TAXATION OF IMMOVABLE
PROPERTY,CAPITAL GAINS & OTHER
INCOME
Nihar Jambusaria
jnihar@rediffmail.com
nihar.jambusaria@ril.com
1
Article 6 – Income from immovable
property
Article 13 – Capital Gains
Article 21 – Other Income
ARTICLE 6 OF DTAA –
Income from immovable
property
 Taxability
as per The Income tax Act,1961Taxable in India if property is situated in
India S.9(1)(i).
 Article 6 of the OECD, U.N., and U.S. model
conventions deal with income from
Immovable Property.
 DTAA between India-Greece is an exception,
income from immovable property falls under
Article 10.
 The paragraphs of Article in all three
conventions are similar with a minor
difference.
 Income
derived by a resident of a country
from immovable property (including income
from agriculture or forestry) situated in the
other country may be taxed in that other
country. The US convention uses the term
‘real property’ instead of ‘immovable
property’
 All three conventions grant the primary right
to tax income from immovable property to
the State of Source as there is a close
connection between source of income and
the State where the property is situated.
 The
State of Source gets primary right but
not the exclusive right as the para uses the
words ‘may be taxed in’. The State of
Residence may also tax the income and
double taxation can be mitigated by granting
tax credit or exemption.
 Exception-Treaties between India and
Bangladesh, Greece and Egypt provide that
such income shall be taxable only in the
country where the property is situated.
 Controversy
in interpretation of the
terminology ‘may be taxed in’ The SC held in CIT v. P.V.A.L. Kulandagan
Chettiar 267 ITR 654 that income from
rubber estate in Malaysia was not taxable in
India although Article 6 uses the words ‘may
be taxed in’. Madras and MP High Courts and
Chennai ITAT have taken the same view.
 Notification No. 91/2008 dt. 28-8-2008
clarifies that where the treaty provides ‘may
be taxed in’, such income shall be included
in the income of resident in India.
 Income
from agriculture and forestry
included as these incomes primarily concern
the use of land. Ownership of immovable
property exploited for agriculture not
necessary.
 The treaty with Armenia, Austria, France,
Indonesia include this income in Article 6
whereas treaty with Australia, China,
Denmark, Japan do not include this income
in Article 6.
 Where such income is not covered in
Article 6, it shall be governed by Article 7.
 Example-
Mr. A, resident of India who owns
property in France has let it out to a resident
of Netherlands, Mr. B. Rent received taxable
under ‘Other Income’. Treaty between India
and The Netherlands can not apply as the
property is situated in France.
 If Mr. B sublets the property to Mr. C of
France, income of Mr. B will be covered by
Article 6 of France Netherlands treaty.
Mr. B of
Netherland
Received rent
from sub-let out
Pays rent
Immovable
property in
France
Mr. A, resident of
India
Owns immovable
property
Immovable Property shall have the same
meaning which it has under the law of the
country in which the property is situated.
 It shall include
 property accessory to immovable property,
 live stock and equipment used in agriculture
and forestry,
 rights to which the provisions of general law
relating to landed property apply,
 usufruct of immovable property,
 Rights to variable or fixed payments as
consideration for the working of mineral
deposits, sources and other natural resources

 Ships,
boats, aircrafts have been excluded
from the scope of Article 6 as Article 8
specifically deals with such income.
 Exception•
India Turkey tax treaty includes fishing places
of every kind within the meaning of Immovable
Property.
Income from all forms of exploitation of
immovable property whether direct or indirect
falls within the scope of this Article. However,
income from alienation (transfer) of immovable
property falls within the scope of Article 13 of
the model convention.
 Tax treaties of India with Finland, Kyrgyz
Republic and Namibia provide that where a
shareholder or owner of other rights in a
company is entitled to enjoyment of immovable
property held by the company, on account of
direct or indirect use or letting or use of such
right, it is taxable under this Article.

 Para
4 makes it clear that paragraph 1 and 3
apply to income from immovable property of
industrial, commercial and other enterprises.
 Article 6 takes precedence over Articles 7
and 14.
 Article
6 deals only with attribution of
taxation on income from immovable
property, it is silent on the modalities of
determining income. In the absence of
specification, the computation shall be as
per the domestic law.
ARTICLE 13 OF DTAA

Paragraph 1 preserves the right of the ‘State of Source’
to tax gains from alienation of immovable property
situated in that State.

The term ‘immovable property’ means property as
explained in Article 6.

It is immaterial whether the property is residential or
commercial, capital asset or stock-in-trade, the state of
source can levy.

