The Limitation of Benefit (LoB) clause is designed to deter treaty abuse and ensure that the benefits of the agreement are extended only to those who genuinely qualify and ensures entities must have real operations in the contracting state, not just serve as conduits for tax avoidance.
The
LOB clause in tax treaty varies from country to country. Treaties of some
countires like Mauritius, Singapore, U.K. focus on the purpose of creation of
the resident or the transaction entered in to and deny benefits where the
reason for creation or transaction was merely to take benefits of treaty laws.
Treaties with countries like U.S. focus more on the characteristics of the
party seeking the benefit. The introduction of LOB clause in India’s DTAAs
makes it evident that the Indian Government is taking the required steps to
fight “treaty shopping”, which is limiting the ability of third states from
obtaining benefits under treaty laws
The
purpose LOB clause is to prevent treaty abuse and tax avoidance by setting
forth conditions and tests that entities and individuals must meet to qualify
for treaty benefits.
A key feature of many DTAAs is the
Limitation of Benefits (LOB) clause, typically found in Clause 24. The LOB
clause is designed to deter treaty abuse and ensure that the benefits of the
agreement are extended only to those who genuinely qualify and ensures entities
must have real operations in the contracting state, not just serve as conduits
for tax avoidance.
The LOB clause sets conditions and
criteria for qualifying for treaty benefits such as reduced withholding tax
rates or exemptions. It prevents taxpayers from inappropriately reducing tax
liabilities, preventing revenue losses for contracting states. In this article,
we will delve into the nuances of the Limitation of Benefits clause, exploring
its provisions and significance in the realm of international taxation.
What are Limitation
of Benefit (LOB) Clauses? Why did they come in to force?
With
the introduction of DTAAs, many companies, in order to minimize tax liability
or many a times evade tax liability completely, started exploiting treaty laws.
For example, a resident in Mauritius could avoid tax on capital gains in India
(the source state) as it was not a resident in India as well as avoid tax on capital
gains in Mauritius (residence state) because in Mauritius, residents were not
taxed on capital gains. Therefore, in order to prevent abuse of treaty benefits
and treaty shopping, countries have revised their tax treaties to include an
anti-abuse provision called the limitation of benefit clause, herein after
referred to as LOB clause. As the name suggests, this provision limits the
benefits of favorable tax treaties.
For
example, under the India – Mauritius treaty, tax on gains from alienation of
shares arising between 01.04.2017 and 31.03.2019 cannot exceed 50% of the tax
rates applicable on such gains in the state of residence of the company whose
shares are being alienated. As a result of this, numerous companies were
incorporated to exploit loopholes provided in tax laws of the DTAA. To counter
misutilization of this benefit, the DTAA was renegotiated to include a LOB
clause, which states that the benefit will not extend to residents of the
contracting State if it’s affairs are primarily set up for taking advantage of
the benefit of this treaty.
Forms of LOB
provisions under tax treaties
§
Condition
of ‘beneficial ownership’ to be satisfied by income recipient for certain
categories of income such as dividend, interest, etc.
§
‘Subject
to tax’ condition under the broader ‘liable to tax’ condition vis-à-vis
definition of tax resident
§
Specific
condition to be fulfilled vis-à-vis exemption from category of income. E.g.
capital gains exemption condition under India-Singapore tax treaties
§
Specific
article on LOB dealing with conduit entities or treaty shopping or entities
attempting to claim double non-taxation
LOB clause of India’s significant DTAAs
India - Mauritius DTAA
The
India - Mauritius DTAA was signed back in 1983. Historically, Mauritius is
considered a “tax haven” as residents in Mauritius were not taxed on capital
gains. Hence, companies starting routing their investments through Mauritius to
evade tax on capital gains.
At
this point, it is pertinent to state that the Hon’ble Supreme Court of India in
Union of India v. Azadi Bachao Andolan (2003)
263 ITR 706 : 184 CTR 450 : 132 Taxman 373 (SC) held that in the absence of
any express or implied provision there is nothing to prevent the nationals of
“third States” from claiming right under the treaty (i.e.) in the absence of a
limitation of benefit clause in the treaty, treaty shopping was valid.
