Income Tax Appellate Tribunal - Hyderabad
Venenburg Facilities B V, Netherlands, ... vs Assessee on 16 January, 2013
ITA No.739/Hyd/2011- Vanenburg Facilities B.V
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" Bench, Hyderabad
Before Shri B. Ramakotaiah, Accountant Member
& Shri Saktijit Dey, Judicial Member
ITA Nos.739 & 2118/Hyd/2011
(Assessment year: 2005-06)
Vanenburg Facilities B.V. Vs. The Asstt. Director of Income
Vanenburgerallee 13, 3882 AE, Tax-II (International
Putten Netherlands C/o Cordys Taxation), 6th Floor, Income
Software India Pvt Ltd. The V Tax Towers, Masab Tank,
Park Plot No.17 Software Units Hyderabad
Layout, Hyderabad 500081
PAN: AABCV 9557 F
(Appellant) (Respondent)
Department by: Shri M. H. Naik, DR
Assessee by: Shri Percy Pardiwalla &
Shri P.V. Haragopal
Date of Hearing: 16/01/2013
Date of Pronouncement: 15 /03/2013
ORDER
Per B. Ramakotaiah, A.M.
These two appeals pertain to the same assessee for the same assessment year. ITA No.739/Hyd/2011 is against the order of the CIT (A) in respect of assessment completed under section 143(3) of the Income Tax Act. ITA No.2118/Hyd/2011 is consequent to the reopening of the assessment under section 147 and also on the directions given by the DRP Hyderabad in the re-assessment proceedings. These are considered by this common order.
ITA No.739/Hyd/20112. This is an appeal by assessee against the order of CIT (A)-5 Hyderabad, dated 25.03.2011. Assessee has raised the issue of taxing the capital gains arising out of sale of shares which it was Page 1 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V holding and also taxability of interest received for the amount belatedly paid by the buyer. Assessee has raised the following grounds:
" On the facts and circumstances of the case and in law, the learned CIT (A):
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 Apepllant.
2. Erred in not applying trhe provisions of Article 13(4) and 13(5) of the DTAA 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% 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.
4. Erred in holding that the transaction of alienation of shares falls wit
5. Erred in law, in not following the decision of the Authority for Advance Ruling which is on similar facts, in case of the Appellants group Company and other foreign companies.
6. Erred in not allowing the claim of exemption under the provisions of section 10(23G) of the Act and holding that the requisite apoproval should be in place at the time of investment by an investor and not at the time of accrual of the long term capital gain.
7. Erred in law, in not following the decision of the jurisdictional Income Tax Appellate Tribunal and the circular issued by the CBDT.
8. Erred in holding that the interest amount paid by the purchaser to the Appellant on account of delay in remittance of the sale ocnsideration has arisen in India Page 2 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V as per the provisions of section 9 of the Act stating that the interest amount is linked to the sale of shares".
3. Briefly stated facts are Vanenburg Facilities B.V. ('VFac' or 'assessee') is a company incorporated under the laws of Netherlands and is a tax resident of Netherlands, having its registered office at Vanenburgerallee 13, 3882 AE, Putten, Netherlands. VFac has made investment into the equity share capital of Vanenburg IT Park Private Limited, Hyderabad ('Indian Company' or'VITP'), with due approval from the Foreign Investment Promotion Board, Government of India ('FIPB'). The Indian Company is into the business of developing, operating and maintaining infrastructure facilities of an industrial park in Hyderabad. The Indian Company's business undertaking has been notified by the Central Government as an industrial park in line with the provisions of section 80- IA(4)(iii) of the Income tax Act, 1961 ('the Act'). The business of the Indian Company was notified as 'eligible business' u/s 80IA(4)(iii) of the Act. The Indian Company has also been approved by the Central Government under section 10(23G) of the Act.
4. During the financial year 2004-05 relevant to the assessment year 2005-06, assessee has sold its 100% share holding in the Indian Company for Rs.224,50,00,000 to M/s. Ascendas Property Fund (India) Pte Limited, 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. Assessee filed its return of income on 1st November 2005 for the AY 2005-06 claiming a refund of the taxes withheld amounting to Rs.35,44,67,476. In the return of income assessee had claimed Page 3 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V 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 Netherlands ('DTAA' or 'tax treaty') the same is not taxable in India. Further assessee also claimed that the interest income is not liable to tax in India as the same does not accrue or arise in India. Assessee has also mentioned that the Indian Company had made an application under section 10(23G) of the Act before the Central Government, which once approved and notified, exempts the long term capital gains.
6. The return of income was selected for scrutiny under section 143 and notices were issued calling for detailed information for claiming the exemption, which was submitted from time to time. The Assistant Director of Income tax - II (International taxation) ('Assessing Officer' or 'AO') had passed an assessment order under section 143(3) of the Act dated February 25, 2008, denying the benefit of the tax treaty and also the benefit of exemption under section 10(23G) of the Act.
7. The AO in the assessment order under section 143(3) of the Act has held as under:
• The provisions of the DTAA between India and Netherlands are applicable to Vfac • that the long term capital gain has arisen on account of transfer of shares.
• that the specific provision overrides the general provision.
• that Article 13(4) of the DTAA specifically deals with taxability of capital gains arising from the alienation of shares of a company, • that Article 13(4) deals specifically with cases where the value of the shares is principally derived from immovable property other than those used in the business of such company and in the present case, the value of shares is derived from immovable property used for business purpose and accordingly Article 13(4) is not applicable Page 4 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V • Further, that provisions of Article 13(5) are not applicable to the present case as the same is only a residuary clause of taxing capital gains.
• That referring to the provisions of section 2(47) and section 269UA(d) of the Act, held that shares of the Indian Company are 'immovable property' under the provisions of the Act.
• that Article 13(1) of the DTAA specifically deals with the taxability of gains arising on alienation of 'immovable property'.
• that Article 13(1) is the specific clause which would be applicable in respect of the transaction of transfer of shares.
• that the provision of section 10(23G) of the Act, which exempts from tax, long term capital gain arising on transfer of investment in a notified project, is not applicable in the present case as the project of the Indian Company was not notified when the investment was made by assessee.
• that the approval of the project under section 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 which granted relief under section 10(23G) was against the intent of 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 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 AO, assessee filed an appeal before the Commissioner of Income-tax (Appeals) -VI. The Commissioner of Income- tax (Appeals)-V issued notices from time to time in response to which assessee made appropriate submissions.
