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TMI Blog2014 (1) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... ale of shares which it was holding and also taxability of interest received for the amount belatedly paid by the buyer. The assessee has raised the following grounds : " On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) : 1. Erred in not considering the submissions, judicial precedents submitted by the appellant and not passing a speaking order in relation to all the grounds of appeal filed by the appellant. 2. Erred in not applying the provisions of article 13(4) and 13(5) of the Double Taxation Avoidance Agreement which specifically deal with the taxation of capital gains arising on alienation of shares. 3. Erred in holding that the company owning the industrial park is nothing but an immovable property along with furniture and fixtures and that the alienation of 100 per cent. shares of such company implies that the rights to enjoy the industrial park is now vested with the purchaser, disregarding the appellant's submissions that the property of the company is not the property of the shareholder. &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia) Pte Ltd., a Singapore based company ("Ascendas" or "purchaser") and has earned long-term capital gains amounting to Rs. 156,93,64,751. The purchaser has also paid interest amounting to Rs. 49,43,750 towards delay in payment of sale consideration. The purchaser has withheld taxes amounting to Rs. 35,24,00,000 on long-term capital gains and Rs. 20,67,476 on the interest payment and remitted the same to the authorities. 5. The assessee filed its return of income on 1st November 2005 for the assessment year 2005-06 claiming a refund of the taxes withheld amounting to Rs. 35,44,67,476. In the return of income, the assessee had claimed that the long-term capital gains arising on the transaction were liable to be taxed in India. However, under the provisions of article 13 of the Double Taxation Avoidance Agreement between India and the Netherlands ("DTAA" or "tax treaty") the same is not taxable in India. Further the assessee also claimed that the interest income is not liable to tax in India as the same does not accrue or arise in India. The assessee has also mentioned that the Indian company had made an application under section 10(23G) of the Act before the Central Governme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 10(23G) of the Act on the date of investment is a prerequisite to the enjoyment of the exemption benefits on such investment. * That the judgment of the Hyderabad, Income tax Appellate Tribunal in the case of VBC Ferro Alloys Ltd. v. Asst. CIT [2007] 107 ITD 367 (Hyderabad) which granted relief under section 10(23G) was against the intent of the Legislature and that the Department has filed an appeal before the hon'ble Andhra Pradesh High Court. * That in relation to taxability of the interest income, the interest income arose or accrued to the assessee through a transaction involving sale of capital asset situated in India and is hence taxable in India as the interest is deemed to accrue or arise in India as per the provisions of section 9 of the Act. 8. Aggrieved by the order passed by the Assessing Officer, the assessee filed an appeal before the Commissioner of Income-tax (Appeals)-VI. The Commissioner of Incometax (Appeals)-V issued notices from time to time in response to which the assessee made appropriate submissions. 9. The learned Commissioner of Income-tax (Appeals) in his order under section 250 of the Act has held that the long-term capital gains derived by as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation Avoidance Agreement and also exemption under section 10(23G) in the alternate. Referring to the facts of the case, learned counsel submitted that the industrial park is the business property of the Indian company which has been leased out to various software development companies registered with the Software Technology Park, Hyderabad and they are operating their business from the industrial park. It was submitted that the shareholders of the Indian company neither occupy nor enjoy any such ownership rights in the property of the Indian company in accordance with the articles of association. It was his submission that the Indian company was claiming benefit under section 80-IA and the assessee has no right or interest in the immovable property of the company but has only interest in shares. It was further submitted that as a shareholder in the company as per the Companies Act, the rights are limited to electing directors, participating in dividends and sharing in the surplus on winding-up of the company. Therefore, it cannot be stated that the assessee has a right in the property as a shareholder and relied on the principles laid down by the hon'ble Supreme Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, since the assessee sold the shares to another foreign company which cannot enjoy the property of the Indian company, the said definition cannot include the transaction of the assessee, nor can it be extended. It was further submitted that under the articles of the Indian company, shareholder does not have any right in the property of the Indian company and relied on the decision of the hon'ble Bombay High Court in the case of CIT v. Mahendra J. Shah [1979] 118 ITR 902 (Bom) for the definition of owner and the decision of the Income-tax Appellate Tribunal in the case of