Therefore, to prevent such treaty shopping, both countries renegotiated the
treaty and included the LOB clause w.e.f 1st April 2017.
With the inclusion of this clause, the advantage provided by
this treaty was withheld from residents of Mauritius or entities specifically
created solely to exploit tax benefits outlined in the DTAA.
“Article 27A – Limitation Of
Benefits,” reads as follows:
“1.
A resident of a Contracting State shall
not be entitled to the benefits of Article 13(3B) of this Convention if its
affairs were arranged with the primary purpose to take advantage of the
benefits in Article 13(3B) of this Convention.
2.
A shell/conduit company that claims
it is a resident of a Contracting State shall not be entitled to the benefits
of Article 13(3B) of this Convention. A shell/conduit company is any legal
entity falling within the definition of resident with negligible or nil
business operations or with no real and continuous business activities carried
out in that Contracting State.
3.
A resident of a Contracting State is
deemed to be a shell/conduit company if its expenditure on operations in that
Contracting State is less than Mauritian Rs. 1,500,000 or Indian Rs. 2,700,000
in the respective Contracting State as the case may be, in the immediately
preceding period of 12 months from the date the gains arise.
4.
A resident of a Contracting State is
deemed not to be a shell/conduit company if:
(a)
it is listed on a recognized stock exchange of the Contracting State; or
(b)
its expenditure on operations in that Contracting State is equal to or more
than Mauritian Rs. 1,500,000 or Indian Rs. 2,700,000 in the respective Contracting
State as the case may be, in the immediately preceding period of 12 months from
the date the gains arise.”
The
clause provides that a resident of Mauritius or a shell company claiming to be
resident of Mauritius will not allowed to avail the benefits under this treaty
if it was set up merely to take advantage of the benefits. The sub-clause (3)
further provides that company will be deemed to be a shell company if it’s
annual expenditure on operations Mauritian Rs.15,00,000 in Mauritius or Indian
Rs. 27,00,000 in India.
Sub-clause
(4) provides that a company will not be deemed to be a shell company if it is
listed in a recognized stock exchange in one of the Contracting States.
India - Singapore DTAA
|
Singapore
employs a territorial taxation system, exempting residents from taxes on
offshore income unless it is remitted to the country. Consequently, any
income earned outside Singapore by a resident is not subject to taxation
unless it is remitted or received within the country. In consideration of
this system, Article 24 provisions were established to prevent taxpayers from
exploiting the tax treaty in conjunction with domestic tax laws. |
Singapore’s
DTAAs typically include a test which says that if the income from one country
is either tax-free or taxed at a lower rate in that country, and the other
country’s laws tax that income based on what is received there rather than the
full amount, then the tax exemption or reduction in the first country will
apply to the part of the income that is sent or received in the other country.
India
and Singapore signed the treaty on 24.01.1994. In 2005 the treaty was amended
to include the LOB clause.
“Article
24 – Limitation of Relief,” reads as follows:
“1.
Where this Agreement provides (with or without other conditions) that income
from sources in a Contracting State shall be exempt from tax, or taxed at a
reduced rate in that Contracting State and under the laws in force in the other
Contracting State the said income is subject to tax by reference to the amount
thereof which is remitted to or received in that other Contracting State and not
by reference to the full amount thereof, then the exemption or reduction of tax
to be allowed under this Agreement in the first-mentioned Contracting State
shall apply to so much of the income as is remitted to or received in that
other Contracting State.
2.
However, this limitation does not apply to income derived by the Government of
a Contracting State or any person approved by the competent authority of that
State for the purpose of this paragraph. The term “Government” includes its
agencies and statutory bodies.”
This
means that where income from sources in India is exempt from tax or taxed at a
reduced rate in India under the laws in force in the Singapore the said income
is subject to tax, the exemption or reduction of tax to be allowed under this
Agreement in India shall apply to so much of the income as is remitted or
received in India and vice - versa. The said provision proves to be highly
beneficial to Singapore residents as in Singapore there is no tax on capital
gains. In order to prevent abuse of this benefit, the treaty was amended to
add, Article 24A, another LOB clause with effect from 01.04.2007.