Page 5 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V9. The Ld CIT(A) in his order u/s 250 of the Act has held that the long term capital gains derived by assessee on the sale of shares is taxable in India after analyzing the applicability of the DTAA to the present case. He approved the contention of AO about the applicability of Article 13(1) of the DTAA to the transaction of sale of shares, thereby rejecting the applicability of Article 13(4) and Article 13(5) of the DTAA to the present case. The Ld CIT(A) has stated that the industrial park is nothing but an immovable property along with furniture and fixtures and that the alienation of 100% shares implies that the rights to enjoy the industrial park now vested with the purchaser. The Ld CIT(A) also upheld the AO's contention that the provision of section 10(23G) of the Act, which exempts from tax, long term capital gain arising on transfer of investment in a notified project, is not applicable in the present case as the project of the Indian Company was not notified when the investment was made by the assessee. The CIT(A) held that the judgment of the Hyderabad Income tax Appellate Tribunal in the case of VBC Ferro Alloys Ltd which granted relief under section 10(23G) to the said Company was not applicable to the Appellant since the judgment does not relate to the specific facts of the present case. In relation to taxability of the interest income, the CIT(A) has held that, the interest income is inextricably linked to the 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. Aggrieved by the above order under section 250 of the Act, assessee has preferred the present appeal.
10. Referring to the submissions made before AO and the CIT (A) and paper book filed in this regard, the learned Counsel submitted that the first question raised by the CIT (A) about the taxability of the capital gains does not arise as assessee has admitted that the Page 6 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V capital gain is exigible to the Indian Income Tax. What assessee is claiming is relief under the DTAA and also exemption under section 10(23)G in the alternate. Referring to the facts of the case the 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 80IA and 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 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 case of LIC of India vs. Escorts Ltd & Ors (AIR 1986) SC 1370. He further submitted that the company registered under the Companies Act 1956 is a legal person separate and distinct from its individual members. The property of the Indian Company is not the property of the shareholders, i.e. assessee. For this he relied on the decision of the Hon'ble Supreme Court in the case of Rustam Cavasjee Cooper v. UOI (1970 AIR 564 SC). In view of the judicial precedents it was his submission that the shareholders do not own the property of the Indian Company.
11. Referring to the arguments of AO that the sale of shares by assessee is equivalent to the sale of immovable property, it was the Page 7 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V submission that under Article-6 of the DTAA, immovable property was defined to have the meaning which it has under the law of the State in which the property in question is situated. The definition of immovable property does not include any rights in the shares of a company. It was submitted that under the general law in India, immovable property does not include shares. AO mainly relied on the definition provided under the Income Tax Act under section 269UA, the definition of which is limited for the purpose of that section and not for the entire Act. He then referred to the definition of 'transfer' in section 2(47) and Explanation 1 to submit that the definition of immovable property as defined under section 269UA, clause-d is only for the purpose of sub-clause-v and vi of section 2(47) and cannot be extended beyond that. Since there is no definition of immovable property under the Act, AO was wrong in relying on the definition given under section 269UA to extend the logic to assessee's transfer of shares in Indian Company. He then referred to the provisions of section 269UA (d) and Board Circular No.495 dated 22nd September, 1997 explaining the introduction of sub clause v & vi in section 2(47) to submit that applicability of the above definition of 'immovable property' to the transaction of sale of shares of a company is applicable only in case where such transaction enables shareholders of the company, the enjoyment of the property of the company. In this light of this definition, since 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 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 Commissioner of Income-tax Vs Mahendra J. Shah (Bom), 118 ITR 902 for the definition of owner and the decision of the ITAT in the case of Commissioner of Income-tax Vs Page 8 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V Mahendra J. Shah (Bom), 9 SOT 572 for the proposition that in the absence of right to use the property the opinion of AO 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. vs. Income-tax Officer-1, 52 ITR 524 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 AO. The learned Counsel also relied on the decision of the Hon'ble Supreme Court in the case of Vodafone International Holdings B.V. vs. Union of India & Anr.(SLPC (C) No.26529 of 2010) to support the contention that the shares in the Indian Company cannot be equated to the property of the company. He also relied on the decision of Carrasco Ltd & Others vs. Special Director (ED)79 COMCIS 631 for the proposition that undertaking of a company is not the same as shares of the company.
12. Referring to the contention of assessee that Article 13(5) applies to the facts of the case, the learned AR relied on the decision of the AAR 871 of 2010 in the case of VNU International B.V. vs. DIT (IT) Mumbai to submit that the opinion of AO that Article 13(1) will apply is not correct. He also referred to another decision in the case of KSPG Netherlands Holding B.V. vs. DIT (International Taxation) Mumbai, AAR No.818/2009 dated 25.02.2010 wherein on similar facts the AAR held that the applicant was not liable to pay the tax on capital gain on sale of shares by virtue of the Article 13(5) of the treaty. It was submitted that assessee having sold the shares of the Indian company to a resident of the Singapore is seeking exemption of capital gain under the DTAA by virtue of Article 13(5) between India and Netherlands DTAA.
13. In the alternate the learned Counsel submits that the sale of shares in the infrastructure company is exempt under section Page 9 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V 10(23G). He then referred to the approval of the Indian Company by the CBDT under section 10(23G) and consequently the investments made by assessee in the said company by way of shares are exempt from the Indian Income Tax Act when they are sold to another person. In this regard assessee referred to the submissions made before the CIT (A) placed in paper book 116 to 123 to submit that the income is in the nature of LTCG, interest, or dividends derived by an investor out of the investment in the infrastructure projects and approved by the Central Govt. are exempt under the provisions of section 10(23G).
14. With reference to the controversy/opinion of AO that the investments made before assessment year 2000-01 cannot fall within the provisions of the section 10(23G) the learned Counsel relied on the decision of ITAT Hyderabad in the case of VBC Ferro Alloys Ltd. vs. Assistant Commissioner of Income-tax, Circle 3(4), Hyderabad, 107 ITD 367 wherein this issue was discussed elaborately and held that investments made before 01.06.1998 are also eligible for exemption under section 10(23G). It was his submission that LTCG arising to the assessee company was also exempt under section 10(23G). He also relied on the decision of the ITAT in the case of Crompton Greaves Ltd vs. JCIT in ITA Nos.4672/Mum/2003 & 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. The learned Counsel submitted that section 9 of the Income Tax Act cannot be invoked as debt was not Page 10 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V incurred or moneys borrowed and used for the purpose of business or profession carried on in India. Since the interest payment was received outside India and was made by a non resident, neither in relation to any debt incurred or moneys borrowed the interest income thereon is not taxable under the Income Tax Act. He also submitted that there is no need to go to the treaty for the above as section 9 itself is not applicable but even otherwise Article 11 of the Netherlands-India treaty also does not allow the tax to be paid in India. He then referred to the Article 11 to submit that interest received by assessee is not taxable in India.
