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TMI Blog2019 (10) TMI 1593X X X X Extracts X X X X X X X X Extracts X X X X ..... Foreign Institutional Investor is refrained from undertaking any other business activity and accordingly the receipt on account of foreign exchange transaction will be in the nature of income from other source or other income taxable in India as per Article 23(3) of the DTAA between India and Spain." 3. Learned representative have fairly agreed that whatever we had decided in ITA No. 6109/Mum/2018, which deals with identical grievance of the Assessing Officer for the Assessment Year 2013-14 and which was heard along with this appeal, will apply mutatis mutandis this year as well. 4. Vide our order of even date, we have dismissed similar ground of appeal, raised by the appellant Assessing Officer for the assessment year 2013-14, and while doing so, we have, inter alia, observed as follows: 5. In our humble understanding, irrespective of whether the gains in question are found to be in the capital filed or in the revenue field, the case of the revenue hinges on the applicability of Article 23 of Indo Spanish tax treaty to the gains in question. It is not even the case of the Assessing Officer that the gains can be taxed as business income in the hands of the assessee, in the abse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce jurisdiction. 7. As a corollary to this proposition, it would seem only elementary that an income cannot be brought within the ambit of source taxation under article 23 just because its taxability has failed, on account of not fulfilling the conditions precedents to its source taxability in the relevant treaty provisions, in the source jurisdiction. 8. To put it in simple words, therefore, it is not the fact of non-taxability under article 6-22 which leads to taxability under article 23, but the fact of income of that nature being covered by article 6-22 which can lead to taxability under article 23. There could be many such items of income which are not covered by these specific treaty provisions, such as alimony, income from chance such as lottery or gambling, rent paid by resident of a contracting state for the use of an immovable property in a third state, and damages (other than for loss of income covered by articles 6-22) etc. 9. In our humble understanding, therefore, article 23 does not apply to items of income which can be classified under sections 6-22 whether or not taxable under these articles, and when income from gains on settlement of forward contracts is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses, interest and other similar expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 28 of the Income Tax Act, 1961)". In other words, even profits of illegal business were held to be taxable as 'business profits'. In CIT Vs Piara Singh [(1980) 124 ITR 40 (SC)], the same position was reiterated. Of course, there are subsequent legislative developments with respect to admissibility, or rather inadmissibility, of deduction for "any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law" but that aspect of the matter is not relevant for the present purposes. 14. In our considered view, therefore, it can be safely concluded that whether legal or illegal, and, therefore, whether with regulatory approvals or without regulatory approvals, fruits of pursuits in the course of business are taxable as business profits nevertheless. 15. The situation under the tax treaties is no different either. 16. Article of 7 of the Indo Spanish tax treaty also refers to "profits of an enterprise" and does not even remotely suggest the compliance with all regulatory framework as a sine qua non for this treaty protection. 17. The stand of the Assessing Officer, on this aspect of the matter, i.e. taxation as non-business income, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in the revenue field, these gains are in the nature of business profits, governed by article 7, which cannot be taxed in the source jurisdiction as the assessee does not have any permanent establishment in India. 21. We thus find that while taxation of business profits is expressly dealt with by article, these business profits cannot be taxed in the source jurisdiction for want of satisfying the fundamental condition precedent for its taxability, i.e. existence of a permanent establishment (PE) in the source jurisdiction. Whichever way one looks at the gains in question, the taxability of these gains is very well expressly dealt with by the provisions of article 7 or article 14 of the Indo Spanish tax treaty. In the light of this analysis, in our considered view, article 23 has no application in the matter. 22. As we part with this ground of appeal, we may also deal with the judicial precedents cited before us. The common thread in all these precedents is the emphasis on the gains being in the nature of income from bonafide hedging contracts and reliance on Citicorp Banking Corporation's case (supra). It is interesting to note that in Citicorp Banking Corporation's ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne, or to follow, the approach adopted in these judicial precedents, as, in our considered view and from our perspective, that aspect of the matter is not really material given the undisputed facts of the present case. We are dealing with a treaty situation. To put a question to ourselves, would it really matter if these were not hedging contracts and the assessee was infact making money out of dealing in forward exchange contracts simplicitor? In view of our detailed analysis earlier and in our humble understanding, that fact, by itself, cannot make the gains taxable under article 7 when the assessee does not have a PE in India, or under article 14 when the gains are not covered by any of the exception clauses in article 14(1) to 14(5). It is not, in a way, even the case of the Assessing Officer that these gains of the assessee are taxable in India under article 7 or article 14; his case is that these gains, admittedly outside the scope of article 7 and 14, are covered by article 23 as such. The question thus remains as to what is the scope of taxation in the source jurisdiction under article 23- an aspect which has not left intact by the judicial precedents relied upon and which, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explain India-Spain treaty." 