India – United
Kingdom (UK) DTAA
The
LOB clause in a UK DTAA provides that benefit provided by the Convention would not
be given for income or capital if it seems reasonable, considering all relevant
facts, that obtaining that benefit was a primary reason for any arrangement or
transaction leading to that benefit. However, if it can be proven that granting
that benefit aligns with the goals of the relevant provisions of the
Convention, it may still be allowed. This clause was inserted in India-UK tax
treaty in the form of below test:
Principal Purposes
Test - It denies
treaty benefits if obtaining those benefits was one of the principal purposes
of a transaction or arrangement.
The
Indo – UK Convention for avoidance of double taxation and prevention of fiscal
evasion w.r.t taxes on income and capital gains came in to force on 26.10.1993.
The two Governments, on 30.10.2012, signed a protocol vide which they amended
the treaty to include Article 28C – LOB clause w.e.f. 27.12.2013.
“Article 28C – Limitation Of
Benefits,” reads as under:
“1.
Benefits of this Convention shall not be available to a resident of a
Contracting State, or with respect to any transaction undertaken by such a
resident, if the main purpose or one of the main purposes of the creation or
existence of such a resident or of the transaction undertaken by him, was to
obtain benefits under this Convention.
2.
Where by reason of this Article a resident of a Contracting State is denied the
benefits of this Convention in the other Contracting State, the competent
authority of that other Contracting State shall notify the competent authority
of the first-mentioned Contracting State.”
This
provision means that the benefits under this treaty will not be available to a
resident of India / U.K. if the main purpose or one of the purposes of creation
or existence of the resident or transaction undertaken by the resident is
merely to obtain benefits under the treaty.
However,
to safeguard the assessee from application of the LOB clause by the tax
authorities in an prejudicial manner, sub-clause (2) of the LOB clause provides
that if the resident of a contracting state is denied benefits in the source
state, the competent authority of the source state will have to notify the
competent authority the residence state of the same.
India – United States
(U.S.) DTAA
The
United States is known for its complex and stringent LOB provisions. The
agreement for avoidance of double taxation and prevention for fiscal evasion
w.r.t taxes on income was signed on 12.09.1989 and came to force in 1990. This
treaty is slightly different from the other treaties entered by India as it
follows the United Nations Model Convention. With the aim to prevent third
country residents from treaty shopping, India and US signed a protocol amending
the treaty to include the LOB clause.
Usually,
in U.S., 30% is deducted as tax on income of non-residents earned from U.S.
sources. The tax treaty provides for relief from taxation or taxation at a
reduced rate to non-residents who qualifies for the benefits. To qualify for
the benefits, the non-resident will have to satisfy the tests mentioned under
the LOB clause. [“Article 24 – Limitation Of Benefits”]
Upon
thorough examination of the DTAA between India and the United States, three
tests are outlined to meet the criteria for benefiting from the treaty:
(a) Ownership and Base Erosion Test -The provision specifies that the
resident of the contracting state must possess a minimum of 50% of shares in
the company owned by the resident in the country where the company is based or
by a United States citizen. Also, the income of such person is not used in
substantial part, directly or indirectly, to meet liabilities (including
liabilities for interest or royalties) to persons who are not resident of one
of the Contracting States, one of the Contracting States or its political
sub-divisions or local authorities, or citizens of the United States.
(b) Active Business Connection Test – It focuses on the engagement and
connection of business activities. It is based on the condition that the
resident is actively involved in a trade or business within their state of
residence, and the claimed item of income is associated with or related to that
trade or business.
(c) Stock Exchange Test – It mandates the business entity
to be a resident in India or the United States, with shares regularly traded on
the authorized stock exchange of the country.
(d) Competent Authority Test - Persons not entitled to benefit
under the above paragraphs, may approach the competent authority of the source
State for grant of benefits.