The treatment of income as capital gains or business
income or other income depends on the domestic law.
For example in India for capital assets it is capital gain
tax and for stock-in-trade it is business income.
Can possession of property for part performance of
contract be considered as transfer??
The DTAA uses the term 'alienation’. It does not use the
term ‘transfer’. The term ‘alienation’ has not been
defined.
 The UN and OECD commentaries state that alienation
includes several kinds of transactions.
 It includes sale or exchange of property including a
partial alienation, the expropriation, the transfer to a
company in exchange for stock, the sale of a right, the
gift and even passing of property on death.
 Also, the meaning of any term has to be applied as per
the domestic law if it is not defined in the DTAA.
 Under section 2(47) of the Income-tax Act, 1961 (Act),
allowing the possession of any immovable property to be
taken for part performance a contract is considered a
‘transfer’
 Hence, there can be capital gain on possession of
property for part performance of a contract


Deals with gains on alienation of –


movable property forming part of the business property of a
PE or pertaining to a fixed base;
the permanent establishment or fixed base.

Such gains may be taxed in the State where such PE or
fixed base is situated i.e. the ‘State of Source’.

This clause applies only if the property sold forms part of
the PE or fixed base.

This article does not apply to stock-in-trade. For stock-intrade, Article 7 – Business Profits applies.

If there is PE in India and the assets sold are stock-in-trade
then gains can be taxed in India. If there is no PE in India,
then sale of stock-in-trade cannot be taxed in India.

If PE or fixed base in India belonging to a non-resident is
sold, the gains can be taxed in India.

Accordingly, the following can be taxed in India:
 Slump sale of undertaking;
 Sale of branch of a foreign bank situated in India.

Gains on alienation of –
 Ships or aircraft operated in international traffic;
 Boats engaged in inland waterways transport; or
 Movable property pertaining to the operation of such
ships, aircrafts or boats.
Can be taxed ONLY in the Contracting State in which the place of
effective management (POEM) of the enterprise is situated.
Any movable property relating to operation of ships and
aircrafts in international traffic can be taxed only where
the POEM is situated.
 It is immaterial whether there is a PE or not or whether
the asset is a part of the PE or not

Article 13(3) being a specific article takes precedence over
article 13(2)

Gains on sale of shares of a company or an interest in a
partnership, trust or estate, the property of which
consists ‘principally’ of immovable property situated in a
Contracting State be taxed by the State in which the
property the situated.

This paragraph is applicable regardless of whether the
company or shareholder, partnership, trust or estate is a
resident of the Contracting State in which the immovable
property is situated or a resident of another State.

The expression ‘principally’ in relation to ownership of
immovable property has been defined to mean the value
of such immovable property exceeding fifty per cent of the
aggregate value of all assets owned by the company,
partnership, trust or estate.
 Hence, if
the property is in India and it is owned
by an Indian entity or a foreign entity, on sale of
shares or interest in the entity, India can tax the
income.
 W.e.f
AY 2013-14 as per Explanation 5 to section
9(1)(i) of the Act if immovable property in India is
held through a foreign company and the value of
the share is substantially derived from the value
of the immovable property then the shares will
be deemed to be located in India.
what is relevant is the situation
of the property.
ARTICLE 13(4) - EXCEPTION
 Gains from the alienation
of share of the capital
stock of the company, partnership, trust or estate
are to be taxed only if such an entity is engaged in
the management of the said immovable
properties.
 This
paragraph shall not apply if the immovable
property is used by such entity in its business
activities.
 A resident of UK selling assets situated in India under the following
situations:
Situation
Taxability of Article 13(4)
UK resident has invested in ABC India
Property Pvt. Ltd. ABC has a flat in
Mumbai. That is only major asset.
On sale of shares of ABC, Capital gains
can be taxed in India and UK.
In the above example, the immovable
property is used for ABC’s own
business.
On sale of shares of ABC, Capital gains
will be taxed according to other
clauses.
ABC is in the business of management
of immovable property.
On sale of shares of ABC, capital gains
can be taxed in India and UK.
Extent of holding by the Non Resident in the Indian Company is not relevant
 All other
assets –
 Shares of other companies
 Residence country has exclusive taxation rights.
 Taxability in Residence depends on domestic
law, e.g. Mauritius does not tax capital gains.
 The UN model of 2011 states that if “at any time
during the 12 month period preceding such
alienation, if the alienator directly or indirectly
held at least __% of the shares”, then the same
will be taxable in India. Example the
shareholding prescribed in the
India – Netherlands DTAA is 10%.
 Residence
country exclusive taxation rights
from alienation of any property other than that
referred to in paragraph 1 to 5.
 For example gains derived from –