6. "Whether on the facts and in circumstances of the case and in law, the ld. CIT(A) erred in not appreciating the Assessing Officer's decision in this case that the transfer of shares of realty based companies attracts Article 14(4) of the India-Spain DTAA which is very clear on this issue." 8. Learned representative have fairly agreed that whatever we had decided in ITA No. 6109/Mum/2018, which deals with identical grievance of the Assessing Officer for the Assessment Year 2013-14 and which was heard along with this appeal, will apply mutatis mutandis this year as well. 9. Vide our order of even date, we have dismissed similar ground of appeal, raised by the appellant Assessing Officer for the assessment year 2013-14, and while doing so, we have, inter alia, observed as follows: 28. In substance, these rather verbose grounds of appeal so raised by the appellant Assessing Officer are nothing but arguments in support of the appellant Assessing Officer's core grievance that the CIT(A) erred in holding that, on the facts and in the circumstances of the case, learned CIT(A) erred in deleting the addition of capital gain of Rs. 11,31,51,216 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... movable property held by them as stock in trade but on several other factors such as capital adequacy, projects in the pipeline, current profits and future prospects". It was noted that the assessee's shareholding in these companies was well under 7% and "with such miniscule shareholding, the assessee cannot be treated as having acquired any right in stock in trade of those companies" and "the assessee had no effective right to occupy the immovable properties of those companies". It was also noted that a purposive construction of the provision of Article 14(4) would show that it was meant to cover the cases in which indirect transfer of immovable properties, by way of transfer of shares in the companies holding such properties, and that it would not cover the cases in which commercial investments are made in the companies dealing in real estate as in the present case. The support for this approach was found in the UN Model Convention Commentary in respect of the similar provisions in the UN Model Convention. It was in this backdrop that, following the judicial precedents- including in assessee's own case, the CIT(A) concluded that the provisions of Article 14(4) would not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stablishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such fixed base, may be taxed in that other State. 3. Gains from the alienation of ships or aircraft operated in international traffic or of movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State of which the alienator is a resident. 4. Gains from the alienation of shares of the capital stock of a company the property of which consists, directly or indirectly, principally of immovable property situated in a Contracting State may be taxed in that State. 5. Gains from the alienation of shares of the capital stock of a company forming part of a participation of at least 10 per cent in a company which is a resident of a Contracting State may be taxed in that Contracting State. 6. Gains from the alienation of any prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ...(proving a negative)..... would be to cast an almost impossible burden". The onus is thus clearly on the Assessing Officer to prove that the conditions of article 14(4) are satisfied was thus on the Assessing Officer. 36. No material is brought on record to discharge the onus, so cast on the Assessing Officer, before taxation under article 14(4) is invoked. There is not even whisper of a suggestion that the Indian companies in which the assessee had invested the monies, as share capital, were "principally" holding the immovable properties. All that the Assessing Officer has pointed out is that these companies were listed on BSE realty index, and proceeded on the assumption, an unrealistic and incorrect assumption by any standard, that every company listed on BSE realty index is a company the property of which principally consists of immovable properties. What it overlooks is that the companies listed in realty index, without any dispute or controversy, are the companies are engaged in the business of real estate development rather than in the business of holding real estate as investments. The business model of realty companies is focussed on gains from real estate developm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind one more aspect of the Hon'ble Supreme Court's landmark judgment, in the case of K.P. Varghese v. ITO [1981] 131 ITR 597 (SC)]. This was also the case in which Hon'ble Justice Bhagwati, in his inimitable manner, dealt with the principles governing interpretation of tax laws and observed that the task of interpretation is not a mechanical task and, Their Lordships' quoting with approval, Justice Hand's observation that "it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning". Their Lordships observed as follows: "...The task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It is an attempt to discover the intent of the Legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated insofar as the particular items under consideration are concerned". 