By Geeta Jani | Dhishat B. Mehta
Chartered Accountants
14 [2019] 112
taxmann.com 21 (Mum.) ING Bewaar
Maatschappij I BV vs. DCIT [IT Appeal No.
7119 (Mum.) of 2014] A.Y.: 2007-08 Date of order:
27th November, 2019
Article 13 of
India-Netherlands DTAA – Section 160(1)(iv) of the Act – Benefit under DTAA is
available to an assessee acting as trustee (i.e., a representative assessee) of
a tax transparent entity, if beneficiaries or constituents of tax transparent
entity are entitled to benefit under DTAA
FACTS
The assessee was a tax transparent
entity established in the Netherlands. It was registered with SEBI as a
sub-account of a SEBI-registered FII. As trustee, it was the legal owner of the
assets held by a fund which, under the Dutch law, was structured as a legal
entity known as FGR (i.e. fonds voor gemene rekening, which means funds
for joint account). The fund had three investors.
The assessee contended as follows.
- The fund was a tax transparent
entity, fiscally domiciled in the Netherlands, and the income earned by it was
taxable in the hands of its beneficiaries.
- All beneficiaries under the
fund were taxable in respect of their shares of income in the Netherlands and,
hence, were entitled to benefits under the India-Netherlands DTAA.
- The assessee was the trustee
of the fund and also the legal owner of the assets owned by the fund.
- Under
the Act, the status of the assessee was AOP. Hence, it was taxable in the
capacity of representative assessee. As the beneficiaries were taxable entities
in the Netherlands, which were entitled to benefits under the India-Netherlands
DTAA, the assessee was also entitled to the same benefits.
Following is a diagrammatic presentation of the structure:
The AO, however, held that since the fund had earned capital gain in
India as an AOP, it should be assessed as an AOP. As the said AOP was not a tax
resident entity of Netherlands, benefits under the India-Netherlands DTAA and
particularly that under Article 13 cannot be extended to it.
CIT(A) confirmed the order of the AO.
HELD
- The role of the assessee was that of
custodian of investments. The AO has nowhere mentioned that profits had accrued
to the assessee in its own right. The AO had framed the assessment order in the
name of the assessee mentioning its capacity as trustee of the fund and
describing its business as ‘sub-account of foreign institutional investor’.
Thus, there was no doubt that the assessment was made in the representative
capacity of the assessee.
- The fund was organised as an FGR in the
Netherlands (i.e., funds for joint account). Under the Dutch law, FGR is in the
nature of a contractual arrangement between the investors, fund manager and its
custodian. Since an FGR is not a legal entity, it does not hold any assets on
its own and the assets are held by a custodian (in this case, the assessee).
The clarifications issued by the Government of Netherlands also noted that the
fund was a tax transparent entity.
- The
question that was to be addressed was who was the actual beneficiary of the
trust, in whose representative capacity the assessee was to be taxed, and
whether those beneficiaries were fiscally domiciled in the Netherlands (i.e.,
‘liable to taxation by reasons of his domicile, residence, place of management
or any other criterion of similar nature’). There are two reasons for following
this approach.
- First, the fund was not a legal entity.
Hence, it was to be seen as to which legal entities the income belonged to. The
income belonged to the three investors in the fund, who were tax residents of
the Netherlands. Hence, benefits under the India-Netherlands DTAA could not be
denied.
- Second, even if one accepts that it is a tax
transparent entity simpliciter, following the principles laid down in Linklaters
LLP vs. Income Tax Officer [(2010) 9 ITR (Trib.) 217 (Mum.)], what is
important is the fact that income should be taxable in the Netherlands and not
the manner in which it is taxable. In such an asymmetrical taxation situation,
as long as income is liable to tax in the Netherlands, whether in the hands of the
assessee or in the hands of its beneficiaries (since it is a tax transparent
entity), benefits under DTAA should be granted in India.
- According to the approach adopted by the AO,
for claiming benefit under DTAA it was essential that income should have
accrued to the taxable entities in the Netherlands. Since the beneficiaries
were the three investors all of which were taxable entities in the Netherlands
and not the fund, the assessee was wrongly denied benefit under DTAA.
- On facts, Article 13(1), (2) and (3) of the
India-Netherlands DTAA are not applicable. Gains on the sale of shares is
covered under Article 13(4) if the shares are unlisted and their value is
principally derived from immovable properties. However, the AO has not brought
out any such facts. Thus, Article 13(5) being the residuary provision would
apply. As Article 13(5) allocates taxing rights to the Netherlands, capital
gain would not be chargeable to tax in India.