Movable property other than that described in
paragraph 2;
Know how, patents not forming part of PE
Debt instruments and various financial instruments
to the extent such income is not characterised as
income taxable under another Artcile eg. Article 10
(dividends) or Article 11 (interest)
 Taxability
law.
in Residence depends on domestic
1)
Gains derived by a resident of a Contracting State from the alienation
of immovable property referred to in Article 6 and situated in the other
Contracting 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 a Contracting State has in the other Contracting State, including
such gains from the alienation of such a permanent establishment
(alone or with the whole enterprise), may be taxed in that other State.
3)
Gains from the alienation of ships or aircraft operated in international
traffic, boats engaged in inland waterways transport or movable
property pertaining to the operation of such ships, aircraft or boats,
shall be taxable only in the Contracting State in which the place of
effective management of the enterprise is situated.
4)
Gains derived by a resident of a Contracting State from the alienation
of shares deriving more than 50 per cent of their value directly or
indirectly from immovable property situated in the other Contracting
State may be taxed in that other State.
5)
Gains from the alienation of any property, other than that referred to
in paragraphs 1, 2, 3 and 4, shall be taxable.
1)
2)
3)
Gains derived by a resident of a Contracting State from the
alienation of immovable property referred to in Article 6 and
situated in the other Contracting State may be taxed in that other
State.
Gains from the alienation of movable property forming part of the
business property of a permanent establishment which an
enterprise of a Contracting State has in the other Contracting State
or of movable property pertaining to a fixed base available to a
resident of a Contracting State in the other Contracting State for
the purpose of performing independent personal services,
including such gains from the alienation of such a permanent
establishment (alone or with the whole enterprise) or of such fixed
base, may be taxed in that other State.
Gains from the alienation of ships or aircraft operated in
international traffic, boats engaged in inland waterways transport
or movable property pertaining to the operation of such ships,
aircraft or boats, shall be taxable only in the Contracting State in
which the place of effective management of the enterprise is
situated.
4) Gains from the alienation of shares of the capital stock
of a company, or of an interest in a partnership, trust or
estate, the property of which consists directly or
indirectly principally of immovable property situated in
a Contracting State may be taxed in that State. In
particular:
(a) Nothing contained in this paragraph shall apply to a
company, partnership, trust or estate, other than a company,
partnership, trust or estate engaged in the business of
management of immovable properties, the property of which
consists directly or indirectly principally of immovable
property used by such company, partnership, trust or estate in
its business activities.
(b) For the purposes of this paragraph, “principally” in
relation to ownership of immovable property means the value
of such immovable property exceeding 50 per cent of the
aggregate value of all assets owned by the company,
partnership, trust or estate.
5) Gains, other than those to which paragraph 4 applies,
derived by a resident of a Contracting State from the
alienation of shares of a company which is a resident of
the other Contracting State, may be taxed in that other
State if the alienator, at any time during the 12-month
period preceding such alienation, held directly or
indirectly at least ___ per cent (the percentage is to be
established through bilateral negotiations) of the
capital of that company.
6) Gains from the alienation of any property other than
that referred to in paragraphs 1, 2, 3, 4 and 5 shall be
taxable only in the Contracting State of which the
alienator is a resident.
OTHER
ISSUES
 No distinction between
Long Term and Short
Term Capital Gain as per DTAA: any kind of
capital gain is covered by this article.
 No distinction between Capital Gain and
Speculation Gain: except if it is business income,
it is taxable under article 7, and if it is a sale of
asset not forming part of the business, it is
taxable under article 13.
 Appreciation of an asset: is not taxable as
capital gain: However, some countries tax the
appreciation, as if there is a transfer. For example
Australia, Canada and now USA have an exit tax.
 Conversion
of capital asset into stock-in-trade :
normally not considered as capital gain. In India
however, it is considered as deemed capital gains u/s
45(2) of the Act.
DTAA covers the taxing rights of capital gains. The manner of taxations
is as per the domestic law.

“Personal effect”: not considered as capital asset under the
Act. W.e.f. AY 08-09, under the Act over and above jewellery, on
transfer of the following assets there can be capital gain:
 archaeological collections,
drawings,
 paintings,
 sculptures and
 any work of art

 Situation where there
is no article for Capital
Gains in a DTAA:


Article 21(other income) which says that ONLY
Country of Residence has the right to tax and Country
of Source does not have the right to tax.
Some Indian DTAAs provide that if the income arises
in Country of Source, then income can be taxed in
Country of Source. (DTAA with India and Malaysia)
 Situation where neither
other income article nor
capital gain article there:

In such a case each country can tax the Capital Gain
as per its own law, as there is no restriction provided
in the DTAA. Example DTAA between India and Libya.
ARTICLE 21 OF DTAA –
Other Income
Article 21 – ‘Other Income’ deals with the Income
which are not specifically covered under any other
Article of the Tax Treaty.

In some of the Tax Treaties (those with Australia,
Singapore etc.) this Article is referred to as ‘Income
not expressly mentioned’

However, both the terms used in the tax treaties
covey the same meaning.


