Article 13 of India-Belgium DTAA – Gain arising on indirect transfer of shares of Indian company not taxable in India as per Article 13(6) of India-Belgium DTAA

2.       TS-129-ITAT-2020

Sofina S.A. vs. ACIT

ITA No. 7241/Mum/2018

A.Y.: 2015-16

Date of order: 5^th March, 2020

Article 13 of India-Belgium DTAA – Gain arising on indirect
transfer of shares of Indian company not taxable in India as per Article 13(6)
of India-Belgium DTAA

FACTS

The assessee is a tax resident of
Belgium and is a venture capital investor who invested in Startups in India
such as Myntra, Freecharge, etc.

The assessee owned 11.34% stake in
preference shares of Sing Co, a company tax resident of Singapore. In turn,
Sing Co held 99.99% shares in an Indian company (ICO). The assessee sold its
entire 11.34% stake in Sing Co to J, an unrelated Indian company. J, while
making the payment, deducted TDS u/s 195 of the Act. The assessee claimed refund
of TDS in its return of income relying on Article 13(6) of the India-Belgium
DTAA as per which gains arising from the alienation of shares of Sing Co are
taxable in the contracting state of which the alienator is a resident, i.e.,
Belgium.

The
A.O. held that the assessee carried out an indirect transfer of shares which is
taxable in India. As per Explanation 5 to section 9(1)(i) of the Act, shares of
Sing Co derived value substantially from ICO and therefore the shares of Sing
Co are deemed to be situated in India. The A.O. imported the Explanation 5 to
section 9(1)(i) in order to deem Sing Co as a company resident in India.
Accordingly, in his view, the transfer of shares of Sing Co was covered under
Article 13(5) and was taxable in India.

On appeal, the DRP approved the view
of the A.O. Being aggrieved, the assessee filed an appeal before the Tribunal.

HELD

Article 13(5) of the India-Belgium
Tax Treaty applies if the following two conditions are cumulatively satisfied:
(i) the transfer of shares should represent the participation of at least 10%
in the capital stock of the company; and (ii) the company whose shares are
transferred should be a resident of a contracting state. As the assessee
transferred shares of a Singapore resident company, the second condition is not
satisfied and, accordingly, Article 13(5) is not applicable.

Unlike Explanation 5 to section
9(1)(i) and Article 13(4) (providing for indirect transfer tax of company
deriving value from immovable property in India), Article 13(5) of the
India-Belgium Tax Treaty did not adopt a see-through approach. It does not
refer to ‘direct or indirect transfer’. Accordingly, the transfer of the shares
of Sing Co cannot be regarded as shares of its subsidiary ICO.

Explanation 5 to section 9(1)(i) of
the Act does not define residence of a person and only deems shares of a
foreign company to be located in India. In the absence of any provision for
deeming a Singapore resident company as a treaty resident of India either in
the DTAA between India and Singapore, or in the DTAA between India and Belgium,
Sing Co cannot be held to be a company resident of India so as to get covered
by Article 13(5).