16. The learned DR in reply however, referred to the findings of AO and the CIT (A). He then referred to the definition of the 'immovable property' as provided in section 269UA to submit that assessee owns ownership of Indian Infrastructure Company which is not a listed company and so any transfer of shares is virtually transfer of the undertaking as such and so the findings of AO and the CIT (A) that assessee has transferred the immovable property is to be upheld. He also referred to the orders of AO and the CIT (A) to submit that Article 13(1) will apply to the facts of the case and since assessee having transferred the immovable property in India even though in the form of shares, the same is taxable in India. He then referred to the contention with reference to section 10(23G) and applicability of the said exempt provision to submit that assessee has invested in the company long back whereas the approval was received just before the sale of shares, therefore, the same cannot be applied to the facts of the case. He also referred to the Explanation 1 of Section 2(47) to submit that the definition under section 269UA has to be invoked and therefore, AO and the CIT (A) are correct in bringing to tax the entire amount. He relied on orders of AO and CIT(A) affirming the taxability of capital gains and interest income.
Page 11 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V17. We have considered the rival submissions in detail and the paper book placed on record. Even though the learned CIT (A) devoted considerable part of his order in deciding the issue whether the transaction is exigible to capital gain under the Indian Income Tax Act, there is no dispute with reference to that issue as assessee itself has offered capital gain but claimed exemption by virtue of DTAA in the first instance or in the alternate by virtue of provisions of section 10(23G) which allows the exemption of LTCG on investments made in infrastructure projects. It was AO'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 assessee claims exemption by virtue of Article 13(4) and Article 13(5) of DTAA. In the alternate assessee also claims exemption from capital gains as the benefit of exemption under section 10(23G) was eligible as CBDT granted permission to the Indian Co. Therefore, it was the contention that the capital gains is not taxable in India. AO for the purpose of invoking Article 13(1) relied on the definition of 'immovable property' as provided under section 269UA(d) of the Act.
18. After considering the detailed submissions on the issue by both the parties, we are of the opinion that assessee is eligible for exemption for the capital gains earned. For arriving at that decision we have examined the Articles of DTAA between India and Netherlands. Article 13 relevant for the discussion is as under:
Article-13
1. Gains derived by a resident of one of the States from the alienation of immovable property referred to in Article 6 and situated in the other State may be taxed in that other State.
2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of one of the States has in the other State or of movable property pertaining to a fixed base Page 12 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V available to a resident of one of the States in the other State for the purpose of performing independent personal services, including such gains from the alienation of such permanent establishment (alone or 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 movable property pertaining to the operation of such ships or aircraft, shall be taxable only in the State in which the place of effective management of the enterprise is situated. For the purposes of this paragraph, the provisions of paragraph 3 of Article 8A shall apply.
4. Gains derived by a resident of one of the States from the alienation of shares (other than shares quoted on an approved stock exchange) forming part of a substantial interest in the capital stock of a company which is a resident of the other State, the value of which shares is derived principally from immovable property situated in that other State other than property in which the business of the company was carried on, may be taxed in that other State. A substantial interest exists when the resident owns 25 per cent or more of the shares of the capital stock of a company.
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, such gains shall remain taxable only in the State of which the alienator is a resident if such gains are realized in the course of a corporate organization, re- organization, 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 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 Page 13 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V 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 article 2, 3 & 6 are not applicable for the present situation. Article 13(1) refers to Article 6 which is as under:
Article-6 Income from immovable property
1. Income derived by a resident of one of the States from immovable property (including income from agriculture or forestry) situated in the other State may be taxed in that other State.
2. The term "immovable property" shall have the meaning which it has under the law of the State in which the property in question is situated.
The term shall in any case include property accessory to immovable property, livestock and equipment used in agriculture and forestry, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; ships and aircraft shall not be regarded as immovable property.
3. The provisions of paragraph 1 shall apply to income derived from the direct use, letting, or use in any other form of immovable property.
4. The provisions of paragraphs 1 and 3 shall also apply to the income from immovable property of an enterprise and to income from immovable property used for the performance of independent personal services.
19. AO relying on the definition of 'immovable property' as provided under Article 6(2) invokes meaning of it under the Income Tax Act that too, as provided under section 269UA(d) of the Income Tax Act.
20. Provisions of section 269UA(d) of the Act defines "immovable property" as under:
"(ii) any rights in or with respect to any land or any building or a part of a building (whether or not including any machinery, plant, furniture, fittings or other things, therein) which has been constructed or which is to be Page 14 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V constructed, accruing or arising from 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 of whatever nature), not being a transaction by way of sale, exchange or lease of such land, building or part of a building;
This provision is referred in section 2(47) to be applicable only with reference to sub-clause (v) & (vi) only. Section 2(47) is as under:
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 1 (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 proviso
(v) & (vi) in Sec 2(47) the CBDT has issued circular No.495 dated 22.09.1987 explaining the reasons for introduction of above two clauses in the act as under:
"Definition of "transfer'" widened to include certain Page 15 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V transactions:
11.1 The existing definition of the word "transfer" in section 2(47} does not include transfer of certain rights accruing to a purchaser, by way of becoming a member of or acquiring shares in a co-operative society, company, or association of persons or by way of any agreement or any arrangement whereby such person acquires any right in any building, which is either being constructed or which is to be constructed. Transactions of the nature referred to above are not required to be registered under the Registration Act. 1908 . Such arrangements confer the privileges of ownership without transfer of title in the building and are a common mode of acquiring flats particularly in in multistoreyed constructions in big cities. The definition also does not cover cases where possession is allowed to be taken or retained in part performance of a contract of the nature referred to in section HA o[the Transfer of Property Act. 1882. New sub-
clause.
(v) and (v;) have been inserted in section 1(47) to prevent avoidance of capital gains liability by recourse to transfer of rights in the manner referred 10 above.
