TMI Blog2023 (12) TMI 922X X X X Extracts X X X X X X X X Extracts X X X X ..... being adopted to present the financials of the company. In order to achieve the transition, Ind-AS 101 was introduced to facilitate the companies to prepare the first balance sheet. This requires the companies to prepare the current (FY 2016-17) and previous year (FY 2015-16) balance sheet by adopting the new and accepted policies and method proposed in the Ind-AS. The argument that the figures reinstated is only comparative purpose is not proper considering the fact that the reinstated figures are based on the new accounting method and new policies as per the Ind-AS, which the company proposes to follow consistently in the future. Reinstated figures are not for past performance but for the future adoption of the policies. The reinstated figures are the actual status and financial position of the company based on the accepted new method of accounting proposed in the Ind-AS. The balance sheet adopted by the share holders as on 31.03.2016 are based on the previous set of accounting method as per Indian GAAP and when the company adopts the new accounting standards as per Ind AS, the assets and liabilities in the balance sheet will certainly change. The changes in the assets and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue can recover from the company with the other specific provisions for recovery. The ratio of the decision clearly shows that the individual share holders should not suffer because of gross failure on the part of the company. We observe the fact in the present case is distinguishable to the fact in the above case. In the present case, the assessee is a holding company holding majority shares (By B Ticino SPA Holding company and the assessee holding 99.999%) in the Novateur India. Basically, the management of the Novateur India is controlled by them and the failure of the Novateur India to pay additional tax in the form of DDT is nothing but failure of the assessee itself. They cannot claim the benefit both sides. In the case of Smt Kayan Jamshbid Pandole (supra), the group of individual share holders does not have any control over the company whereas in the given case, the situation is different. One hand, we cannot hold the Novateur India as defaulter and other hand, we cannot allow the same management to take the advantage of benefit u/s 10(34) of the Act for the failure of the same management. It is fact on record that Novateur India has not paid any DDT on the dividen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d circular objecting to unilateral implementation of protocol by the Netherland. Unless it is notified by the Indian government under section 90(2) of the Act. Accordingly, Ground No. 4 is dismissed. Capital gain claimed as not taxable in India as per the para 5 of Article 13 of the Tax Treaty - HELD THAT:- Capital reduction by way of an order of the NCLT cannot be reckoned as alienation of shares in the course of corporate organization, re-organization, amalgamation, division or similar transaction. What has been canvassed before us is that, the first exception is only applicable if the alienation takes place to the resident of that other state i.e. India, if it is sold to a resident of India, i.e., other than NOVATEUR INDIA. Such a plea in our opinion cannot be accepted, because exception for taxability of capital gains in the state of resident which has been carved out, clearly envisages that if alienation of shares are more than 10% of the Indian company and such an alienation takes place to an Indian resident, then resident based taxation cannot be applied if the Netherland company had more than 10% interest in the Indian Company. Undisputedly, the alienation took plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06.2022 for the A.Y. 2017-18 passed u/s. 144C(5) of Income-tax Act, 1961 (in short Act ). 2. Assessee has raised following grounds in its appeal: - 1. On the facts and in circumstances of the case and in law, the AO/ DRP has erred in treating the capital gains of INR 138,47.19,180 as dividend under section 2(22)(d) of the Income-tax Act. 1961 (the Act), out of the total capital gains of INR 275,20,00,000 arising pursuant to capital reduction by the Indian company. Novateur Electrical and Digital Systems Private Limited ( Novateur ) 2. Further, in treating the capital gains as dividend, the AO/ DRP erred in recomputing the accumulated profit as against the actual accumulated loss of Novateur as on the date of capital reduction 3. Without prejudice to the above, even if the aforesaid amount is considered as dividend, the AO/ DRP has erred in taxing the alleged dividend in the hands of the Appellant by holding that Section 115-O of the Act does not apply in case of deemed dividend as per section 2(22)(d) of the Act and hence, dividend as per section 2(22)(d) of the Act is not exempt under section 10(34) of the Act. 4. Without prejudice to the above, even if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of section 112(1)(c)(iii) of the Act. The assessee filed its tax return for the AY 2017-18 and offered the capital gains to tax. During the assessment proceedings, the assessee made a claim before the Assessing Officer that the capital gain arising on cancellation of shares pursuant to the capital reduction undertaken by Novateur India is not taxable in India in view of Article 13(5) of the India - Netherlands tax treaty (hereinafter referred as the tax treaty ). 