Supreme
Court to consider Revenue’s SLP on Mauritius DTAA LoB clause, treaty shopping
allegations
Observing that the case in hand is
an ‘interesting’ issue and orally remarking on the interplay between
Westminster, Vodafone & McDowell principles, Supreme Court issues notice in
Revenue’s SLP against Bombay High Court judgment on India. Mauritius DTAA
benefits; ASG N. Venkataraman submits before Bench that the issue at hand
concerns Article. 27A of India-Mauritius DTAA, i.e. the Limitation of Benefit
(LoB) clause; ASG Venkataraman states that two weeks before the transaction in
question, entities were created in Mauritius, shares were sold to that
Mauritian entity which in turn is a subsidiary of a South African co.; ASG
argues that this entire structure was created to avoid capital gains tax in
India; Supreme Court Bench questions ASG on the substance of the transaction as
also about McDowell and Vodafone principles; On being asked by the Bench as to
what is the legal impediment to the creation of the Mauritian entity, ASG
replies that in lieu of Vodafone ratio and Article 27A. of Mauritius DTAA, a
structure cannot be created only for the purpose of treaty shopping; On being
further questioned on whether ‘look at’ or ‘look through’ test is to be applied
in this case, ASG responds that on application of either test, it will be found
that there is no ‘substance’ at all; Supreme Court observes delay in filing
SLP, issues notice both on merits and delay. – [Authority For Advance Ruling (Income Tax) Mumbai & Ors.
V. BID Services
Division Mauritius Ltd. – Date of Order : 27.09.2024 (SC)]
Delhi High Court overturns AAR in Tiger Global-Flipkart case; Mauritius TRC sacrosanct sans fraud/sham transaction
In a landmark 224 pages judgment, Delhi High Court overturns AAR
ruling in the case of Tiger Global. Flipkart transaction, allows Mauritius
treaty benefit to petitioner on ground that the transaction stands
grandfathered by Article 13(3A) of India-Mauritius DTAA; High Court holds that
TRC issued by a jurisdiction is ‘sacrosanct’ sans tax fraud/sham
transaction proof presented by Revenue: High Court further rejects
beneficial ownership concept invocation by Revenue, observes that “TGM LLC
cannot be said to be the beneficial owner of shares since no evidence has been
rendered to suggest that the writ petitioners are under a contractual or legal
obligation to transmit revenue to TGM LLC or that the revenue obtained from
transfer of shareholding was as a result of actions undertaken by the writ
petitioners at the behest of TGM LLC.”; High Court upholds primacy of Treaty
LOB provisions vis-a-vis treaty abuse, rules “it would be impermissible for the
Revenue to manufacture additional roadblocks or standards that parties would be
required to meet in order to avail of DTAA benefits, subject to caveats of
illegality, fraud and the transaction being in contravention of the underlying
object and purpose of the treaty”. [In favour of assessee] – [Tiger Global
International III Holdings
v. The Authority For Advance Rulings (Incometax) & Ors [TS-624-HC-2024(DEL)] – Date of Judgement : 28.08.2024
(Del.)]
Upholds Singapore-based FII’s
eligibility for capital gains exemption; Rejects invocation of LoB caluse
Bombay High Court upholds ITAT
order allowing Singapore-based Foreign Institutional Investor (FII)
capital gains exemption under Article 13(4) of India-Singapore DTAA; Rejects
Revenue’s invocation of Article 24 of India-Singapore DTAA ‘Limitation of
Benefit clause’ (LoB clause) to limit the benefit to the extent of amount repatriated
by the Assessee to Singapore, remarks that “Singapore authorities have
themselves certified that the capital gain income would be brought to tax in
Singapore without reference to the amount remitted or received in Singapore.