Westwind Realtors P. Ltd. v. Deputy CIT [2006] 9 SOT 572 (Mum) for the proposition that in the absence of right to use the property the opinion of the Assessing Officer does not stand. He then referred to the decision of the hon'ble Supreme Court in the case of Andhra Pradesh State Road Transport Corpn. v. ITO [1964] 52 ITR 524 (SC) wherein the hon'ble Supreme Court held that the income of the corporation is not the income of the State to submit that owning shares in an Indian company is not equivalent to owning the property of the Indian company as contemplated by the Assessing Officer. Learned counsel also re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer that the investments made before the assessment year 2000-01 cannot fall within the provisions of the section 10(23G) learned counsel relied on the decision of the Income-tax Appellate Tribunal, Hyderabad in the case of VBC Ferro Alloys Ltd. [2007] 107 ITD 367 (Hyderabad) wherein this issue was discussed elaborately and held that investments made before June 1, 1998 are also eligible for exemption under section 10(23G). It was his submission that long-term capital gain arising to the assessee-company was also exempt under section 10(23G). He also relied on the decision of the Income-tax Appellate Tribunal in the case of Crompton Greaves Ltd. v. Joint CIT in ITA Nos. 4672/Mum/2003 and 2785/Mum/2007 that investments made earlier on any infrastructure project were also applicable even though such section was not in existence when the investments were made. 15. With reference to the issue of taxability of interest income it was submitted that the interest was paid for the delayed payment of sale consideration by the Singapore company and was arising out of the contractual obligations imposed on the purchaser for delay in payment of sale consideration. Learned counsel subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the paper book placed on record. Even though the learned Commissioner of Income-tax (Appeals) devoted considerable part of his order in deciding the issue whether the transaction is exigible to capital gain under the Indian Incometax Act, there is no dispute with reference to that issue as the assessee itself has offered capital gain but claimed exemption by virtue of the Double Taxation Avoidance Agreement in the first instance or in the alternate by virtue of provisions of section 10(23G) which allows the exemption of longterm capital gain on investments made in infrastructure projects. It was the Assessing Officer's contention that the capital gains arising out of sale of shares in the Indian company is taxable in India as he invoked the provisions of article 13(1), whereas the assessee claims exemption by virtue of article 13(4) and article 13(5) of the Double Taxation Avoidance Agreement. In the alternate the assessee also claims exemption from capital gains as the benefit of exemption under section 10(23G) was eligible as the Central Board of Direct Taxes granted permission to the Indian company. Therefore, it was the contention that the capital gains is not taxable in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alienation of shares issued by a company resident in the other State which shares form part of at least a 10 per cent. interest in the capital stock of that company, may be taxed in that other State if the alienation takes place to a resident of that other State. However, such gains shall remain taxable only in the State of which the alienator is a resident if such gains are realised in the course of a corporate organisation, re-organisation, amalgamation, division or similar transaction, and the buyer or the seller owns at least 10 percent of the capital of the other. 6. The provisions of paragraph 3 shall not affect the right of each of the States to levy according to its own law a tax on gains from the alienation of the shares or "jouissance" rights in a company, the capital of which is wholly or partly divided into shares and which under the laws of that State is a resident of that State, derived by an individual who is a resident of the other State and has been a resident of the first-mentioned State in the course of the last five years preceding the alienation of the shares or "jouissance" rights. In this article, sub-articles 2, 3 and 6 are not applicable for the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 2 (47) "(47) 'transfer', in relation to a capital asset, includes, (i) the sale, exchange or relinquishment of the asset ; or (ii) the extinguishment of any rights therein ; or (iii) the compulsory acquisition thereof under any law ; or (iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment ; or (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation.-For the purposes of sub-clauses (v) and (vi), 'immovable property' shall have the same meaning as in clause (d) of section 269UA ;" 21. Explaining the provisions of introduction of the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany. Therefore the said definition relied on by the Revenue does not apply to the facts of the case. 23. It is also to be examined whether the "immovable property" definition provided under the Income-tax Act under section 269UA(d) is the law of the State under the Double Taxation Avoidance Agreement. Even though the Income-tax Act does not define "immovable property" in section 2 of the Income-tax Act, section 269UA(d) defines immovable property for specific purposes. Even in section 2(47), the definition of immovable property has a restricted applicability. Therefore, it cannot be considered that "immovable property" as defined in section 269UA(d) has a general purpose definition under the common law. It is also to be noted that immovable property has also been defined differently under section 11(5), clause (x) of the Income-tax Act. In the case of income from property held for charitable or religious purpose under section 11, in the forms and modes of investing and depositing money, sub-section (5) prescribes various modes. Clause (x) is also one such mode of investment which is as under : "Section 11(5) clause (x) (x) investment in immovable property: Explanation.- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... include land, benefits to arise out of land and things attached to the earth, or permanently fastened to anything attached to the earth". Section 2(6) of the Registration Act, 1908 defines immovable property "includes land, building, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land and things attached to the earth or permanently fastened to anything which is attached to the earth but not standing timber, growing crops nor grass". Therefore, it is clear from the above definitions that immovable property include land, building or any rights pertains to that but, share in a company cannot be considered as immovable property. What the assessee had sold was shares in an Indian company. 27. In the case of Andhra Pradesh State Road Transport Corpn. v. ITO [1964] 52 ITR 524 (SC) the hon'ble Supreme Court held that the "corporation, though statutory, has a personality of its own and this personality is distinct from that of the State or other shareholders. It cannot be said that the shareholder owns the property of the corporation or carries on the business with which the corporation is concerned. The doctrine in the corporati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icle 13(1) of the Double Taxation Avoidance Agreement. 30. Article 13 was subject to elaborate discussion and the interplay between article 13(1), 13(4) and 13(5) was elaborately discussed in the order by the Authority for Advance Rulings in the case of VNU International B. V., In re [2011] 334 ITR 56 (AAR) in reference No. 871 of 2010 dated March 28, 2011. In that case also the issue was on the transfer of shares of ORG.IMS whether capital gain earned by VNU International would be liable to tax as per the provisions of India-Netherlands treaty. The issue was elaborately discussed vide paras 6 to 8 in the said order as under: "6. The learned advocate contended that as the shares of ORGIMS are not immovable property or movable property forming part of the business property of a permanent establishment or any gain from alienation of ships or aircraft operated in international traffic or movable property pertaining to such business, the transfer of shares of ORG-IMS by the applicant would not be governed by articles 13(1) to (3) of the tax treaty. As the shares of ORG-IMS do not derive their value from any immovable proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of paragraph 5 is not attracted in a case of transfer of shares to a non-resident. Therefore, even if the quantum of shares transferred exceed 10 per cent. of the capital stock of PG India, the second condition for triggering the exception, namely, the alienation to a resident of India, is not satisfied. Thus, according to the applicant, the substantive part of article 5 governs the present case. We find substance in the plea taken by the applicant. 3.2. It is beyond dispute that the applicant is a resident of the Netherlands within the meaning of article 4(1) of the treaty. The applicant is entitled to invoke the benefit of the provisions in the treaty notwithstanding the provisions of the Income-tax Act, 1961 on the same subject. Section 90(2) of the Income-tax Act recognises this principle. It lays down that in relation to the assessee to whom the agreement (treaty) applies, the provisions of the Act shall apply to the extent they are more beneficial to the assessee. The opening sentence of paragraph 5 of article 13 mandates that the gains from the alienation of any property (other than that referred to in the following paragraphs) are liable to be taxed only in the State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly acquired the shares of the Indian company from Pierburg GMBH at a price determined as per the evaluation guidelines prescribed under the Foreign Exchange Management Act, 1999. The substantial investments it has made was with a view to broaden the capital base of the Indian company, as stated by the applicant. The implied suggestion of the Revenue that the applicant is a sham entity or a conduit company deliberately set-up to avoid the tax liability relating to capital gains is wholly misconceived. It would be presumptuous to predicate that the gains accruing to the applicant by the transfer of shares held in the Indian company would not enure to the benefit of the applicant or will not enter into the profit and loss account of the applicant or that the gains will be just passed on to the ultimate holding company (i.e., German company), dictated by its mandate. It is not possible to assume that the applicant would merely act as a conduit to siphon off the gains to the ultimate holding company by means of a colourable device contrary to its corporate status and the stake in the Indian company. It is of course open to the tax authorities to look to the facts at the time of transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the Indian company-value of which is principally derived from immovable property other than property in which the business of the company was carried on ; (iii) alienation of shares which forms part of at least 10 per cent. interest in the share capital of the Indian company ; (iv) alienation of shares which forms part of at least 10 per cent. interest in the share capital of the Indian company-alienated to a resident of India ; and (v) other case of alienation of shares." 