5. During the assessment proceedings, Assessing Officer considered the issue and he was of the view that the assessee did not have any accumulated loss as on date of capital reduction, but it had accumulated profits as on that date. In this regard, the Assessing Officer observed that Indian Accounting Standard became applicable to the assessee with effect from the FY 2015-16 and accordingly, the opening balance for computing accumulated profit should be considered as per Indian Accounting Standard instead of considering opening balance as per Indian Generally Accepted Accounting Principles (GAAP). In view of the above and relying on the judgement of the Hon'ble Supreme Court in case of G Narsimhan [1999] 236 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eur India were prepared, audited, and approved by the shareholders in line with the Indian GAAP till the FY 2015-16. Accordingly, the accumulated loss as on 31.03.2016 as per the audited financial statements (i.e. ₹. 441.54 crores) was crystalized pursuant to adoption of the accounts by the shareholders in the Annual General Meeting of the company. Consequently, that amount became sacrosanct and cannot be altered Indian Accounting Standard became applicable to Novateur India from the FY 2016-17. The amount of accumulated loss as on 31.03.2016 / 01.04.2016 was reinstated from ₹. 441.84 crores to ₹. 7.55 crores having regard to Indian Accounting Standard provisions, in the financial statements for FY 2016-17 only for the comparative purpose whereby the assessee was required to present the opening figures as on 01.04.2016 in sync with the manner in which the figures are reflected for 31.03.2017. In this regard, a requisite disclosure has been made in the audited financial statements for FY 2016-17 at 'point II.a.i.' of Note 1- Statement of significant accounting policies, which is reproduced below: - (i) Compliance with Ind AS These finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India filed a detailed submission (Page No. 147-148 of the paper book) explaining that Novateur India had accumulated loss as on the date of capital reduction and hence, there was no question of section 2(22)(d) be applied. The same was /accepted by the Assessing Officer. (Page No 149-186 of the paper book for the assessment order of Novateur India for AY 2017-18). Ld. AR of the assessee submitted that once it is accepted in the assessment of Novateur India that Novateur India had accumulated loss as of date of capital reduction, would not be open to the Tax Department to take a contrary position in the assessment of the assessee. 10. In light of the above, Ld. AR of the assessee submitted that the balance as on 31.03.2016/ 01.04.2016, for computation of accumulated loss as on date of capital reduction should be considered as per the audited financial statements prepared as per Indian GAAP and not as per Indian Accounting Standard, which became applicable from the F.Y.2016-17 and the reinstatement of figures as of April 2016 was done only for comparative disclosure purpose. Ld. AR submitted that there is no question of any part of the consideration received by it on the reductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opening figures as on 1.4.2016 in sync with the requirement to present the financial statement for 31.03.2017. The same was disclosed in the notes to statement of significant accounting policies. 13. After considering the submissions, we observe that the migration from IGAAP to Ind-AS was mandated for better presentation of financial statements and for the purpose of uniform and standard presentation of financials keeping in mind the universal applicability. In our view, the financial statement prepared and approved by the share holders prior to Ind-AS are based on policies and method of accounting adopted by the assessee's. As per the new Ind-AS, general accepted policies and method in line with the global acceptance are being adopted to present the financials of the company. In order to achieve the transition, Ind-AS 101 was introduced to facilitate the companies to prepare the first balance sheet. This requires the companies to prepare the current (FY 2016-17) and previous year (FY 2015-16) balance sheet by adopting the new and accepted policies and method proposed in the Ind-AS. The argument that the figures reinstated is only comparative purpose is not proper consideri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are proper and the determination of dividend as per section 2(22)(d) is proper, accordingly sustain their findings. 15. With regard to Ground No. 3, brief facts are, considering the facts mentioned above, in the final assessment order, the Assessing Officer held that exemption under section 10(34) would be applicable only for the amount, which has suffered tax under section 115-O of the Act. Further, the Assessing Officer observed that section 115-O of the Act has got application where a domestic company is distributing profits. In the case of deemed dividend, no profits are explicitly distributed by the domestic company, and essentially, it is upon the assessing authorities to bring the receipt to tax under an explicit deeming provision, there is no question of applicability of section 115-O. However, the assessee submitted that the Explanation below section 115-Q puts it beyond any pale of doubt and excludes sub clause (d) of Section 2(22) from the expression dividend for the purposes of Chapter XII-D (containing section 115(O) to 115(Q)). Therefore, the assessee has to be given benefits of claiming deduction under section 10(34) of the Act. 16. Before us, at the time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and provided that for the purposes of the said Chapter Chapter XIID) which contains Section 115-O and 115-Q, the expression dividend shall have the same meaning as it given to dividend under Sub-Section (22) of Section 2, but shall not include sub- clause (e) thereof. The plain effect of the explanation, therefore, would be