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
The present appeal filed by the assessee is directed against the assessment framed by the A.0 under Section 143(3) r.w.s 144C(13) of the Income-tax Act, 1961 (for short ‘Act’), dated 15.10.2018. The assessee has assailed the impugned order by raising before us the following grounds of appeal:
“Based on the facts and circumstances of the case and in law, Sofina S.A. (hereinafter referred to as “Appellant”), respectfully craves leave to prefer an appeal against the Assessment Order (hereinafter referred to as the “Order”) of the Assistant Commissioner of Income-tax (International Taxation) 4(2)(2), Mumbai (hereinafter referred to as the “learned AO”) dated October 15, 2018 (which was received on October 31, 2018) after taking into account the directions of the Hon’ble Dispute Resolution Panel – 2, Mumbai (hereinafter referred to as the “Hon’ble DRP”) dated September 27, 2018, under Section 253 of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) on the following grounds:
General Grounds:
1. The Order of the learned AO is contrary to law, facts and circumstances of the case;
2. The Order passed by the AO has been passed in violation of the statutory provisions under the Act without compliance with the principles of natural justice, is bad in law and is liable to be set aside.
3. In the facts and circumstances of the case, the learned AO has grossly erred in law in holding that gains arising from the transfer of shares of Accelyst Singapore Pte. (“Accelyst Singapore”) is liable to tax in India under the India Belgium double taxation avoidance agreement (“Tax Treaty”).
4. In the facts and circumstances of the case, the learned AO has grossly erred in law in concluding in the show cause notice dated 22.11.2017 as well as at the beginning of the Order that the transaction of sale of shares on which short term capital gains have been earned is chargeable to tax, wherein such an action is contrary to the settled law that an adjudicating authority cannot reach a definitive conclusion in a show cause notice as the same vitiates the whole purpose of issuance of a show cause notice and when a notice is issued with premeditation, such notice is bad in law and should be set aside.
5. In the facts and circumstances of the case, the Hon’ble DRP has failed to discuss each objection raised by the Appellant and as to why each such objection cannot be sustained and merely has reiterated the findings of the AO and has thus passed a cryptic order, which has been passed with non-application of mind.
Accelyst Singapore is wrongly been regarded as a company resident in India
6. In the facts and circumstances of the case, the learned AO and the Hon’ble DRP has erred by holding that the shares of Accelyst Singapore are deemed to be the shares of a company resident in India by virtue of Explanation 5 to Section 9(1)(i) of the Act without having regard to the fact that the deeming fiction created by Explanation 5 to Section 9(1)(i) of the Act deems shares of a foreign company to be situated in India and does not deem that the company itself becomes a resident in India.
7. In the facts and circumstances of the case, the learned AO and Hon’ble DRP has erred in treating a company incorporated under the laws of Singapore as a company resident in India, without having regard to the provisions of Act, which provides for specific provisions to regard a foreign company as a resident in India and the provisions under Section 9 do not suggest changing the residential status of a company.
8. In the facts and circumstances of the case, the Hon’ble DRP has erred in holding that Accelyst Singapore shall be deemed to be situated in India as per Explanation 5 to Section 9(1)(1), as it derives substantial value from the assets located in India, without considering the fact that how a share is valued is irrelevant for determining the situs of the
9. In the facts and circumstances of the case, merely because the shares of Accelyst Singapore are deemed to be situated in India, would not make Accelyst Singapore a company resident in India.
10. In the facts and circumstances of the case, the learned AO and the Hon’ble DRP has grossly erred by wrongly reading the deeming fiction under Explanation 5 to Section 9(1)(1) of the Act as applicable to a company rather than to shares and accordingly treating a foreign company as a company resident in India.
11. In the facts and circumstances of the case, the learned AO has grossly erred in concluding at paragraph 5.4.9 of the Order that “this deeming provision is attracted directly from the Income-tax Act, 1961, without taking recourse to the Belgium Treaty. Hence the transaction is chargeable to tax in India as per the Income-tax Act, 1961″ without having regard to the provisions of Section 90 of the Act, which provides that the beneficial provisions between the Act and double taxation avoidance agreement shall be made applicable to a non-resident, which would mean that the taxation of a non-resident cannot be determined solely on the reading of the provisions of the Act.
12. In the facts and circumstances of the case, the learned A.0 erred in holding that transfer of shares of Accelyst Singapore by the assessee, shall be deemed to be a transfer of assets located in India which in turn implies that it shall be deemed to be the “transfer of capital stock of a company resident in India” and concluding that the transaction is chargeable to tax in India by virtue of Explanation 5 to Section 9(1)(i) of the Act.
