Valid TRC issued by Other Contracting State Authority is sufficient for grant of treaty benefits

While allowing the benefit of Article 13(4A) of India-Singapore DTAA to Singaporean subsidiary of British Virgin Islands company on short term capital gain arising from transfer of shares of the Indian companies, the Delhi ITAT pointed that the AO had approached the entire issue with a pre-conceived mind in order to reach the pre-determined destination of denying the treaty benefits.

The ITAT therefore denied the applicability of GAAR as the shares were acquired before the cut-off date of Apr 1, 2017 and because the Assessee furnished valid documents to justify the sanctity of transaction such as Tax Residency Certificate, audited financial statements, assessment orders of Singapore tax authorities.

Finding that the affairs of the Assessee were not controlled from outside Singapore, the Coram comprising of Shri Kul Bharat, Judicial Member and Shri M. Balaganesh, Accountant Member, observed that “The Assessee company was incorporated as an investment company and had resorted to make investments in earlier years on its own volition in two Indian companies. These shares were held by the Assessee company from the date of acquisition till the date of its sale. The Assessee company had duly reflected the acquisition of shares of two Indian companies at premium in its Balance Sheet and these audited Balance Sheets were duly subjected to verification by the Singapore Tax Authorities and tax assessment orders were passed on the Assessee company for the last three years”.

The Coram further observed that “Since the loan borrowed from its Holding Company was subsisting in the books of the Assessee company, the assessee chose to use the sale proceeds of the shares to repay the loan dues payable to Holding Company. In case if the allegation of the AO, that Assessee is a shell or conduit company and entire activities were carried out only by the BVI entity, is to be accepted, then there is absolutely no need for the Assessee to even repay the loan back to the Holding Company”.

Advocate Deepak Chopra appeared for the Assessee, while the Revenue was represented by Vizay B. Vasanta, CIT-DR

Briefly, the Assessee, an investment company sold shares of Dr. Fresh Healthcare Pvt. Ltd. and earned short-term capital gains of Rs.1.92 Cr and sold shares of Dr. Fresh SEZ Pvt. Ltd. that led to long-term capital loss of Rs.3.16 Cr. During assessment, the Assessee claimed short-term capital gains as exempt under Article 13 of India-Singapore DTAA and sought carry forward of long-term capital loss to subsequent years. The AO however denied the treaty benefit on the ground that the Assessee adopted a scheme of tax-avoidance through treaty shopping as the Assessee’s holding company is in British Virgin Islands with which India has no DTAA and instead routed the transactions through Singapore. The AO further found that there is a clear lack of beneficial ownership at the Assessee’s level and the Tax Residency Certificate is not sufficient to establish the tax residency if the substance establishes otherwise. Further, opining that there is no commercial rationale of establishment of Assessee company in Singapore, the AO held that proceeds from sale of shares of DFHPL and DFSPPL have been used to repay the loans obtained by the Assessee from its holding company.

After considering the submission, the ITAT stated that the AO in all fairness ought to have accepted the assessment orders of Singapore Tax Authorities which goes to prove that the Assessee is a tax resident of Singapore and is independently carrying on its business activities in Singapore.

Regarding the observation made by the AO that a complex scheme of arrangement was crafted and executed to utilize the tax advantages provided in India-Singapore DTAA, the ITAT observed that to avoid any damage to the parties involved, the Assessee entered into a settlement agreement and disposed of the shares without even being aware that the transaction would be eligible for treaty benefit under the India-Singapore DTAA. 

The Coram found that Assessee was incorporated as an investment company and made investments in earlier years on its own volition in two Indian companies, and these shares were held by the Assessee from the date of acquisition till the date of its sale which were duly reflected in its Balance Sheet and were subjected to verification by the Singapore Tax Authorities and tax assessment orders were passed for the last three years.

The Coram also highlighted that the Assessee had given enough evidences to prove that its entire affairs were not controlled from outside Singapore and observed that if AO’s allegation of Assessee being a shell or conduit company of its BVI holding company is to be accepted then there was absolutely no need for the Assessee to even repay the loan taken from its holding company.

Finally, the ITAT concluded that the treaty benefits cannot be denied when Assessee has furnished a valid tax residency certificate issued by Inland Authority of Singapore, audited financial statements, and return of income filed along-with tax assessment orders by Singapore Tax Authority.

Cause Title: The Golden State Capital Pte Ltd vs. DCIT [ITA No. 1686/Del/2022 / 2023-Enterslice-17-ITAT-Del]

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