that even the deemed dividend under Section 2(22)(d) of the Act would be covered for the purpose of Chapter XIID. In turn, therefore, such deemed dividend would be one which is referred to Section 115-O of the Act Inescapable conclusion, therefore, would be that such dividend also would be exempt from tax in the hands of the receiver in terms of Section 10(34) of the Act. The contention of the counsel for the Revenue that the company having not paid such dividend distribution tax, exemption under Section 10(34) should be deprived to the assessee needs to be noted only for rejection. If a certain income is exempt at the hands of recipient by virtue of statutory provision, unless a provision is made in the statute itself, such exemption cannot be withdrawn only because the payer has not paid tax. The statute has made specific provision for recovery o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t case, the assessee is a holding company holding majority shares (By B Ticino SPA Holding company and the assessee holding 99.999%) in the Novateur India. Basically, the management of the Novateur India is controlled by them and the failure of the Novateur India to pay additional tax in the form of DDT is nothing but failure of the assessee itself. They cannot claim the benefit both sides. In the case of Smt Kayan Jamshbid Pandole (supra), the group of individual share holders does not have any control over the company whereas in the given case, the situation is different. One hand, we cannot hold the Novateur India as defaulter and other hand, we cannot allow the same management to take the advantage of benefit u/s 10(34) of the Act for the failure of the same management. It is fact on record that Novateur India has not paid any DDT on the dividend, hence the benefit u/s. 10(34) cannot be claimed even though the definition of dividend u/s.2(22)(d) is covered u/s 115O of the Act. 23. In another perspective, the assessee has received the gross dividend including DDT. In the normal case, the company will deduct DDT at the applicable rate and remit the net dividend. Therefore, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention. 26. The MFN clause in the tax treaty covers the situation where India limits its right of taxation as a source country under a tax treaty with another OECD member on account of a lower tax rate as compared to the rate provided in the tax treaty. The MFN clause makes it clear that same rate as provided in the tax treaty with such OCED member shall apply and to that extent India's rights as a source country will get limited. Subsequent to tax treaty protocol, India has entered into DTAA with Slovenia which is an OECD member and in terms thereof the tax rate on dividend is not to exceed 5% of gross amount of dividend. Accordingly, in view of MFN clause in the tax treaty and tax rate on dividend under India-Slovenia DTAA, the dividend tax rate under the tax treaty shall also not exce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the dividend income is taxable and the assessee is eligible to take the benefit under DTAA. Before us, assessee has pleaded to invoke MFN clause under the treaty to claim beneficial rate of tax @5% instead of 10% provided under Article 10 of India- Netherland DTAA. In support the assessee has relied upon following judgments:- (i) Concentrix Services Netherlands B.V. v. ITO (2021) 434 ITR 516 (Delhi) (ii) Nestle SA v. Assessing Officer Circle (W.P.(C) 3243/2021)., (iii) Steria (India) Ltd. v. CIT [2016] 386 ITR 390 (Delhi) 32. The lower rate of 5% is based on the reasoning that India had entered into DTAA with Slovenia which became member of the OECD in the year 2010 which provides for lower rate of tax @5% and also later on with Lithuania which became OECD member in 2018. It is relevant to note here that CBDT vide Circular No. 3 of 2022 dated 03 rd Feb, 2022, had brought the clarification that such unilateral decree / bulletin do not represent the stand of India as a treaty partners on applicability of the MFN clause, without taking into bilateral consultation with India and therefore, does not have a binding force. India has expressed its strong reservation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of tax have to be lodged with the competent authority of the State having levied the tax, within a period of three years after the expiration of the calendar year in which the tax has been levied. 2. If after the signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention. 35. From the above it is clear that where tax has been levied at source at excess under the provisions of Article 10 to 12, applications for refund of the same have to be lodged with the competent authority of the state which levied the tax within a period of three years after the expiration of the calendar year in which the tax has been le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares do not derive value principally from immovable property in India. 38. Para No. 5 deals with gains from the alienation of any property other than that referred to in Para No. 1, 2, 3 and 4. Para No.5 is reproduced below: - 5. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 4 shall be taxable only in the State of which the alienator is a resident. However, gains from the 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, much 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, reorganization, amalgamation, division or similar transaction, and the buyer or the seller owns at least 10 per cent of the capital of the other. 39. The above mentioned Para 5 of Article 13 is divided into three limbs as under First limb -Gains from the alienation of any property other than that referred to in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee; the shares got cancelled pursuant to the scheme of capital reduction being approved by the Court/ National Company Law Tribunal. 