ITAT Rules Capital Gains on Share Buy-Back Protected Under India-Netherlands DTAA

The appellant, Huntsman Investment [Netherlands] BV, is a company incorporated in and a tax resident of the Netherlands. The dispute arose from the buy-back of shares by its Indian subsidiary, Huntsman International (India) Private Limited (HIIPL).

For the Assessment Year 2017-18, the Revenue sought to tax the gains arising from this buy-back in India. The case saw a split in opinion between the Judicial Member and the Accountant Member of the ITAT, leading to the appointment of a Third Member by the President of the ITAT. The core issue being, whether the capital gains were taxable in India under domestic law or exempt/taxable only in the Netherlands under the Double Taxation Avoidance Agreement (DTAA).

Issue Raised: Whether the gains arising to a Dutch tax resident from the buy-back of shares by its Indian subsidiary are taxable in India, or if the resident is entitled to the benefits of Article 13(5) of the India-Netherlands DTAA, which generally allocates taxing rights for such capital gains to the country of residence (Netherlands).

ITAT Decided: The ITAT, through the Vice President acting as the Third Member, concurred with the view of the Accountant Member. The Tribunal held that the gains arising from the buy-back of shares by HIIPL are covered by Article 13(5) of the India-Netherlands DTAA. It was observed that tax treaties are intended to provide relief, and their provisions prevail over the domestic Income Tax Act to the extent they are more beneficial to the assessee.

Since Article 13 of the treaty grants the right to tax such capital gains to the Netherlands, the demand for tax in India was unsustainable. Therefore, the appeal of the assessee was allowed, and the assessment order was set aside on this substantive issue.

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