11.2 The newly inserted sub-clause (vi) of section 2(47) has brought into the ambit of "transfer ". the practice of enjoyment of property rights through what is commonly known as Power of Attorney arrangements. The practice in such cases is adopted normally where transfer of ownership is legally not permitted. A person holding the power of attorney is authorized with the powers of owner, including that of making construction. The legal ownership in such cases continues to be with the transferor ".
22. As can be seen from the above, applicability of the above definition of section 269UA(d) with reference to section 2(47) is in a situation where such transactions enable the shareholder of the company or a member of the society, the enjoyment of the property. In the present case assessee does not enjoy the property of the company which in this case is an Industrial Park, a business property of the Indian Company. Therefore the said definition relied on by Revenue does not apply to the facts of the case.
Page 16 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V23. 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 DTAA. Even though the Income Tax Act does not define 'immovable property' in section 2 of 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 IT 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) sub-clause (x).
(ix).......
(x) investment in immovable property "Explanation - "Immovable property" does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to or permanently fastened to, anything attached to the earth;)
(xi).......
(xii)......."
24. As can be seen from the above, the definition of immovable property for the purpose of section 11(5) of IT Act does not include any machinery or plant even though attached to or permanently fastened to anything attached to the earth. This definition of 'Immovable Property' is at variance to the definition provided under section 269UA(d). This indicates that even under the Income Tax Act, immovable property definition has different connotations Page 17 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V depending on the section in which it is defined. So the contention of the Revenue that the definition of 'immovable property' as defined under section 269UA(d) is a general definition applicable under the DTAA cannot be accepted. The definition as provided in the Income Tax Act can only be limited to the application of the said definition to relevant section but cannot be taken as a general law of India. In view of this the contention of the Revenue that the immovable property includes rights in shares of the property cannot be accepted.
25. Immovable property is an immovable object, an item of property that cannot be moved. In all civic law system, immovable property is the equivalent of the "real property" i.e. its land or any permanent feature or structure above or below the surface. The term "immovable property" occurs in various central acts. However, none of those acts conclusively define this term. In the Transfer of Property Act, the term to be defined in exclusive terminology is as under:
"i. According to section 3 of that Act, "immovable property" does not include standing timber, growing crops or grass. Thus, the term is defined in the Act by excluding certain things. "Buildings" constitute immovable property and machinery, if embedded in the building for the beneficial use thereof, must be deemed to be a part of the building and for the beneficial use thereof, must be deemed to be a part of the building and the land on which the building is situated".
26. Under the General Clauses Act 1897, section 3(26) defines "immovable property" which "shall 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 Page 18 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V 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 assessee had sold was shares in an Indian Company.
27. In the case of Andhra Pradesh State Road Transport Corpn. vs. Income-tax Officer-1, 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 Corporation or carries on the funds with which the Corporation is concerned. The doctrine in the Corporation has a separate legal entity of its own is so firmly rooted in our notions derived from common law that it is hardly necessary to deal with elaborately; and so, prima facie, the income derived by the appellant from its trading activity cannot be claimed by the State which is one of the shareholders of the Corporation". Thus the Hon'ble Supreme Court established that the shareholder is different from the property of the company.
28. Likewise in the case of Vodafone International Holding B.V. vs. Union of India, the Hon'ble Supreme Court while dealing with the issue of share sales and assets sale held that it is a share sale but not an asset sale in that case. While elaborately discussing in Para 56 of the concurring order (by Justice K.S. Radhakrishnan), it was held as under:
"HOLDING COMPANY AND SUBSIDIARY COMPANY
56. Companies Act in India and all over the world have statutorily recognised subsidiary company as a separate legal entity. Section 2(47) of the Indian Companies Act 1956 defines "subsidiary company" or "subsidiary" a subsidiary company within the meaning of Section 4 of Page 19 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V the Act. For the purpose of Indian Companies Act, a company shall be subject to the provisions of sub-section 3 of Section 4, be deemed to be subsidiary of another, subject to certain conditions, which includes holding of share capital in excess of 50% controlling the composition of Board of Directors and gaining status of subsidiary with respect to third company by holding company's subsidization of third company. A holding company is one which owns sufficient shares in the subsidiary company to determine who shall be its directors and how its affairs shall be conducted. Position in India and elsewhere is that the holding company controls a number of subsidiaries and respective businesses of companies within the group and manage and integrate as whole as though they are merely departments of one large undertaking owned by the holding company. But, the business of a subsidiary is not the business of the holding company (See Gramophone & Typewriter Ltd. v. Stanley, (1908-10) All ER Rep 833 at 837)".
29. Thus, it is an established view that a share held by a company cannot be considered as 'immovable property'. Unless the conditions prescribed in Article-6 applies, the same can not be considered as immovable property under Article 13(1) of DTAA.
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 AAR in the case of VNU International B.V. vs. DIT (IT) Mumbai in reference No.871 of 2010 dated 28.03.2011. 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 Para 6 to 8 in the said order as under:
"6. The learned Advocate contended that as the shares of ORG-IMS are not immovable property or movable property forming part of the business property of a PE 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 Page 20 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V applicant would not be governed by Article 13(1) to (3)of the Tax Treaty. As the shares of ORG-IMS do not derive its value from any immovable property situated in India, Article 13(4) would also not apply to any capital gain earned by the applicant from sale of shares of ORG- IMS. The learned Advocate further contended that the capital gains earned by the applicant on transfer of shares would be covered by Article 13(5) of the Tax Treaty and shall be taxable only in the state in which the transferor is a resident. As the applicant is a resident of the Netherlands, any capital gain earned by it would be taxable in the Netherlands. Further condition under Article 13(5) that gains from alienation of shares issued by an Indian company forming part of at least 10% interest in the capital stock of that Indian company can be taxed in India, if the transfer takes place to a resident of India is not attracted as the shares of ORG-IMS have been transferred to the purchasers who are residents of Switzerland.
7. Conceding the applicant's contentions to questions no.1, 3 and 4, the revenue submits that as per the facts provided by the applicant, it is apparent that Article 13(5) would be applicable as the purchaser companies are not the residents of India. The taxability of the capital gains would arise only in the Netherlands and the transaction would not be liable to tax in India. The transfer pricing provisions from section 92 to 92F of the Act would not be attracted as the sale and purchase of shares is between non resident companies of the Netherland and Switzerland. Since there is no income chargeable to tax, there would be no liability to deduct tax u/s.195 of the Act.