The Assessing Officer could not have come to a conclusion otherwise.”;
Assessee, a SEBI registered FII engaged in debt segment, filed return of income
for Assessment year 2010-11, whereby income from sale of debt instruments
of Rs. 86.62 Cr. was claimed as exempt under Article 13(4) of India-Singapore
DTAA; Revenue disallowed the benefit of Article 13(4) since Assessee failed to
provide any proof of repatriation of such income to Singapore, as required
under Article 24, which was confirmed by the DRP whereas ITAT
allowed Assessee’s appeal; High Court holds that in terms of
Article 13(4), the entire capital gains shall be taxed in Singapore; Notes that
as per Article 24, the exemption or reduction of tax to be allowed under the
DTAA in India shall only apply to so much of the income as is remitted to or
received in Singapore where the laws in force in Singapore provides that the
said income is subject to tax based on the amount remitted or
received in Singapore, however, where under the laws in force if the income is
subject to tax based on full amount regardless of remission or receipt in
Singapore, then Article 24(1) would not apply; Considers the certificate from
Singapore Tax Authorities, submitted by the Assessee, certifying that the
income derived by the Assessee from buying and selling of Indian Debt Securities
and from Foreign Exchange transactions in India would be considered under
Singapore Tax Law as accruing in or derived from Singapore and such income
would be brought to tax in Singapore without reference to the amount remitted
or received in Singapore; Refers to CBDT Circular No. 789, dated 13.04.2000
issued with reference to India-Mauritius
DTAA and observes that certificates issued by the Singapore Tax Authorities
will constitute sufficient evidence for accepting the legal position; Relies on
Madras High Court ruling in Lakshmi
Textile Exporters, wherein
it was held that the certificate issued by the Singapore authorities should
constitute sufficient evidence for accepting the position of the law in
Singapore and the Revenue should not try to interpret the laws of
Singapore; Rejects Revenue’s argument that ITAT, while passing the impugned order
relied on it's coordinate bench rulings in Set Satellite and APL Company
wherein SLP has been admitted by the Supreme Court and remarks that even if,
the ITAT had not relied upon these two decisions, the position in law would not
change; Accordingly, dismisses Revenue’s appeal as devoid of substantial
question of law. – [CIT(International
Taxation) v. Citicorp Investment Bank (Singapore) Ltd.) [TS-346-HC-2023(BOM)]
– Date of Judgement : 21.06.2023
(Bom.)]
Rules on taxability of advertising rights in Cricket tournaments, LoB Clause applicability
Mumbai ITAT deletes TDS demand against Indian
Co. (Assessee) by holding that payment made to Malaysian Group Co.
(TSA Malaysia) under sub-licensing agreement for advertising rights of Sri
Lanka and West Indies Cricket teams in Cricket Tournaments is not taxable
as royalty; Rejects invocation of Article 28 (Limitation of
Benefits) of India-Malaysia DTAA to deny treaty benefits based on
Revenue's conclusion that: (i) the agreement between Total
Sports Asia Ltd., Cayman Island (TSA Cayman Islands) and TSA Malaysia
lacked economic substance and (ii) the transaction
was actually between TSA Cayman Island
and the Assessee where TSA Malaysia was merely a conduit
designed to avail treaty benefits; ITAT instead holds that considering the
setup of TSA Malaysia and scale of the
revenue it earned, the Revenue is incorrect to hold that
TSA Malaysia had no role to play; Also observes that that granting of the
rights to the Assessee prior to the granting of the same by the
respective Cricket Board to the TSA Cayman Islands, cannot be basis for
invocation of Article 28; Assessee, a wholly owned subsidiary of TSA
Cayman Islands, is engaged in the business of seeking and endorsing
sponsorship deals for athletes and carrying on the business of rights
sponsorships for any sports and entertainment related accessories; TSA
Cayman Islands distributes the advertising and other rights acquired
by it through TSA Malaysia; Assessee entered into two
sub-licensing agreements with TSA Malaysia, for the advertising rights of Sri
Lanka National Cricket Team and West Indies Senior Men’s National Cricket Team;
