ING Bewaar Maatschappij I BV Vs DCIT (ITAT Mumbai)
The principle emerging out of this analysis of legal position is that when an assessee is a representative assessee of a tax transparent entity, it is the status of beneficiaries or constituents of tax transparent entities which is relevant for the purpose of determining treaty protection. Viewed thus, this is beyond doubt that the income in question has actually accrued to the taxable entities on the Netherlands, which, according to the approach adopted by the Assessing Officer, is sine qua non for tax treaty protection. It would thus appear that the treaty protection has indeed been wrongly declined to the assessee. The reservation on treaty protection has arises only on account of INGEMEF, a tax transparent entity which is in the nature of contractual arrangement, being in the picture, but then the assessee being a representative assessee of a tax transparent entity, as discussed above, requires the beneficiaries or constituents of the tax transparent entity being looked at. The assessee is indeed a trustee of INGEMEF but then INGEMEF is only a contractual arrangement for common investments by three investors and it cannot be treated as a beneficiary as it is not even a legal entity, it’s a tax transparent conduit contractual arrangement for the purpose of collective investments. It is to be looked through so far as trust beneficiaries are concerned. The beneficiaries are thus clearly taxable entities in Netherlands. What essentially follows is like this. If the assessee is to be taxed in its own right, which is not even the case of the revenue, there cannot be any dispute that the assessee is a taxable entity in the Netherlands, and, for this reason, the assessee is liable for treaty protection. If the assessee is to be taxed as a trustee in representative capacity, in our considered opinion, on the facts of this case clearly the beneficiaries are the three investors all of which are taxable entities in the Netherlands, and not the INGEMEF per se. Whichever way we look at it, thus, the assessee is entitled to treaty protection. Once that is found to be the position, article 13(5) clearly provides that the “gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 4 shall be taxable only in the State of which the alienator is a resident ”. So far as sale on gains of shares are concerned, only article 13(4) can come into play and that too is not applicable on the facts of this case and it is not even the case of the revenue that the gains are on sale of unlisted shares which form part of substantial interest in the capital stock or are of the companies which hold principally immovable properties, other than the property in which the business is carried out. In any case, article 13(5) lays down the broad principle and article 13(1) to 13(4) set out the exceptions. It is not even the case of the Assessing Officer, and rightly so, that these exception clauses come into play on the facts of this case. This being the position, the capital gains, on sale of shares, in the hands of the assessee, and the investors it represents as trustee, are treaty protected from taxation in India. As we hold so, we may add that we are dealing with pre 1st April 2013 legal position and the requirements of Tax Residency Certificate (TRC) do not, therefore, come into play.
FULL TEXT OF THE ITAT JUDGEMENT
1. By way of this appeal, the assessee appellant has challenged correctness of the order dated 13th August 2014, in the matter of assessment under section 143(3) r.w.s. 147 of the Income Tax Act, 1961, for the assessment year 2007 -08.
2. Concise ground of appeal, as filed by the assessee appellant on 8th May 2019, adequately sums up the controversy requiring our adjudication in this case, and sets out the grievance of the assessee as follows:
On the facts and in the circumstances of the case and in law, the Ld. Commissioner of Income Tax Appeals ¬– 10 (“CIT (A)”) erred in upholding the action of the Deputy Director of Income Tax (International Taxation)- 3(1)(“the Ld. A.O.”) in denying the benefit of Article 13 of the India-Netherlands Double Taxation Avoidance Agreement (“DTAA”) and consequently, taxing the capital gains amounting to Rs.23,38,08,365/- as per the Income Tax Act, 1961 (“the Act”)
3. To adjudicate on this appeal, only a few material facts need to be taken note of. The assessee before us is, as the Assessing Officer puts it, “a Fund established in the Netherlands and registered with the Securities Exchange Board of India (SEBI) as a sub account of ING Assets Management BV, a SEBI registered Foreign Institutional Investor (FII)”It was case of reopened assessment. During the course of the ensuring assessment proceedings, it was noticed that, in India, the assessee had short term capital gains of Rs 23,38,08,365 and long term capital gain of Rs 12,60,91,050, on sale of shares. While there was no dispute about non taxability of long term capital gains, in view of exemption under section 10(3 8), of the Act, the short term capital gains were claimed to be treaty protected from taxation in India, under article 13 of the India Netherlands Double Taxation Avoidance Agreement [(1989) 177 ITR (Statute) 72; ‘Indo-Dutch tax treaty’, in short]. The case of the assessee, in substance, was that the assessee is a tax transparent entity in the Netherlands, but since all its beneficiaries are fully taxable in respect of their shares of income in the Netherlands, the assessee is entitled to the treaty protection. It was also pointed out that the assessee, as a trustee, is legal owner of the assets held by ING Emerging Market Funds (INGEMEF, in short) which is a legal entity known, in the Dutch law, as FGR. i.e. fonds voor gemene rekening, which literally means funds for joint account, that admittedly the assessee acts for INGEMEF which is fiscally domiciled in the Netherlands, and, that INGEMEF is a tax transparent entity in the Netherlands in the sense that while it is not taxable in its own right, all the incomes earned by the entity are fully taxable in the hands of its constituents. It was emphasized that the assessee was a trust AOP, taxable in the capacity of representative assessee, and as the beneficiaries were taxable entities in the Netherlands, the assessee was eligible for the same treaty protection as well. Broadly, on the strength of these arguments, the assessee claimed the treaty protection from taxation in India. The Assessing Officer rejected this claim of treaty protection by observing as follows:
…………….a detailed submission was filed by the assessee on 5.12.2013 wherein it was stated that:
i) The assesse i.e ING BewaarMaatschappij I BY as a Trustee of ING Emerging Markets Equity Fund (ING EMEF)
ii) ING EMEF is Fund for joint account set up in Netherlands by way of contractual It has been conceded that the Fund itself is not a tax entity in Netherlands but all the participants of the Fund are tax residents of Netherlands and therefore share in the Fund is determined as under:
