring to UN Model Convention commentary, which states that the provisions of Article 14(4) come into effect to prevent the case of indirect transfer of ownership of immovable property by transfer of shares owning these properties.
The Bench of Padmavathy S (Accountant Member) and Sunil Kumar Singh (Judicial Member) clarified that capital gain in hands of Spanish company (assessee/ appellant) from sale of shares of IMI Investments (Indian company) cannot be taxed in India, since assessee has no controlling interest in said Indian company.
In a nutshell, the assessee, a VC Fund incorporated in Spain, and engaged in investing business, having no permanent establishment (PE) or any office in India, declared Nil return. The assessee has shown Long Germ Capital Gain (LTCG) of Rs. 27 crores and Short-Term Capital Loss (STCL) of Rs. 65 lacs on sale of shares and claimed the same as exempt u/s 90/91 of the Income tax Act and Article-14 of India-Spain DTAA.
Finding that assessee has failed to provide any evidence in support of entitlement for the benefit of Article-14 of the Indo-Spain DTAA, the AO brought to tax the net capital gain in the hands of assessee. The AO opined that if share of immovable property is more than 50% of the total assets of assessee company, then any gain from alienation of shares of the company whose property consists principally immovable property, is taxable in India. Hence, the assessee approached the ITAT.
Referring to Article-14(4) of the Indo Spain treaty, the Bench explained that gains from alienation of shares of the capital stock of a company (the assessee in this case) the property of which consists, directly or indirectly principally of immovable property situated in a contracting state (India) may be taxed in that State (India).
The Bench referred to the submission of the AO that the immovable property owned by assessee is more than 50% and therefore, the gain arising on the transfer of shares would result in capital gain in India.
However, the Bench noticed that the value of immovable property as a percentage of total assets of the assessee does not exceed 50% either based on book value or as per the Fair Market Value.
Therefore, Article-14(4) of India-Spain DTAA cannot be applied in assessee's case, added the Bench.
Referring to decision of Co-ordinate Bench in the case of JCIT Vs. Merrill Lynch Capital Market Espana SA SV (ITA No.6108/Mum/2018), the Bench reiterated that interpretation of Article 14(4) must essentially remain confined to the shares effectively leading to control of the company or which gives the right to enjoy the underlying immovable property owned by the company, and such property is what the company principally holds.
Finding that the assessee is holding only 9.65% of the shares indirectly in IMI Investments, the Bench refused to accept that such holding is towards any controlling interest.
Hence, the ITAT allowed Assessee's appeal and directed the AO to delete the additions of capital gains, made in the hands of assessee.
Counsel for Appellant/ Assessee: Gaurav Singhal and Mohit Khandelwal
Counsel for Respondent/ Revenue: Anil Sant
Case Title: India Opportunity Fund I F.C.R DE REGIMEN COMUN versus DCIT
Case Number: I.T.A. No. 4536/Mum/2023