During the Assessment year 2014-15, Assessee remitted Rs. 2.70 Cr
without TDS and the Revenue held that the payments were towards
use/right to use of patent, design, trademark, and similar property of Sri
Lanka and West Indies Cricket teams, thus, taxable as Royalty; The
Revenue also held that the advertising package/rights were sub-leased by
TSA Cayman Islands to the Assessee through TSA Malaysia only to avail
the benefit of the India-Malaysia DTAA and accordingly invoked Article 28 to
deny treaty benefits to the Assessee and hold it liable for TDS default;
CIT(A) held that Article 28 could not be invoked in the present case and
bifurcated the payment in two categories: (i) payment in respect of display of
logo on team’s apparel, display of content on billboards – not qualifying
as royalty and (ii) payment made for use of the name “Official Partners” or
“Official Advertisers” in respect of the teams, providing links on the website
of the Assessee and use of various items – qualifying as royalty, in the ratio
of 60:40; ITAT notes that three agreements were entered into in respect
of advertising or sponsorship rights of Sri Lanka National Cricket
Team/ West Indies Cricket Team: (i) between TSA Cayman Islands and Sri Lanka
Cricket/ West Indies Cricket Board Inc. for sponsorship rights, (ii) between
TSA Cayman Islands and TSA Malaysia for sub-licensing the rights and (iii)
between TSA Malaysia and Assessee for further sub-licensing the rights; On
applicability of Limitation of Benefits clause, ITAT notes that: (a)
Malaysian office is head office with all senior management members, (b)
Malaysian office is well equipped, with sufficient teams of staff, and is run
effectively under CFO, CEO and COO, and (c) the revenues of TSA Malaysia are
much higher than the revenue earned out of the remittance made by the Assessee;
Thus, ITAT observes that these factors, among others, prove that there
was a bona fide business activity and the transaction giving
rise to remittance is in the normal course of business; Further noting the
date of incorporation of all the three entities, opines that when TSA Malaysia
(1999) has been found to be existing much prior to TSA Cayman Island (2000) and
the Assessee (2004), and its revenue and setup have not been disputed by the
Revenue, “…it would be wrong to allege that TSA Malaysia to be mere conduit
and paper company existing merely to avail the benefit of India-Malaysia DTAA.”;
As regards nature of payment made by the Assessee to TSA Malaysia, ITAT
analyses the relevant agreements with Sri Lanka and West Indies Cricket
authorities and opines that payment in respect of advertisement package/rights
does not fall in the category of royalty as defined under Article 12(3) of the
India-Malaysia DTAA, by relying on Delhi HC ruling in DIT v. Sahara India Financial Corporation
Ltd, [2010] 321 ITR 459 (Delhi), delivered in the context of India-Canada DTAA and deletes
the demand raised under Section 201(1)/(1A); Accordingly, ITAT disposes of
cross appeals by an ex parte order. [In favour of assessee] (Related Assessment
year : 2014–15) – [ITO,
International Transaction (TDS) v. Total Sports & Entertainment India (P)
Ltd. [TS-145-ITAT-2023(Mum)]
– Date of Judgement : 27.03.2023 (ITAT Mumbai)]
Shipping income taxable in Singapore on accrual, not remittance basis; Rejects LoB plea
Rajkot ITAT allows Assessee’s
appeal, rejects invocation of Limitation of Benefits (LoB) clause in Article 24
and allows benefit of Article 8 on all voyages carried out
by the Assessee; Holds that “the shipping profits derived by a
Singapore resident shipping enterprise from the operation of ships in
international traffic shall be taxable only in Singapore in accordance with
Article 8(1) and the same does not confer the Indian Authorities to the right
to tax such profits.”; Assessee is a company incorporated in
Singapore and engaged in the business of operation of ships in international
traffic; During Assessment year 2017-18, Assessee earned freight income
from such shipping operations in India; Assessee’s agent filed provisional
return under Section 172(3) in respect of two voyages undertaken
by the Assessee, declaring freight income, against which NOC was
granted under Section 172(6); However, subsequently, after Assessee filed the