8. We are in agreement with the Learned Advocate that the capital gains earned by the applicant on transfer of shares would be covered by Article 13(5) of the Tax Treaty and shall be taxable only in the Netherlands, the state in which the transferor is a resident. The revenue has also conceded the applicant's contentions to questions no.1, 3 and 4. We accordingly answer questions no.1, 3 and 4in favour of the applicant".
31. Similarly in the case of KSPG Netherlands Holding B.V. vs. DIT (International Taxation) Mumbai, AAR No.818/2009 dated 25.02.2010, the AAR analysed Article 13 to hold as under:
Page 21 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V"3.1. It is the case of the applicant that the exception provided in the second part of para 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% 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 Art.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 Art.4 (i) 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 IT Act recognizes 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 para 5 of Art.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 of which the alienator is a resident. Property in the form of shares is not excluded from the purview of the above opening provision in para 5. That being the position, the Govt. of India is precluded from subjecting to tax the gains on account of transfer of shares of the Indian company to a non-resident. This clear legal position is not in dispute. However, the Revenue contends that "the beneficial owner of capital gains arising out of the transactions, if and when undertaken, would be the German company" and accordingly the provisions of the India-Germany DTAA would be applicable in which case the capital gains can be taxed in India. It is submitted on behalf of the Revenue that Kolbenschundt Pierburg AG is the ultimate holding Company of the Indian Company and it is that Company which has beneficial ownership in the shares of the Indian Company sought to be transferred. The Revenue further avers that till November 2008, Pierburg GMBH (German Company) was the immediate holding Company, but, the applicant (Netherlands Company) incorporated on 6th November 2008 became the immediate holding company of the Indian company. In this background, it is alleged by the Revenue that the interpolation of the Page 22 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V Netherlands' Company as recently as 6th November, 2008 is a part of the scheme for the avoidance of liability to tax on capital gains". We find it difficult to accept the contention of the Revenue. Assuming that the concept of beneficial ownership which finds specific mention in Articles 10 to 12 of the Treaty (relating to dividends, interest, royalty and FTS), can be transposed into Art.13, we find no factual or legal basis to hold that the German Company is the real beneficial owner of the shares and the capital gains that would accrue. The transferor i.e. the Netherlands Company though a subsidiary of the aforementioned Germany Company is a distinct legal entity having its own board of directors and management systems. The glaring fact which is to be taken note of in this context is that the applicant which was incorporated towards the end of 2008 made significant investments in the Indian Company. It is stated that from September 2009 onwards, it invested nearly 17 million Euros (110 crores) in Pierburg India. It is seen from the facts stated by the applicant that the applicant had initially 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,2000. 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 ensure 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 colorable 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, but, on principle and in the light of the facts stated and substantiated in this application, we cannot reach the conclusion that the beneficial ownership in the gains resulting from the transfer of shares is vested with the ultimate holding Page 23 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V company i.e. German company. As stated earlier, we find no reason and no basis to characterize the proposed transaction as a mere device to avoid the capital gains tax by unlawful means.
3.3. In the comments furnished on behalf of the Revenue, it is pointed out that no details are available now and therefore the question cannot be adjudicated at this stage. We do not think that in the absence of details such as the number of shares, the consideration and the name of the non-resident transferee, this Authority shall desist from giving a ruling on the legal issue. Not much turns out from these details. However, we would like to observe that at the time of transfer, the applicant shall furnish information to the Department. Of course, the Revenue is bound by this ruling and observations made herein in making any inquiry at that stage. We are, therefore, of the view that the answer to Question No.2 should be in the negative and the applicant is not liable to pay the tax on capital gains by virtue of the opening sentence of Art.13.5 of the Treaty".
32. Thus as can be seen Article 13(1) cannot be made applicable to the transfer of shares as assessee has not sold the immovable property or any rights directly attached to the immovable property. Therefore, in our view Article 13(1) of DTAA is not applicable. There are specific provisions on sale of shares, the value of which was primarily derived from the inherent immovable property thereon. In such a case since the assets of the Indian Company are immovable property but, are used in the business of the Indian Company, Article 13(4) cannot be invoked. The only provision which can be invoked in the circumstances is the Article 13(5) which allows the capital gains to be taxed in Netherlands and not in India.
33. The following circumstances could be envisaged for transfer of shares and treatment of Capital gains thereon :
"i) alienation of shares forming part of substantial interest in the Indian Company - value of which is principally derived from immovable property;Page 24 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V
ii) alienation of shares forming part of substantial interest 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% interest in the share capital of the Indian company.
iv) alienation of shares which forms part of at least 10% 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 DTAA would be determining the tax jurisdiction of income. The first two circumstances enumerated above are covered under the provisions of Para 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 Para 5 of Article 13. Article 13(5) provides for circumstance where the shares forming at least 10% of the capital stock of the Indian company are transferred to a resident of India, then such capital gains would be taxable in India. In all other circumstances, the capital gain arising on alienation of shares would be taxable only in the country of residence of the alienator. Therefore, only capital gain arising in the fourth circumstance of alienation of shares would liable to tax in India. Capital gain arising on the third and fifth circumstances of alienation of shares would be taxable only in the Netherlands.
35. Considering what assessee has sold is only shares in Indian company which has business property, Article 13(4) is not applicable to the facts of the case and since assessee did not sell the immovable property or any rights in the immovable property in which the shareholders enjoy the ownership of the property as contemplated in section 269UA(d), the provisions of Article 13(1) are Page 25 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V not applicable. Since the capital gain arising on transfer of shares does not fall either under the Article 13(1) or Article 13(4) the same is not taxable in India. Therefore, under Article 13(5) assessee is entitled to get exemption from capital gain tax in India as the same is taxable in Netherlands.
36. Assessee in the alternate also claims exemption under the provisions of section 10(23G) as the requisite approvals have been obtained. It was the contention of AO that the benefits under section 10(23G) cannot be extended to assessee as there is no such exemption provided at the time of investment and as approval was granted by the CBDT from 1.4.2002 the capital gains arising on investment made prior to 1st April, 2002 is not eligible for exemption under section 10(23G). It was the contention of AO that the investments made prior to 1.4.2002 are not eligible for exemption. There is no logic in the arguments of AO.
37. The Act does not provide for any condition that the exemption would be applicable only for further investment. If the benefit of exemption under the provisions of section 10(23G) of the Act is made applicable only for further investments, then this would not promote significant investments into infrastructure projects for which the benefit is granted since it requires huge initial investment and very minimal further investment. Accordingly, the contention of AO 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". AO 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.
