INCOME TAX ACT, 1961

Section 9(1)(i), Expln. Section 195 Article 13(5)

Income deemed to accrue or arise in India - Under section 9(1)(i) - Transfer of shares by Belgium company of Singapore company -

Assessee had sold its entire 11.34% stake holding in A Pte Ltd., Singapore to M/s JI Pvt. Ltd., an Indian company. M/s JI Pvt. Ltd. while making the payment of the consideration for acquiring the shares of A Pte Ltd., Singapore to the assessee-company had deducted TDS under section 195. It was observed by the AO 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. Being of the view, that the assessee by transferring the shares of the aforesaid company, viz., A Pte Ltd. Singapore, had in fact carried out an indirect transfer of the shares of its subsidiary Indian company, vis., M/s. A Solutions (P) ltd., the AO worked out the 'short-term capital gain' (STCG) which as per him was liable to be assessed in the hands of the assessee. It was submitted by the assessee that as it was a resident of Belgium, therefore, the taxability under article 13(6) did arise in Belgium and not in India. AO was of the view that as the shares of A Pte Ltd., Singapore derived their value substantially from the assets of AS Pvt. Ltd., therefore, as per 'Explanation 5' to section 9(1)(i), the preference shares of A Pte Ltd., Singapore sold by the assessee were to be deemed to be situated in India. Dispute Resolution Panel did not find any infirmity in the view taken by the AO. Held: For the purpose of applying article 13(5) of the tax treaty, one of the pre-condition that has to be satisfied is that the company whose shares are transferred should be a resident of a Contracting State viz. India or Belgium. As the shares transferred by the assessee in the present case are 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 was 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. It would be relevant to point out that as per the indirect transfer of shares provisions contemplated in the 'Explanation 5' to section 9(1)(i), a see-through approach had 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. In the absence of a see-through approach in article 13(5), the transfer of shares of A Pte. Ltd., Singapore cannot be regarded as a transfer of shares of its Indian subsidiary viz. AS Pvt. Ltd. Both the AO and the Dispute Resolution Panel were in error in concluding that the gains on the transfer of the shares of A Pte. Ltd., Singapore by the assessee-company would be exigible to tax in India as per article 13(5) of the India-Belgium tax treaty. The order passed by the AO under section 143(3) read with section 144C(13), was therefore, set aside and vacate the addition of STCG made in the hands of the assessee.

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