42. As we deal with the principles of interpretation of tax treaties, it may also be appropriate to refer to some of the observations made by a coordinate bench, in the case of Hindalco Industries Ltd. Vs ACIT [(2005) 94 ITD 242 (Mum)] in the context of principles governing the interpretation of tax treaties. That was a case in which the coordinate bench, after an elaborate analysis of the related judicial precedents from even outside India and the related first principles, inter alia, observed that "A tax treaty is to required to be interpreted as a whole, which essentially implies that the provisions of the treaty are required to be construed in harmony with each other", that "the words employed in the tax treaties ...... need not be examined in precise grammatical sense or in literal sense" and "even departure from plain meaning of the language is permissible whenever conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by negotiations between the two contracting Governments. Although I am thus constrained to do violence to the language of the Convention, I see no reasons to inflict a deeper wound than necessary. In other words, I prefer to depart from the plain meaning of language only in the second sentence of article XV and I accept the consequence (strange though it is) that similar words mean different things in the two sentences." 43. Article 31(1) of the Vienna Convention States that "A treaty shall be interpreted in good faith in accordance with the ordinary meaning given to the terms of the treaty in their context and in the light of its object and purpose". In the light of the detailed discussions above, the mandate of article 31(1) has to be borne in India while interpreting article 14(4). What was the object and purpose of Article 14(4). The question that we must, therefore, ask ourselves is as to what was the purpose and object of article 14(4). 44. We find that the gains on alienation of immovable properties are taxable in source jurisdiction. That provision is contained in article 14(1). However, as we have also noted in our analysis earlier, rather than an assessee holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l period. This interpretation of the scope of "principally" must be understood in the context of the purpose of this treaty provision. 49. The UN Model Convention Commentary, as last updated, notes the historical background and justification for this treaty provision, by observing that "Since it is often relatively easy to avoid taxes on such gains through the incorporation of a company to hold such property, it is necessary to tax the sale of shares in such a company. This is especially so where ownership of the shares carries the right to occupy the property". The OECD Convention commentary, as last updated, notes that by this provision, it is ensured that "gains from the alienation of such shares or comparable interests and gains from the alienation of the underlying immovable property" are equally taxable in that State. 50. There cannot be any dispute that these model convention commentaries do not bind us, but even then these commentaries are in the nature of contemporanea expositio nevertheless inasmuch as the meaning and backdrop of expressions in the tax treaties can be inferred, to use the words of Lord Redcliffe, as in 'international tax language' developed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the mandate of Article 31(1) of VCLT aside for a while, the guidance given by Hon'ble Supreme Court in the case of K P Varghese (supra) is worth bearing in mind when it comes to interpretation of tax laws. Hon'ble Supreme Court had, inter alia, quoting, with approval, Justice Hand that, "it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning". Viewed thus, we cannot ignore the clear intent of the scheme of article 14(4) and interpret the meaning thereof in isolation with its unambiguous object and purpose, and we interpret this provision in the light of the purpose and object it was to accomplish, the inevitable conclusion is that the taxability of gains on sale of shares in companies principally holding the immovable property can be taxed in the source jurisdiction when such an alienation of shares, directly or indirectly and on standalone basis or in conjunction with other transactions, results in the control and enjoyment, of the underlying propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abulls Real Estate Limited, Mahindra Lifespace Developers Ltd., Shobha Developers Ltd. and Unitech Limited, as an investor. There is no question of holding any controlling interest or even significant interest in these companies. These holdings therefore cannot give, or be even part of an effort to get, controlling right or any other right to occupy the property. It has not even be the case of the Assessing Officer that the assessee had significant holdings in these companies. That apart, it is also important to note that all these companies are engaged in the business of real estate development rather than in the business of holding real estate as investments. The business model of realty companies is focussed on gains from real estate development rather than gains from holding the immovable properties. Viewed in the context of the purpose for which article 14(4) finds place in the Indo Spanish tax treaty, and unambiguous thrust of such provisions in the tax treaty literature, article 14(4) is to be read alongwith and to supplement article 14(1), the gains on sale of such shares cannot indeed be taxed in the source state under article 14(4). 56. Secondly, while the expression &# ..... 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