Scope of deeming fictions cannot be extended
13. In the facts and circumstances of the case, the learned AO has erred in law in extending the scope of the deeming fiction under Explanation 5 to Section 9(1)(i) to deem a foreign company to be a resident in India rather than just deeming the shares of such foreign company to be deemed to be situated in India ignoring the settled law which provides that deeming fictions are to be applied for the purpose for which they are enacted and the scope of deeming fictions cannot be extended.
Transfer of shares of Accelyst Singapore cannot taxed under Article 13(5) of the India Belgium Tax Treaty
14. In the facts and circumstances of the case, the learned AO and the Hon’ble DRIP has erred in holding that the transfer of shares of Accelyst Singapore are taxable in India under Article 13(5) of the India-Belgium Tax Treaty, by erroneously stating that:
(a) shares of Accelyst Singapore form a part of participation of the capital stock of Accelyst India, indirectly;
(b) though Accelyst Singapore is not a resident of India, yet its shares are deemed to be situated in India by virtue of Explanation 5 to Section 9(1)(i). This means that shares of Accelyst Singapore are deemed to be the shares of a company resident in India;
(c) when the assessee transferred 11.34% shares of Accelyst Singapore, it has in essence transferred or deemed to have transferred 11.34% shares of Accelyst India. In other words, the assessee has transferred 11.34% capital stock of Accelyst Singapore, which is forming part of a participation of shares of at least 10% of capital stock of Accelyst India.
without having regard to the provisions of Article 13(5), which explicitly provides that the company whose shares are transferred should be a resident of one of the contracting states i.e. either India or Belgium.
15. In the facts and circumstances of the case, the learned AO and the Hon’ble DRP has erred in law by incorporating a deeming fiction, created by Explanation 5 to Section 9(1)(i), into the India Belgium Tax Treaty without there being an express provision to this effect and deeming Accelyst Singapore as a resident of India and concluding that the sale of Accelyst Singapore shares is taxable under the provisions of Article 13(5) of the India Belgium Tax Treaty.
16. In the facts and circumstances of the case, the learned DRP has erred in law in treating Accelyst Singapore as a company deemed to be situated in India and transfer of its capital stock comprising more than 10% of its capital shall be covered by Article 13(5) of the India Belgium Tax Treaty without having regard to the fact that Explanation 5 to Section 9 deems shares to be situated in India and not company to be situated in India.
17. In the facts and circumstances of the case, the learned AO and the Hon’ble DRP has erred in law in not appreciating that the amendments made either retrospective or prospective to the provisions of the I.T Act cannot be read into the provisions of the Treaty, unless specific provision has been made to this effect and to observe that the provisions under the Act and India Belgium Tax Treaty is the same and has no
18. In the facts and circumstances of the case, the learned AO and the Hon’ble DRP has erred in law in not appreciating that if a Tax Treaty does not provide for a particular levy, the same cannot be read as a part of the Tax Treaty and taxed accordingly, even though the said levy has been provided in the Act.
19. In the facts and circumstances of the case. the learned AO and Hon’ble DRP has erred in law by referring to the provisions of Article 3 of the India Belgium Tax Treaty, considering that there is no ambiguity in the provisions of Article 13(5) of the India Belgium Tax Treaty and in the absence of such ambiguity, invoking provisions under Article 3 is not warranted.
20. In the facts and circumstances of the case, the learned AO has erred in holding that under the provisions of Article 3 of India Belgium Tax Treaty, since the terms ‘forming part of a participation’ and ‘alienation’ are not defined therein, the same will have the meaning under the Act.
21. In the facts and circumstances of the case, the learned AO has erred in law in interpreting the word “participation” to mean “indirect participation” by referring to provisions of Article 3(2) without considering the context in which it was used under the India-Belgium Tax Treaty.
22. In the facts and circumstances of the case, the learned AO has erred in law in referring to Article 3 of India-Belgium Tax Treaty, without taking into consideration that Article 3 only suggests that the terms not defined under the Tax Treaty shall have the same meaning under the Act and does not suggest incorporating the deeming fictions under the Act into the Tax Treaty.
23. In the facts and circumstances of the case, the learned AO erred in relying on the provisions of Section 2(18), 2(22)(e), 2(32) and 2(47) of the Act for the purposes of the meaning of the undefined terms in the Tax Treaty i.e. ‘forming part of a participation’ and ‘alienation’.
