Case Law Details
Sofina S. A. Vs ACIT (ITAT Mumbai)
Transfer of shares of Singapore Company could not be regarded as a transfer of shares of its Indian subsidiary in absence of see-through approach under clause 13(5) of India Belgium Treaty
Conclusion: Gain arising from transfer of shares of A Pte. Ltd., Singapore by the assessee to M/s J Pvt. Ltd. could not be regarded as a transfer of shares of its Indian subsidiary was exigible to tax in India as per Article 13(5) of India-Belgium tax treaty in the absence of a see-through approach in Article 13(5) and the unilateral amendment brought via ‘Explanation 5’ to Sec. 9(1)(i) of the I.T. Act by incorporating a see-through approach 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, could not be read into the India Belgium Tax Treaty. As the transaction of transfer of shares was assessable under the residuary provisions i.e Article 13(6) of the India-Belgium tax treaty, therefore, the gain, if any arising therefrom would only be taxable in Belgium i.e the Contracting State of which the alienator of the shares i.e the assessee company was a resident of.
Held: Assessee company-a tax resident of Belgium was a venture capital investor had invested into start ups of India. It had vide a share subscription agreement agreed to subscribe to Series B and Series C Preference shares of A Pte Ltd., a company which was a tax resident of Singapore. Assessee had a stake holding of 11.34% in Singapore company. A Pte Ltd., Singapore was holding 99.99% of the shares of M/s A Solutions Pvt. Ltd., an Indian company. Assesee company had during the year under consideration sold its entire 11.34% stake holding in A Pte. Ltd., Singapore to M/s J Pvt. Ltd., an Indian company, for a total consideration of USD 4,73,62,724. M/s J Pvt. Ltd. while making the payment of the consideration for acquiring the shares of A Pte Ltd., Singapore to assessee company had deducted TDS under Sec. 195. As assessee company was of the view that as per Article 13(6) of the India-Belgium tax treaty which was applicable to the current fact pattern of the transaction of transfer of shares under consideration, the gains, if any, arising therefrom were exigible to tax only in Belgium, had thus filed its return of income declaring Nil income and claimed the refund of the entire amount of TDS. AO held a conviction that as assessee by transferring the shares of the aforesaid company viz. A Pte Ltd, Singapore, had indirectly transferred the shares of its subsidiary Indian company viz. M/s A Solutions Pvt., therefore, the gain arising from the said fact pattern of transaction of transfer of shares was exigible to tax in India, both as per `Explanation 5′ to Sec. 9(1)(i) and also Article 13(5) of the India-Belgium tax treaty. Accordingly, AO had brought to tax STCG in the hands of the assessee. The controversy involved in the present case was whether the gain arising from transfer of shares of A Pte. Ltd., Singapore by the assessee to M/s J Pvt. Ltd. was exigible to tax in India as per Article 13(5) of India-Belgium tax treaty and ‘Explanation 5’ to Sec. 9(1)(i) of the Act, as claimed by Revenue, or was regulated by Article 13(6) of the tax treaty and was chargeable to tax only in Belgium, as was the claim of assessee. It was held that as the shares transferred by assessee in the present case were of A Pte. Ltd., i.e a Singapore based company, therefore, in the absence of satisfaction of the pre-condition that the shares transferred should form part of the capital stock of a company which is a resident of a Contracting State, the application of Article 13(5) stands excluded to the current fact pattern of the transaction of transfer of shares under consideration. As per the indirect transfer of shares provisions contemplated in the ‘Explanation 5’ to Sec. 9(1)(i), 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, the 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 could not be regarded as a transfer of shares of its Indian subsidiary viz. A Solutions Pvt. Ltd. Moreso, as the current fact pattern of the transaction of transfer of shares was assessable under the residuary provisions i.e Article 13(6) of the India-Belgium tax treaty, therefore, the gain, if any arising therefrom would only be taxable in Belgium i.e the Contracting State of which the alienator of the shares i.e the assessee company was a resident of. The gains arising from the transaction of transfer of shares of A Pte. Ltd., Singapore by assessee company were not chargeable to tax in India as per the India-Belgium tax treaty therefore, the same was not chargeable under the provisions of the Income-tax Act, 1961, which having been rendered as academic in nature. Accordingly, the addition of STCG made in the hands of assesse was vacated.
FULL TEXT OF THE ITAT JUDGEMENT
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