Page 26 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V38. AO 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, 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 financial year 1999-2000. The Central Government had formulated Industrial Park Scheme, 1999 for providing tax exemption under section 80IA of the Act for setting up industrial parks for the period beginning on April 1, 1997 vide Gazette Notification (Extraordinary) bearing SO No.193(E) dated 30th March, 1999. The said scheme was operational since 1997 and deduction was allowed for such industrial park as infrastructure facility. Further reliance can also be placed on the Finance Act, 1999's amendment which included the industrial parks as infrastructural facility under section 80IA(4)(iii) of the Act. The amendment made to section 80IA(4)(iii) is as under:
"any undertaking which develops, develops and operates or maintains and operates an industrial park notified by the Central Govt. in accordance with the scheme framed and notified by that Govt. for the period beginning on the 1st day of April, 1997 and ending on the 31st day of march, 2002".
39. It is evident from the above that the industrial park scheme was operational from 1st April, 1997 and the industrial parks are notified as infrastructural facility under section 80IA of the Act from April 1, 1977 onwards. Based on the above, the Indian Company has been granted approval by the Central Govt. on September 16, 1999 under the above scheme for setting up the Industrial Park under section 80IA of the Act. Therefore, since the Indian company is into the eligible business as notified by the Central Govt. the investment of VFac in the Indian Company qualifies for the exemption under the provisions of section 10(23G) of the Act.
Page 27 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V40. Further it was noticed that the Finance (No.2) Act, 1998 had substituted a new clause 10(23G) in the place of the existing clause, stating that the benefit of exemption would be available for the investments made on or after 1st June, 1998. In this regard the CBDT vide circular No.772/1998 dated 23rd December, 1998 has clarified that the exemption available under the provisions of section 10(23G) prior to amendment by the Act, will continue to govern the investments made prior to June 1, 1998. Subsequently, the Finance Act 1999 introduced Explanation 2 to section 10(23G) stating that long term capital gain arising from investment made before 1st June, 1998 shall not be included (in the total income i.e exempt from tax) and the provisions of this clause as it stood immediately before its amendment shall apply to such income.
41. In view of the above provision and CBDT 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 all though loans do not constitute the eligible investments.
42. The above view has also been upheld by the Hyderabad Bench of the ITAT in the case of VBC Ferro Alloys Ltd vs. ACIT 107 ITD 367 (Hyd). In the said case it was held as under:
"Held: When the Explanation is r/w Circular No. 772, dt. 23rd Dec., 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."Expln. 2", is to explain an earlier Act and thus would be without object unless constructed retrospectively. The law applicable to investments made prior to 1st June, 1998 is declared to remove doubts. Thus, the Explanation is declaratory or explanatory and has to be construed as Page 28 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V retrospective as it is retroactive in nature. A plain reading of Expln. 2, as introduced by Finance Act, 1999,does not permit an interpretation that the investment should have been made between the first day of April, 1998 and the first day of June, 1998 for being eligible for the deduction. All that it says is that the investment should be made before the first day of June, 1998. Thus, the interpretation sought to be placed by the Revenue is not the correct interpretation of law. There is no warrant for adding the date "1st April, 1998"
to the enactment. The words "before 1st day of June, 1998" cannot be read as "between 1st day of April, 1998 and 1st day of June, 1998". The reliance placed by the Revenue on the speech of Finance Minister as well as the word in Board's circular does not come to the rescue of the Revenue as it is well settled that these cannot override the provisions of the Act. Even going by the speech of the Finance Minister or by the Board's circular, one does not find at any place a mention that the investment in question for the purposes of claiming exemption under Explanation to s. 10(23G), as introduced by the Finance Act, 1999, should have been made between 1st April, 1998 and 1st June, 1998. On the contrary, by Finance Act, 1997, 'infrastructure facility', to the extent relevant to this case, is defined as "a project for generation or generation and distribution of electricity or any other form of power where such project starts generating power on or after 1st day of April, 1993". This implies that the investment should have been made prior to 1st April, 1993, as, otherwise, it would never be possible for a company to generate power on 1st April, 1993. It would be anomalous to hold that the generation should start on or after 1993 but the investment should be made on or after 1st April, 1998. Looking at the issue from another angle, if a long-term capital gain has to arise in 1997, as contemplated by the Act, then the investment must necessarily be made much before that date. For these reasons, the argument of the counsel for the assessee that as the investment in question was made prior to 1st June, 1998, Expln. 2 is squarely applicable to the case of the assessee is sustainable.-CIT vs. Nestle India Ltd.(2005) 195 CTR (Del) 98 : 2005 TIOL- 58-HC-Del-IT, Vikrant Tyres Ltd, vs. Income Tax Officer (2001) 166 CTR (SC) 1 : (2001) 247 ITR 821 (SC) and Kerala Finance Corporation vs. CIT (1994) 119 CTR (SC) 164 : (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 Expln.2 introduced by Finance Act, 1999, shows that the provision as it stood immediately before its amendment by 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 s. 10(23G) as it Page 29 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V existed immediately before amendment by 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 s. 10(23G), there is no hesitation whatsoever in holding that the capital gain in question is exempt from tax under s. 10(23G) as per the provisions of the statute existing in 1997 r/w Expln. 2 introduced by Finance Act, 1999. Explanation 2 mandates that income by way of long-term capital gain of an infrastructure capital company from investments made before 1st June, 1998, by way of shares in any enterprise which is an infrastructure facility shall not be included in the total income i.e. it shall not form part of total income.
Coming to the computation of book profits i.e. reduction of this long-term capital gain, which is exempt under s. 10(23G), from the book profits of the company under the special provisions of s. 115JB, the Revenue authorities have committed an error, as the disallowance is in violation of sub-so (2) of s. 115J8, Expln. (ii). Conclusion:
Explanation 2 to section 10(23G) inserted by the Finance Act, 1999 is declaratory, hence retrospective in operation; assessee was entitled to exemption under section 10(23G) on long term capital gains arising on infrastructure capital fund invested before 1st June, 1998".
43. The contention of assessee was rejected by AO and also by the CIT (A) on the reason that the above order of the ITAT was not accepted by the Revenue. This can not be reason to deny the benefit to assessee. Not only in the above case but also in the case of Crompton Greaves Ltd vs. JCIT (ITA Nos.4672/Mum/2003 &4394/Mum/2003-A.Y1999-2000,2785/Mum/2007& 3750/Mum/ 2007 - A.Y 2003-04 and ITA No.4362/Mum/2006 - A.Y 2000-01 & 5811/Mum/2006 - A.Y 2001-02) the same opinion was expressed.
