Facts The Taxpayer, a Netherlands Company, made 100% equity investment in an Indian Company (ICo), which was engaged in the business of developing, operating and maintaining infrastructure facilities of an industrial park in India. Further, ICo was an approved infrastructure company u/s. 10(23G) of the Act, which exempts Long Term Capital Gains (LTCG) on investments made in infrastructure projects.
During the relevant AY, the Taxpayer sold its 100% shareholding in ICo to a Singapore Company (BuyCo). BuyCo also paid interest to the Taxpayer for delay in payment of sale consideration. Taxes were withheld by BuyCo both on LTCG and on interest paid. The Taxpayer claimed refund of the taxes withheld on the ground that, under the India-Netherlands Double Taxation Avoidance Agreement (Netherlands DTAA) LTCG was not taxable and the interest income did not accrue or arise in India. Alternatively, the Taxpayer also claimed shelter u/s. 10(23G) of the Act.
The tax authority rejected the claim made by the Taxpayer on the following grounds
• Article 13(1) of the Netherlands DTAA, which permitted taxation of gains arising on alienation of ‘immovable property’ and the same is applicable in the facts of the present case as transfer of 100% shares implied that the rights to enjoy the property of ICo vested with BuyCo.
• Exemption u/s. 10(23G) was not available as the approval to ICo was granted after the investment was made by the Taxpayer.
• Since interest is inextricably linked to base transaction, the same is taxable on the same lines as the base transaction.
The CIT(A) upheld tax authority’s order.
Held
The Tribunal based on the following, ruled that the LTCG and the interest received from FCo is not taxable in India in the hands of the Taxpayer.
On taxability under the Netherlands DTAA:
• Though the Act does not define ‘immovable property’ in section 2, it has been defined in a varied manner under different sections in the Act, which would be applicable specifically in a particular scenario. Therefore, it cannot be considered that ‘immovable property’ as defined for special purpose in sections like 269UA of the Act, 3(26) of General Clauses Act etc. has a general purpose meaning applicable to all provisions of the Act.
• A share held by a company cannot be considered as ‘immovable property’. In terms of Article 6 of the Netherlands DTAA immovable property shall have the meaning which it has under the law of the State in which the property in question is situated. Unless the conditions prescribed in Article 6 of Netherlands DTAA apply, the same cannot be considered as immovable property under Article 13(1) of the DTAA.
• Article 13(1) cannot be made applicable to the transfer of shares, as Taxpayer has not sold the immovable property or any rights directly attached to the immovable property.
• Article 13(5), which provides for taxability in case of alienation of shares (and consequential exclusive right of taxation to country of residence) is applicable to the facts of the present case, as per which the capital gains would be taxable in Netherlands. On exemption u/s. 10(23G):
• Since the Indian Company was already approved as an infrastructure company and was allowed deduction u/s. 80IA and further at the time of sale of shares the conditions as provided u/s. 10(23G) are satisfied, the sale of shares of an infrastructural company, is eligible for exemption as provided u/s. 10(23G).
• The fact that the approval was received post the date of investment is not relevant. On taxability of interest:
• As per Section 9 of the Act, interest is taxable in India if the same is towards a debt incurred or moneys borrowed and used for the purpose of a business or profession carried on by non-resident in India. In the facts, neither the Taxpayer nor BuyCo is carrying on any business in India, nor is the interest payable in respect of any debt incurred or moneys borrowed and used for the purpose of business in India. Therefore, the interest received by the Taxpayer which was paid and received outside India, cannot be taxed u/s. 9 of the Act.
• Even if interest were to be considered as part of consideration it would form part of the sale consideration and will be considered like capital gains.