No valid distinction between the present facts and Sanofi
24. In the facts and circumstances of the case, the Hon’ble DRP erred in law confirming the dissimilarities as pointed out by the AO between the facts of the present case and the judgment of the Hon’ble Andhra High Court in the case of Sanofi Pasteur Holdings SA Without considering the principle which has been laid down by the Hon’ble High Court and the manner in which ratio of the judgment can be made applicable to the facts of the present case.
25. In the facts and circumstances of the case, the Hon’ble DRP erred in law in observing the reasons as to why the judgment of the Hon’ble Andhra High Court in the case of Sanofi Pasteur Holdings SA cannot be applied to the facts of the present case by stating that in that case the company whose shares were sold was a French company whereas in the present case was Singapore company cannot be the reasoning to reject the binding nature of the applicability of the judgement of the Hon’ble High Court.
Substantive provision cannot be implemented without the procedural provisions
26. In the facts and circumstances of the case, the learned AO and the Hon’ble DRP erred in holding that explanations are clarificatory in nature and they aid and support the main section i.e. Section 9(1) and the absence of an explanation, will not render the existing section void or incapable of being administered, without taking into account that if the provision cannot be implemented in the absence of computation provisions, the income cannot be computed and charged to tax under that provision and without having regard to the settled law in this regard as laid down by the Hon’ble Supreme Court.
27. In the facts and circumstances of the case, the learned AO and the Hon’ble DRP erred in rejecting the Appellants plea that due to the absence of computation mechanism for deriving the value of shares or interest referred to in Explanation 5 to Section 9(1)(1) of the Act for Assessment year 2015-16, the computation mechanism fails and the capital gains cannot be determined.
28. In the facts and circumstances of the case, the Hon’ble DRP has erred in observing that “The purchase value and sale value of these shares are already available with the AO.
The entire purchase and sale value was clearly related to asset situated in India. Therefore, there as no difficulty in arriving at the value of sale and purchase consideration” on the issue being argued that the capital gains cannot be computed, without having to regard to the fact that the general computation mechanism cannot be applied to a provision which specifically intends to prescribe a computation mechanism and in the absence of such computation mechanism, the provision cannot be given effect.
29. Without prejudice, the learned AO erred in concluding that the entire short-term capital gains income of Rs.163,97,61,840/- arising from the indirect transfer of shares of Accelyst India is deemed to be accruing and arising in India under Section 9(1)(i) read with Explanation 5 thereto, without giving due consideration to actual income which could have been taxable in India.”
2. Briefly stated, the assessee company which is a tax resident of Belgium is a venture capital investor listed on Euronext, Brussels and had invested into start ups of India like Myntra, Freecharge etc. As per the records, the assessee company had invested across nine countries in two continents. The assessee company had e-filed its return of income for Assessment Year 2015-16 on 25.09.2015, wherein it had declared its total income at Rs. Nil and claimed a refund of Rs. 70,93,60,000/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.
3. In the course of the assessment proceedings it was observed by the A.0 that the assessee had vide a share subscription agreement dated June 9, 2014 agreed to subscribe to 82,41,285 (Nos.) of Series B Preference shares of Accelyst Pte Ltd., a company which was a tax resident of Singapore. Further, the assessee company had vide a share subscription agreement dated December 12, 2014 agreed to subscribe to 31,34,624 (Nos.) of Series C Preference shares of Accelyst Pte. Ltd. Post subscription of Series C Preference shares the assessee had a stake holding of 11.34% in Accelyst Pte. Ltd., Singapore. On a perusal of the records, it was noticed by the A.0 that Accelyst Pte Ltd., Singapore was holding 99.99% of the shares of M/s Accelyst Solutions Pvt. Ltd., an Indian company.
4. During the year under consideration the assessee had sold its entire 11.34% stake holding in Accelyst Pte Ltd., Singapore to M/s Jasper Infotech Pvt. Ltd., an Indian company, for a total consideration of USD 4,73,62,724. M/s Jasper Infotech Pvt. Ltd. while making the payment of the consideration for acquiring the shares of Accelyst Pte Ltd., Singapore to the assessee company had deducted TDS of Rs. 70,93,60,990/- under Sec. 195 of the Act. It was observed by the A.0 that the assessee company had returned its income for the year under consideration at Rs. Nil and had claimed a refund of the entire amount of TDS of Rs. 70,93,60,990/-. Being of the view, that the assessee by transferring the shares of the aforesaid company viz. Accelyst Pte Ltd, Singapore, had in fact carried out an indirect transfer of the shares of its subsidiary Indian company viz. M/s Accelyst Solutions Pvt. Ltd., the A.0 worked out the ‘Short Term Capital Gain’ (for short `STCG’) at Rs. 163,97,61,840/-, which as per him was liable to be assessed in the hands of the assessee in India, as under :
