DCIT (IT) 3(2)(1), MUMBAI vs. MERRILL LYNCH CAPITAL MARKET, ESPANA SASV, MUMBAI

Whether on the facts and in the circumstances of the case and in law, the Id CIT(A) erred in not appreciating the fact that it is not required to consider the commentary on Article 13(4) of the UN model when the Article 14(4) is very clear in itself and the commentary on the article comes in picture only when there is any ambiguity on the issue.

Though the revenue has raised many grounds, all of them are directed against a solitary issue, viz., whether the capital gains arising on sale of shares is exempt under Article 14(6) of India- Spain Double Taxation Avoidance Agreement.

At the time of hearing, both the parties agreed that this issue has been decided in favour of the assessee by the co-ordinate bench in the assessee’s own case in dated 15.02.2019 relating to AY 2010-11. For the sake of convenience, we extract below the order passed by the co-ordinate bench in AY 2010-11:- ./2016 M/s Merril Lynch Capital Market Espana SASV “3. Brief facts are, the assessee a tax resident of Spain is licensed to purchase and sell securities in India as a Foreign Institutional Investor (FII). The assessee is also registered with SEBI. For the assessment year under dispute, the assessee filed its return of income on 22nd September 2010, declaring total income of ` 2,31,150. The return of income filed by the assessee was initially processed under section 143(1) of the Income–tax Act, 1961 (for short "the Act"). Subsequently, the Assessing Officer re–opened the assessment under section 147 of the Act by issuing notice under section 148 of the Act on 26th March 2014. While framing draft assessment order, the Assessing Officer noticed that the assessee has declared a loss of ` 50,53,55,685, on account of its transaction in foreign exchange and has treated the same as short term capital loss. Further, the assessee claimed gain / loss on account of transaction in foreign exchange as exempt under Article–14 of the India–Spain DTAA. Though, the Assessing Officer made no adjustment since there was a loss on foreign exchange transaction, however, he called upon the assessee to explain why the capital gains arising from sale of shares of companies dealing in real estate in India and deriving their value from immovable property should not be covered under Article–14(4) of the DTAA and charged to tax in India. In response, though, the assessee submitted that there is no direct transfer of immovable properties through sale of shares of real estate companies and further submitted that under Article–14(6) of the tax treaty gain / loss on sale of shares are not liable to tax in India, however, the Assessing Officer did not accept the contention of the assessee. Relying upon the assessment order passed for the assessment year 2007–08, 2008–09 and 2009–10, the Assessing Officer ultimately computed short term capital gain of ` 94,71,36,713. Being aggrieved with the aforesaid decision of the Assessing Officer, the assessee preferred appeal before the first appellate authority.

The learned Departmental Representative, though, agreed that the issue is decided in favour of the assessee by the Tribunal in preceding assessment years, however, he also submitted that the Department has not accepted such decision and has preferred appeal before the Hon'ble Jurisdictional High Court. Learned Departmental Representative submitted, when as per Article–14(4) of the India– Spain tax treaty, the assessee is liable to tax on capital gain, there is no need to refer to U.N. Model Convention.

We have considered rival submissions and perused material on record. Undisputedly, the Assessing Officer relying upon the assessment order passed for the assessment years 2007–08, 2008–09 and 2009–10 on identical issue has held that the assessee is liable to be taxed on capital gain on sale of shares held by it in real estate companies as per Article–14(4) of India–Spain DTAA. However, it is a fact on record that when identical issue arising in assessment year 2007–08 to 2009–10 came up for consideration before the Tribunal in ITA no.2824/Mum./ 2012 &Ors., dated 11th September 2017, the Tribunal upheld the decision of the first appellate authority in allowing assessee’s claim of exemption on capital gain under Article 14(6) of the India–Spain DTAA. The same view was expressed again by the Tribunal while deciding Department’s appeal in assessee’s own case for the assessment year 2012–13, in ITA no.1831/Mum./2017, dated 9th November 2018. For better appreciation, the relevant observations of the Tribunal in this regard is reproduced here under:– “5. We have considered rival submissions and perused materials on record. At the outset, learned Authorised Representative submitted, the issue in dispute is now covered by the decision of the Tribunal in assessee’s own case for the assessment year 2007–08 to 2009–10. The learned Authorised Representative submitted, while deciding the issue the Tribunal has upheld the decision of the learned Commissioner (Appeals) that the assessee is entitled to avail exemption of capital gain under Article–14(6) of India–Spain DTAA. In this context, he drew our attention to the relevant observation of the Tribunal as contained in Para–7 of the order passed in ITA no.2824/Mum./ 2012 and Ors., dated 11th September 2017. The learned Departmental Representative submitted, assessee’s case is covered under Article–14(4) of the India– Spain tax treaty, therefore, capital gain / loss is taxable in India. He tried to distinguish the decision of the Tribunal in assessee’s own case for preceding assessment year by submitting that the Tribunal has decided the issue keeping in view the Article–14(5) of the India–Spain tax treaty. In rejoinder, the learned Authorised Representative submitted, reference to Article–14(5) of the India–Spain DTAA in the order of the Tribunal is a typographical error which has been wrongly mentioned in place of Article– 14(4). To demonstrate such fact, the ./2016 M/s Merril Lynch Capital Market Espana SASV learned Authorised Representative drew our attention to the assessment order and first appeal order passed for assessment year 2009–10.

In the result, the appeal filed by the revenue is dismissed.