The Coordinate Bench, Mumbai has considered the decision in the case of VBC Ferro Alloys Ltd vs. ACIT 107 ITD 367 (Hyd) and held as under:
"36. Last ground is against not allowing exemption u/s 10(23G) in respect of capital gain of Rs.20,49,33,542 arising on the shares of M/s.Skycell Communication Limited. The facts apropos this ground are that the assessee sold shares of M/s Skycell Communication Limited, which secured cellular phone operator licence for Page 30 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V the city of Chennai, in the year under consideration and claimed such capital gain to be exempt u/s 10(23G). On being called upon to furnish the details in this regard the assessee filed the following detail showing date of investment, assessment year in which investment was made, number of shares, cost of shares, total cost, sale consideration and gain on sale of shares.
Date of Asst. Year No.of Cost
investment of Inv. shares (Crores)
(crores)
31.01.1996 1996-97 0.84 8.4
23.12.1997 1998-99 0.84 8.4
08.03.1998 1998-99 0.84 8.4
Total cost 2.52 25.2
Sale 2.52 123.09
consideration
Gain on 97.89
sale of
shares
37. It was also made clear that the assessee-company was co-promoter of M/s Skycell Communication Limited. The Assessing Officer observed that clause (23G) of section 10 was inserted by the Finance (No.2) Act, 1996 with effect from assessment year 1997-98. He opined that when the first lot of shares was purchased on 31.1.1996 this section was not in existence. He, therefore, refused to allow the exemption u/s 10(23G) in respect of such a lot of shares. However the assessee's claim for exemption u/s 10(23G) on sale of shares which were purchased on 23.12.1997 and 08.03.1998 was accepted. The learned CIT(A) upheld the assessment order on this issue.
38. We have heard the rival submissions and perused the relevant material on record. The Finance (No.2) Act, 1996 introduced clause (23G) to section 10 providing exemption in respect of any income by way of dividend, interest or long term capital gains of an infrastructure capital fund or an infrastructure capital company or investment made by way of shares or long term finance in any enterprise carrying on the business of developing, maintaining and operating any infrastructure facility, which fulfils the conditions specified in sub-section (4A) of section 80-IA. This section was amended in 1997 and again by Finance (No.2) Act, 1998. Certain conditions, with which we are not presently concerned, were made Page 31 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V stringent to provide that the exemption under this provision will be available only in respect of investment in an enterprise which is wholly and exclusively operating infrastructure facility and which has been approved by the Central Government on an application made by it in accordance with the rule made in this behalf and which satisfies the conditions specified. The amended provision provided that it would be applicable only in respect of investment made on or after 1st June, 1998. Doubts were expressed in different quarters about the granting of exemption available u/s 10(23G) in respect of investment made prior to 1st June, 1998 for assessment year 1999- 2000 and onwards. Vide Circular No.772 dated 23.12.1998 the position has been clarified vide para 10.3 as under:-
"10.3 The amended provisions would apply only in respect of investments made on or after 1st June, 1998. Doubts had been expressed in different quarters about the continuance of exemption available u/s 10(23G) in respect of investments made prior to 1st June, 1998 for assessment year 1999-2000 and onwards. The Central Board of Direct Taxes have clarified by way of a press release that the exemption available under the provisions of section 10(23G), prior to its amendment by the Act, will continue to govern the investments made prior to 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) 149 CTR (St) 48]."
(Emphasis supplied by us)
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) Page 32 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V
40. Prior to the issuance of Circular No.772 dated 23.12.1998, a Press note dated 21.07.1998 was issued clarifying that the amended provisions of section 10(23G) come into effect from 1st April, 1999, i.e., for assessment year 1999-2000, the return for which is due after 1st April, 1999. Any income of the nature covered by section 10(23G) arising for and up to assessment year 1998-99 would continue to be governed by the old provisions.
41. There is no dispute on the availability of exemption u/s 10(23G) to the assessee in respect of capital gain arising from the transfer of shares of M/s Skycell Communication Limited which secured the cellular phone operator licence. Rather the Assessing Officer has himself allowed exemption in the current year in respect of the shares which were purchased by the assessee on 23.12.1997 and 08.03.1998. The only reason for the denial of benefit in respect of shares purchased on 31.01.1996 given by the authorities below is that section 10(23G) itself was introduced with effect from assessment year 1997-98 and hence the shares purchased prior to the introduction of this provision are ineligible for the benefit. We are unconvinced with the submissions advanced by the learned Departmental Representative on this issue and the view taken by the authorities below. The exemption has been provided in respect of the capital gain arising from the transfer of eligible shares. When clause (23G) was inserted to section 10, it also provided exemption in respect of transfer of shares of the eligible companies. The relevant criteria is the arising of income at the material time, on which exemption is to be allowed and not the date when the shares were purchased. It is noticed that the Circular No.772 dated 23.12.1998 has clarified the position beyond any pale of doubt by providing that the exemption will be available on the investment made prior to 1st June, 1998. As the shares in question have been actually sold in the year under consideration and the Assessing Officer has allowed the benefit in respect of other shares acquired in 1997 / 1998, in our considered opinion, there is no logic in denying the exemption u/s 10(23G) in respect of the shares which were purchased on 31.01.1996. We have noticed above that the exemption under this provision is available on income resulting from the transfer of shares and not from the purchase of shares. If the eligible shares as sold in the relevant period, exemption cannot be denied simply on the ground that such shares were purchased in 1996. Our Page 33 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V view is fortified by the order passed by the Hyderabad Bench of the Tribunal in the case of V.B.C.Ferro Alloys Limited Vs. ACIT [(2007) 107 ITD 367 (Hyd.)] for the assessment year 2000-2001 and 2001-2002 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 u/s 10(23G) on long term capital gain arising on infrastructure capital fund investment before 1st June, 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. Vs. CIT [(1979) 120 ITR 921 (SC)] is misplaced because in that case the loss incurred in assessment year 1950-51 was held to be not available for set off against the income of 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 31.01.1996 could not be made eligible for exemption u/s 10(23G) because clause (23G) of section 10 itself was inserted from assessment year 1997-98. The distinguishing feature in the facts of the instant case vis-à-vis those of the Hon'ble Supreme court in Reliance Jute and Industries Ltd. (supra) is that in that case the loss was incurred in assessment year 1950-51 which was claimed to be eligible for set off in assessment year 1960-61. In the present case we are not concerned with any profit arising to the assessee available for exemption u/s 10(23G) prior to the insertion of the provision with effect from 1997-98. The capital gain itself has resulted in a later year unlike the loss incurring in assessment year 1950-51 in the case of Reliance Jute and Industries Ltd. (supra). If the assessee had sold some shares prior to introduction of the provision and claimed the benefit u/s 10(23G), his case would have been definitely hit by the above judgment. Here we are confronted with a case in which the profit has in fact resulted during the previous year relevant to the assessment year 2001-2002 and the only event which took place before the insertion of sec. 10(23G) is the purchase of shares. We, therefore, hold that the ratio laid down in this judgment cannot apply to the facts of the instant case. As such we overturn the impugned order on this issue and hold that the assessee is eligible for the benefit u/s 10(23G) in respect of the shares which were purchased by it on 31.01.1996. This ground is allowed".