43. Furthermore, the third limb is an exception to the second limb and would need to be evaluated only if the case falls in the second limb (i.e, if the reduction is considered as an alienation to a resident of India) Despite the same, the third limb takes away the taxing rights from India in favour of Netherlands. The third limb states that capital gains shall remain taxable only in the Netherlands if such capital gains are realized in the course of a corporate organisation, reorganisation, amalgamation, division, or similar transaction. Since the assessee's case falls under first limb (ie, it is an alienation by way of cancellation of shares pursuant to capital reduction) and it does not fall under the second limb (ie, it is not an alienation to a resident), therefore it would not be required to test the third limb (i.e. alienation of shares in the course of organisation, reorganisation......). 44. Ld. AR of the assessee, further, submitted that, without prejudice to the assessee's claim that its case falls under the first li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussed again for this ground for clarity and better understanding, Legrand Netherland B.V. (LNBV) is a Netherland entity and a tax resident of Netherland. It held 48.659% shares in Novateur Electrical Digital System Pvt. Ltd, India (Novateur India) which is an Indian entity. In the previous year of A.Y. 2017-18, 80 lakhs shares held by LNBV in NOVATEUR INDIA was cancelled on 06/10/2016 under a scheme of capital reduction undertaken by NOVATEUR INDIA. Pursuant to the scheme of capital reduction approved by NCLT, the NDBV received ₹. 372.20 Crores as consideration against cancellation of shares. NOVATEUR INDIA computed the capital gains arising on such reduction at ₹. 275.20 Crores by treating the consideration of ₹. 375.20 Crores as full value of consideration and reducing the cost of shares of ₹. 100 Crores. Accordingly, taxes were withheld @10.815% u/s. 112(1)(c)(iii). The Netherland entity filed its tax return and offered the same as capital gains. However, during the course of assessment proceedings, assessee made a claim before the Assessing Officer that the capital gains arising on cancellation of shares pursuant to capital reduction is not taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the course of a corporate organisation, reorganization, amalgamation, division or similar transaction, and the buyer or the seller owns at least 10 per cent 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 at tax on gains from the alienation of 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. 51. In Para No. 5 of the aforesaid Article, first of all provides that gains from alienation of any property which in this case the shares which are not covered from Para Nos. 1 to 4 shall be taxable in the state of an alienated resident which here in this case would be Netherland company. However, two exceptions have been provided in the said para: The first is that gains from alienation of shares issued by company resident in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es is by way of capital reduction and in lieu of such capital reduction where Indian company has paid consideration for alienation of such shares which it has bought back and had paid a compensation, is nothing but a consideration of transfer of shares and therefore, it tantamount to gain on alienation of shares taxable under the head 'capital gain' in India. As stated above, second exception is not applicable. 53. Another contention of the assessee before us is that it falls under the first limb which categorically provides that in case of alienation of shares, resident country had right to tax the capital gain i.e. Netherland. Though under Article 13(5), it is a resident based taxation, however, if the exception has been carved out if the threshold of alienation of shares which forms part of 10% interest in the capital stock of Indian Company is present, then resident based taxation is shifted to source based taxation and the source country i.e. India has right to tax under DTAA. Accordingly, this ground raised by the assessee is dismissed. 54. With regard to Ground No. 6, Assessing Officer computed surcharge and cess on the rate of tax for dividend (ie, 10%) provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in other cases 12.5% of gross amount of interest. In this case, the assessee is the beneficial owner of interest and tax charged cannot exceed 12.5% of gross interest. Tax has been defined in Article-2(2)(b) as per which income tax included surcharge. Therefore, tax referred to in Article 11(2) @ 12.5% also includes surcharge. Further, nature of education cess and surcharge being same as held by the Tribunal in the case of DIC Asia Pacific Pte Ltd.(supra), in our view education cess and surcharge cannot be levied separately and will be included in tax rate of 12.5%. The judgment of Hon ble High Court of Uttarakhand in the case of Arthusa Offshore Co. (supra), is not applicable to the facts of the present case as the Hon'ble High Court was concerned with taxability of income under Article 14(2) of the DTA between India and USA. The Hon'ble High Court was not concerned with interpretation of tax payable on interest income under DTAA. The judgment of AAR in the case of Airports Authority of India, IN RE (supra), is also distinguishable as in that the court was concerned with taxability of business income and it was held that under Article 5(3) of DTAA with USA, preparator ..... X X X X Extracts X X X X X X X X Extracts X X X X
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