The Article does not apply to those income which is
not covered by Article 2 of the tax treaty
Eg Indirect Taxes.

Also, if any income which is not subject to tax under
any Article, it should not lead to taxable under this
Article – DCIT v/s Andaman Sea Food Pvt. Ltd [ITA No
1412/KOL/2011]
Inclusions
 Lottery Winnings
 Prize Money
 Gambling income
 Guarantee fees
 Punitive damages
 Social security payments
 Non compete fees etc
Exclusions:
× Items of Income which are specifically covered under
any other Article of the treaty
‘Other Income’ – Under OECD Model and UN
Model
Para
OECD Model
UN Model
21(1) Income of a Resident of a Identical to OECD Model.
contracting state,
wherever arising, not
covered under any other
article of the tax treaty
shall be taxable only in the
state of residence.
Article 21(1)

Under both the Models, the ‘State of Residence’ has
the exclusive right to tax the other Income.

Some of the tax treaties entered into by India where
there is exclusive right of taxation to the ‘State of
Residence’ (eg with Korea, Philippines)

However, under India-Namibia Treaty, the exclusive
right to tax the other income is given to the ‘State of
Source’

Also, under the India-Singapore Treaty, other
income is taxable in accordance with the
domestic law of the respective contracting state

Article 21 uses the term ‘wherever arising’ which
widens up the scope of the Article ‘Other
Income’ irrespective of whether such income has
arisen in the Source State or any Third State.

Under OECD Model, income from Third State can
be taxed only in the ‘State of Residence’.
Article 21(2) – Exclusions to 21(1)
Para
OECD Model
UN Model
21(2)
The provisions of Paragraph 1 shall
not apply to income, other than
income from immovable property
as defined in Paragraph 2 of Article
6, if the recipient of such income,
being a resident of a Contracting
State, carries on business in the
other Contracting State through a
permanent establishment situated
therein and the right or property
in respect of which the income is
paid is effectively connected with
such permanent establishment. In
such case the provisions of Article
7 shall apply.
The provisions of Paragraph 1 shall not
apply to income, other than income from
immovable property as defined in
Paragraph 2 of Article 6, if the recipient of
such income, being a resident of a
Contracting State, carries on business in
the other Contracting State through a
permanent establishment situated
therein, or performs in that other State
independent personal services from a
fixed base situated therein, and the right
or property in respect of which the
income is paid is effectively connected
with such permanent establishment or
fixed base. In such case the provisions of
Article 7 or Article 14, as the case may be,
shall apply.
No
No
Yes
Yes
Yes
44

However, even if the tax treaty does not contain
para 2 under this Article, still the Income could be
taxable as per the para 1.

Few eg with which India has entered treaty which do
not contain paragraph 2 are Italy, Korea, New
Zealand, Thailand, South Africa etc.
Article 21(3)
Para
OECD Model
21(3) Missing
UN Model
Notwithstanding the
provisions of Paragraphs 1 and
2, items of income of a
resident of a Contracting
State not dealt with in the
foregoing Articles of this
Convention and arising in the
other Contracting State may
also be taxed in that other
State.

By virtue of Para 3, it gives a co-relative right to tax
the income arising in such other state i.e. the ‘State
of Source’.

This leads to double taxation and the provisions of
Article 23 pertaining to tax credit will come into
effect

India adopts UN Model and hence in majority of the
Treaties which India has entered into, the article
contains the above para. Exceptions are treaties
with Korea, Nepal, Philippines etc.




OECD has inserted in its commentary, the Arm’s Length
principle in the case of Other Income for the transactions
between the parties having special relationship.
Few articles (Interest, Royalty) under treaty covers only
Arm’s Length amount. If any excessive amount due to
special relationship does not get covered in any of the
foregoing Articles, such excessive amount will fall under
‘Other Income’
Such excess amount will be taxable according to the laws
of each Contracting State
Special relationship includes relationships by blood or
marriage or any community of interest other than which
give rise to payment due to legal relationship.
OTHER
ISSUES

If a particular tax treaty do not contain ‘Fees for
technical services’ Article, the same could be treated
under ‘Business Income’ Article – AAR ruling in case of
Tekniskil (Sendirian) Berhad (88 taxman 435)

However, another view was also ruled by AAR that in
the absence of Fees for technical services’ Article, the
same could be treated under ‘Other Income’ Article –
XYZ. In re (20 taxman.com 88)

There is an ambiguity in this matter and the approach
would depend upon facts to facts and matter to
matter.

Few Tax Treaties which India has entered into do not
have ‘Other Income’ Article (eg: Netherlands, Libya
etc)

In such a scenario, both the contracting States may
tax in accordance with their domestic laws.