A company is entitled to tax treaty benefits between India and another country even if it fails to disclose some key information.

This decision was made by the Income-Tax Appellate Tribunal (ITAT), Mumbai, in the case of Sun Chemical of the Netherlands. The case involved capital gains from shares acquired by Sun from an associate company. The transaction pertained to shares of Coates of India.

The income-tax department denied the benefit of treaty between India and the Netherlands on the ground that the company failed to disclose a vital information in its return which had a bearing on determining the quantum of capital gains.

The company did not mention that ‘the shares were acquired from an associate enterprise’ — an information crucial for applying the transfer pricing rules. Initially, the company wanted the income to be treated under the provisions of the Indian Income-Tax Act, preferring it over the Double Taxation Avoidance Agreement (DTAA) between India and the Netherlands.

It, however, changed its earlier stance and sought the benefits under DTAA when the income-tax department found out that the share transaction was with an associate company and the acquisition price was lower than what was declared, resulting in higher income.

Under the India-Netherlands DTAA, capital gains arising in India can be taxed only in the Netherlands. The assessing officer refused to provide the benefit of DTAA to the company on the ground that it had defaulted and provisions of DTAA do not deal with any amount payable on account of default.

He further stated that the company was attempting to set off the long-term capital loss against the short-term capital gains by opting to be assessed under the Income-Tax Act. He even stated that only when the company was caught on its default, it sought the benefit of DTAA. The assessing officer, making another point to support his stand, pointed out that under the provisions of the DTAA treaty, benefit can be availed by honest and tax compliant entities only.

But, ITAT, in a decision in end June, made it clear that the default defined under the domestic law is different from the default explained in the DTAA and, therefore, the stand of the tax department denying treaty benefit to the company cannot be accepted.