Page 34 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V44. Respectfully following the above, we are of the opinion that AO and the CIT (A) erred in rejecting the exemption provided under the statute to assessee on the reason that the investments made prior to 1.4.2002 are not eligible for exemption. Since the Indian Company was already approved as an infrastructural company and was allowed deduction under section 80IA and further at the time of sale the conditions as provided under section 10(23G) are satisfied, we are of the opinion that the sale of shares of an infrastructural company is eligible for exemption as provided under section 10(23G). Therefore, on both the counts i.e. by virtue of DTAA as well as by virtue of section 10(23G), assessee's claim of exemption from capital gain is to be upheld. Therefore, the grounds raised by assessee on this issue are allowed. AO is directed 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. Assessee received an amount of Rs.49,43,750 from M/s Ascendas Ltd Singapore for delay in making payment @7% per annum for the 15 days delay in payment thereof. It was the contention of assessee that the payment and receipt of the interest was in Singapore and 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 AO as well as the learned CIT (A) 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 CIT (A) also holds that since the payment of sale of shares from VITP Ltd involved two components i.e. original payment plus penal payment Page 35 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V on account of delay, it is only logical that the entire payment to be brought to tax. He further holds that interest payments cannot be divorced from the original payment as both pertain to the same transaction.
46. We are afraid we cannot agree with the above opinion. Payment of sale consideration and payment of interest are of two different transactions. The interest was calculated for the period of delay on the balance amount of sale consideration which was due on a given day. AO as well as the CIT (A) relied on the section 9(1)(v) of the Act to consider that this amount is taxable as per the provisions of the Act. Section 9(1)(v) is as under:
Section 9(1)(v): Income by way of interest payable by:
a) The Government; or
b) A person who is a resident, except where the interest is payable in respect of any debt incurred or moneys borrowed and used, for the purpose of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
c) A person who is a non resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used for the purposes of a business or profession carried on by such person in India"
Sub clause (c) only is applicable in respect of income by way of interest under section 9(1)(v). It clearly states that the interest payment payable on any debt incurred or moneys borrowed and used for the purpose of a business or profession carried on by such persons in India. In this case neither assessee nor the purchaser is carrying on any business in India nor the interest is payable in respect of any debt incurred or moneys borrowed and used for the purpose of business. It is clear that the interest payment received by assessee was received outside India and the payment was made by a non resident neither in relation to any debt incurred or moneys borrowed nor used for the purpose of business or profession in Page 36 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V India. Therefore, the above interest income cannot be considered as received 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 non resident cannot be brought to tax under the Income Tax Act. The argument of AO 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 LTCG. Looking it either way, the interest received by 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 assessee and direct AO to exclude the interest amount. The grounds are allowed.
ITA No.2118/Hyd/201147. This appeal is preferred by assessee directly on the directions of DRP Hyderabad under section 144C(5) consequent to which AO completed the assessment under section 143(3) r.w.s
147. As briefly considered in the above appeal, the issue is with reference to levy of income tax on long term capital gain and the interest income which are claimed exempt by assessee. The original assessment under section 143(3) was completed on 25.02.2008 bringing the amounts to tax. AO noticed that the Company had claimed the expenditure of Rs.5,27,13,857 in connection with the transfer of shares but debited in the Profit & Loss A/c of Rs.4,09,48,050. He came to a conclusion that the amount claimed in connection with the transfer of shares is found to be excessive. He also noticed that the consideration as per the MOU should be Page 37 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V Rs.228.00 crores whereas assessee admitted the sale consideration of Rs.224.50 crores. With reference to the rate of tax also he had differed from the predecessor Officer. For these reasons the assessment was reopened under section 147 as it is within four years from the end of the assessment year. The matter was contested by filing objections before the DRP. The DRP has accepted many objections but rejected with reference to the reopening of the assessment and the claim of expenditure for transfer of shares. These are contested by assessee in the following grounds:
"AO based on the directions of the DRP erred in following:
(1) Initiating the reassessment proceedings under section 147 of the Act.
(2) Not allowing the total expenses incurred wholly and exclusively in connection with the sale of shares and restricting the same to the expenses debited to the Profit & Loss A/c of VFAC for the relevant financial year in which the sale took place, there by making an addition of `.1,17,65,807;
(3) Levy of surcharge and education cess on the tax on the interest income earned on delayed receipt of sale consideration charged to tax at the rate prescribed under the India-Netherlands Double Tax Avoidance Agreement;
(4) Not considering the interest under section 244A on the tax refundable to the Appellant.
(5) Initiating the penalty proceedings under section 271(1)(c) of the At".
48. Since the claim of exemption of long term capital gain and interest income was considered and allowed to assessee in Appeal (ITA No.739/Hyd/2011), there is no need to consider the issues in this appeal as they become academic in nature. Therefore, without going to the merits of the contentions and deciding issue-wise, since the entire capital gain earned and the interest received abroad was held to be not taxable in India, the issues with reference to the working of the capital gain and the levy of surcharge and education Page 38 of 39 ITA No.739/Hyd/2011- Vanenburg Facilities B.V cess need not be considered. Accordingly the grounds are allowed for statistical purposes.
49. In the result both the appeals are allowed.
Order pronounced in the open court on 15th March, 2013 Sd/- Sd/-
(Saktijit Dey) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, dated 15th March, 2013.
Vnodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, " " Bench, ITAT, Mumbai
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Hyderabad Benches, Hyderabad
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