34. The provisions of the Double Taxation Avoidance Agreement would be determining the tax jurisdiction of income. The first two circumstances enumerated above are covered under the provisions of paragraph (4) of article 13 as per which, in the first circumstance above, the capital gain arising on alienation of shares would be liable to tax in India ; whereas in the second circumstance the capital gain is not liable to tax in India because of the specific exclusion provided therein. The third, fourth and fifth circumstances of alienation of shares enumerated above are covered under the provision of paragraph (5) of article 13. Article 13(5) provides for circumstance where the shares forming at least 10 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly, the contention of the Assessing Officer that the benefit of exemption is available only for further investment into existing projects is not correct. The memorandum explaining the provisions of section 10(23G) states "in order to attract further investment in this sector an urgent need has been felt for providing more tax incentive to investors". The Assessing Officer failed to appreciate that the provision is an extended benefit to investments made into the infrastructure sector and not for attracting further investment into existing old infrastructure projects/undertakings. 38. The Assessing Officer mentioned that the industrial park was not considered as infrastructure facility for the purpose of section 10(23G) of the Act till financial year 1999-2000. In this regard, the assessee claimed that the industrial parks set up from April 1, 1997 were included in the definition of infrastructural facilities for purposes of section 10(23G) from the financial year 1999-2000. The Central Government had formulated Industrial Park Scheme, 1999 for providing tax exemption under section 80-IA of the Act for setting up industrial parks for the period beginning on April 1, 1997 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and the Central Board of Direct Taxes circular, it is clear that the investments made prior to June 1, 1998 would be eligible for exemption from capital gains if other conditions mentioned in the said clause are satisfied. The basic purpose and intention of section 10(23G) is to provide exemption on income from long-term capital gains/interest income/dividend and is more focused on the results of the investments made and not focused on the investment per se. This is also brought out by the fact that interest income in the hands of the lenders is also provided with the benefit although loans do not constitute the eligible investments. 42. The above view has also been upheld by the Hyderabad Bench of the Income-tax Appellate Tribunal in the case of VBC Ferro Alloys Ltd. [2007] 107 TTJ (Hyd.) 925. In the said case it was held as under : "Held : When the Explanation is read with Circular No. 772, dated December 23, 1998 it is clear that this Explanation is a declaratory statute inserted to supply an obvious omission and to clear doubts. The new Act, i.e., 'Explanation 2', is to explain an earlier Act and thus would be wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the investment in question was made prior to June 1, 1998, Explanation 2 is squarely applicable to the case of the assessee is sustainable. CIT v. Nestle India Ltd. [2005] 275 ITR 1 (Delhi), Vikrant Tyres Ltd. v. First ITO [2001] 247 ITR 821 (SC) and Kerala Finance Corporation v. CIT [1994] 210 ITR 129 (SC) relied on. The next question is as to which are the provisions of the Act that are applicable to the assessee's case as the investment in question was made prior to the 1st day of June, 1998. A plain reading of Explanation 2 introduced by the Finance Act, 1999, shows that the provision as it stood immediately before its amendment by the Finance (No. 2) Act, 1998 shall apply to such income. The term 'immediately before' means provision existing in the Finance Act, 1997, has to be applied in this case. As section 10(23G) as it existed immediately before amendment by the Finance (No. 2) Act, 1998, clearly states that any income by way of long-term capital gain of an infrastructure capital fund is exempt under section 10(23G), there is no hesitation whatsoever in holding that the capital gain in question is exempt from tax under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be exempt under section 10(23G). On being called upon to furnish the details in this regard the assessee filed the following details showing date of investment, assessment year in which investment was made, number of shares, cost of shares, total cost, sale of shares Date of investment Assessment year of investment No. of shares (crores) Cost (crores) (Rs.) 31-01-1996 1996-97 0.84 8.4 23-12-1997 1998-99 0.84 8.4 8-3-1998 1998-99 0.84 8.4 Total cost 2.52 25.2 Sale consideration 2.52 123.09 Gain on sale of shares 97.89 37. It was also made clear that the assessee-company was co-promoter of M/s. Skycell Communication Ltd. The Assessing Officer observed that clause (23G) of section 10 was inserted by the Finance (No. 2) Act, 1996 with effect from the assessment year 1997-98. He opined that when the first lot of shares was purchased on January 31, 1996 this section was not in existence. He, therefore, refused to allow the exemption under section 10(23G) in respect of such a lot of shares. However the assessee's claim for exemption under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st June, 1998. The Rules and Forms in this regard have since been notified vide notification No. S.O. 897(E) dated 12th October, 1998 ([1998] 234 ITR (St) 11)." 