See-through approach u/s 9(1)(i) not available under Article 13(5) of India Belgium Treaty: Mumbai ITAT

The assessee company being a venture capital investor, registered in Belgium, had acquired shares of a Singapore Company to the extent of 11.34%, which in turn further held 99.9% shares of an Indian Company.
Assessee sold its entire shareholding in the Singapore Company to the Buyer in India, which deducted taxes u/s 195 of IT Act. Pursuant to such deduction of taxes, assessee filed its return of income claiming the entire taxes deducted as refund in light of the beneficial provisions under Article 13(6) of the India-Belgium tax treaty.
AO rejected the contention of the assessee and held that the capital gains arising from sale of shares of the Singapore company is taxable in India, as the Singapore company is substantially deriving its value from the assets located in India.

The Assessee contented that the Department has erred in treating a company incorporated under the laws of Singapore as a company resident in India by virtue of Explanation 5 to Section 9(1)(i) of the Act without having regard to the fact that the deeming fiction created by the said Explanation deems that shares of a foreign company to be situated in India and does not deem that the company itself becomes a resident in India.
Further, as per Article 13(5) of the India-Belgium tax, the company whose shares are transferred being a resident of contracting state shall be taxable in that contacting state only. Since, assessee company is Singapore resident, the same should not be taxed as per the provisions of Article 13(5) of the India-Belgium tax treaty.

The Department was of the view that the assessee by transferring the shares of the Singapore company carried out an indirect transfer of shares of its subsidiary Indian company and the same were liable to the assessed in the hands of the assessee as Short-Term Capital Gain as per Sec. 9(1)(i) of the Act and also Article 13(5) of the India-Belgium tax treaty.

The ITAT held that Article 13(5) of the India Belgium DTAA applies only if the shares transferred are of a company who is resident of a contracting state and the same forms part of a participation of at least 10% of the capital stock of the company, as the shares transferred are of a Singapore company, application of Article 13(5) of the India Belgium tax treaty should be excluded in the present case.
Additionally, ITAT stated that Article 13(5) of the India Belgium tax treaty does not permit a see-through approach. Accordingly, in the absence of a see-through approach, the transfer of shares of the Singapore company cannot be regarded as transfer of shares of its Indian subsidiary. Further, Unilateral amendments in the domestic law cannot be allowed to override the provisions of the tax treaties.
ITAT accordingly held that Article 13(5) of the India Belgium DTAA is not applicable to the present case and gains if any, would be taxable under Article 13(6) of the India Belgium tax treaty. In this regard ITAT relied on decision held by Hon’ble High Court of Andhra Pradesh in the case of Sanofi Pasteur Holding SA Vs. Department of Revenue, Ministry of Finance (2013) 30 taxmann.com 222.

Source: Sofina SA vs. The Asst. Commissioner of Income Tax (ITA No.7241/Mum/2018)

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