Non-Taxability of Transfer of Shares in real estate business by a Non-Resident Indian if he doesn’t hold substantial interest in the company

Fact of the Case:

1. The taxpayer was a Non-resident Indian,
2. He had transferred a portion (less than 2%) of its shareholding of some Real-Estate companies engaged in real estate development. The business model of realty companies is focused on gains from real estate development rather than gains from holding immovable property.
3. The issue was arising regarding the taxability of this transfer as per Article 14(4) of India-Spain tax treaty; which states that gain from alienation of shares of a company, the property of which consist of principally immovable property; will be taxable in the jurisdiction of that country where such immovable property has situated.
4. The Assessing Officer was of view that the investee companies were dealing in the real estate business, whose share prices were directly determined by the value of immovable property held by it. So, the transfer by the taxpayer shall be taxable in India (as per India-Spain tax treaty).
5. The taxpayer is considering the view of UN model tax treaty; which states that the taxability of indirect transfer of ownership of immovable property resulting by transfer of shares.

Held by the Hon’ble ITAT of Mumbai:

1. The ITAT bench clarifies Article 14(4) of India-Spain tax treaty and states that the taxability under this article arises when there is;

• Capital gain on the sale of immovable property; and
• Gain on sale of shares of a company, whose property is principally consisting of immovable property. [i.e. more than 51% of total assets of company].

2. Further ITAT states that article 14(4) shall be applicable when the transaction in shares gives right of either: –

• Control over the company; or
• To occupy the underlying immovable property; or
• Have substantial interest in the company.

3. In the present case, taxpayer has sold only 2% of its shareholding so there is no question arise for the taxability of such transaction in India.

Conclusion:

The aid judgement shall give a huge relief to several non-resident taxpayers of India, who holds a small quantum of shares in the real estate business of India, as it shall be not taxable as per the Article 14(4) of India-Spain tax treaty.

JCIT v Merrill lyunch Capital Market Espana SA SV [ITA No. 6108/Mum/2018]