39. Accordingly the Finance Act, 1998 introduced Explanation 2 providing as under : 'Explanation 2.-For the removal of doubts, it is hereby declared that any income by way of dividends, interest or long-term capital gains of an infrastructure capital fund or an infrastructure capital company from investments made before the 1st day of June, 1998 by way of shares or long-term finance in any enterprise carrying on the business of developing, maintaining and operating any infrastructure facility shall not be included and the provisions of this clause as it stood immediately before its amendments by the Finance (No. 2) Act, 1998 (21 of 1998) shall apply to such income. (Emphasis supplied by us) 40. Prior to the issuance of Circular No. 772, dated December 23, 1998, a press note dated July 21, 1998 was issued clarifying that the amended provisions of section 10(23G) come into effect from April 1, 1999, i.e., for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch shares were purchased in 1996. Our view is fortified by the order passed by the Hyderabad Bench of the Tribunal in the case of VBC Ferro Alloys Ltd. [2007] 107 ITD 367 (Hyderabad) for the assessment years 2000-01 and 2001-02 in which it has been categorically held that section 10(23G) inserted by the Finance Act, 1999 is declaratory and hence retrospective in operation. In this case also, the assessee has been entitled to exemption under section 10(23G) on long-term capital gain arising on infrastructure capital fund investment before June 1, 1998. The reliance of the learned Departmental representative on the judgment of the hon'ble Supreme Court in the case of Reliance Jute and Industries Ltd. v. CIT [1979] 120 ITR 921 (SC) is misplaced because in that case the loss incurred in the assessment year 1950-51 was held to be not available for set off against the income of the assessment year 1960-61. On the strength of the ratio of this judgment, the learned Departmental representative contended that the shares purchased by the assessee on January 31, 1996 could not be made eligible for exemption under section 10(23G) because clause (23G) of section 10 itself was inserted from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to treat the amount as exempt from tax under the income-tax provisions. 45. Next issue for consideration is the issue of interest received on delayed payment of sale consideration paid by the buyer. There is no dispute to the fact that the buyer is a non-resident Singapore company and the recipient is a non-resident Netherland Co. The assessee received an amount of Rs. 49,43,750 from M/s. Ascendas Ltd., Singapore for delay in making payment at 7 per cent. per annum for the 15 days delay in payment thereof. It was the contention of the assessee that the payment and receipt of the interest was in Singapore and the Netherlands respectively and does not accrue or arise through or any property in India or through from any asset or source of income in India or through the transfer of capital assets situated in India. Both the Assessing Officer as well as the learned Commissioner of Income-tax (Appeals) hold that such interests would be deemed to accrue or arise in India as per section 9(1)(v) of the Act as it has inextricably linked to the original transaction of payment for sale of shares. The learned Commissioner of Income-tax (Appeals) also holds that since the payment of sale of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or deemed to have received or accrued or arising or deemed to have accrued or arise as provided by section 9 of the Act. Therefore, by virtue of the provisions of section 5 interest income received abroad and paid by a nonresident cannot be brought to tax under the Income-tax Act. The argument of the Assessing Officer that interest is on account of transaction involving of sale of capital asset in India cannot be accepted as interest was paid by the purchaser to compensate the delay in discharging the consideration and cannot be considered as part of consideration. If it were to be considered as part of consideration, then it becomes part of the sale consideration which was already considered as exempt from the long-term capital gain. Looking it either way, the interest received by the assessee abroad from a non-resident cannot be brought to tax as the provisions of section 9 or section 5 are not applicable to the transaction. In view of this, we uphold the contentions of the assessee and direct the Assessing Officer to exclude the interest amount. The grounds are allowed. I.T.A. No. 2118/Hyd/2011 47. This appeal is preferred by the assessee directly on the directions of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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