final return, the Revenue observed that the Assessee had
remitted freight income to its agent in Denmark and accordingly held that
Assessee was not eligible to claim exemption under Article 8 of India-Singapore
DTAA, by invocation of Article 24; CIT(A) dismissed Assessee’s appeal while
ITAT remitted the matter with the direction that fresh assessment order should
be passed under Section 172(4) following the provisions of Section
144C; Revenue, in the draft assessment order passed pursuant to ITAT
directions, held that the shipping income for voyages performed by the vessels
do not qualify for tax exemption in India under the provisions of
India-Singapore DTAA, because freight income was not directly remitted to
Singapore and the freight income was never subjected to tax in Singapore; DRP
dismissed Assessee’s objections and accordingly, final assessment order was
framed determining freight income of Rs. 3.55 Cr and determined tax liability
of Rs.11.52 Lacs; Based on Article 24(1) of India-Singapore
DTAA, ITAT notes that if the income in question was taxable in
Singapore on the basis of receipt or remission and not by reference to the full
amount of income accruing, Article 24(1) would apply depending on the
facts of each case, exemption as per Article 8 either in whole or in part would
be excluded; Takes note of letter from Inland Revenue Authority of Singapore
(IRAS) furnished by the Assessee, whereby IRAS stated that: (i)
Assessee derives shipping income from export voyages from Indian ports,
(ii) such income is reported by Assessee in its Singapore Tax Return
for Assessment years 2017 and 2018, (iii) Article 24(1) of
India-Singapore DTAA is not applicable to the chartered income derived by
the Assessee on the voyages from Indian ports, as the income is sourced in
Singapore and assessable to tax in Singapore on accrual and not on remittance
basis; Also refers to IRAS letter to Kandla Port Steamship Agents
Association wherein it is clarified that Article 24(1) does not apply to the
shipping income received by a Singapore Shipping Enterprises from Indian
customers and the shipping income is taxable in Singapore, when it
arises regardless of whether the shipping income is received in or
remitted to Singapore; Opines that “Since Article 24(1) is not applicable,
the provisions of Article 8(1) should apply without any limitation. As such the
shipping profits derived by a Singapore resident shipping enterprise from the
operation of ships in international traffic shall be taxable only in Singapore
in accordance with Article 8(1) and the same does not confer the Indian
Authorities to the right to tax such profits.”; Accepts Assessee’s reliance
on Chennai ITAT ruling in Bengal
Tiger Line, coordinate bench in Albra Shipping Pte. Ltd. (2015) 62 taxmann.com 185 (ITAT Rajkot),
Mumbai ITAT in APL Co. Pte. Ltd. v.
CIT (2017) 78 taxmann.com 240 (ITAT Mumbai) and Hyderabad ITAT in Far Shipping (Singapore) Ltd. v. ITO (2017) 84 taxmann.com 297 (ITAT
Hyderabad); Holds that Revenue was not justified in denying benefit of
Article 8 by invoking Article 24(1) following jurisdictional High Court ruling
in M. T. Maersk Mikage v.
DIT(International Taxation) (2016) 72 taxmann 369 (Guj.), opines that
Revenue’s exercise of co-relating the remittances and denying the
certificate issued by the Singapore Tax Authorities is not proper and also that
Revenue erred in not considering the Singapore Income Tax Returns filed by the
Assessee; Accordingly, sets aside Revenue’s order and directs Revenue to allow
the benefit of Article 8 to all the voyages carried out by the Assessee. [In
favour of assesse] (Related Assessment year : 2017-18) – [Maersk Tankers Singapore Pte. Ltd. v. ACIT(International Taxation) [TS-929-ITAT-2022(Rjt)]
– Date of Judgement : 30.11.2022
(ITAT Rajkot)]
Applies LoB clause for extending treaty benefit to Singapore-based Investment Co. on share-sale
AAR rules that capital gain in
the hands of Singapore-based Investment Co. (assessee) upon
sale of shares of Indian Co. is not taxable in India, holds that
assessee satisfied the conditions of Limitation of Benefit
clause stipulated in Art. 3 of the Third Protocol to India-Singapore
DTAA and was eligible to avail exemption under Article 13(4) of the DTAA; As a
part of its business restructuring process,
assessee (seller) proposed to sell its entire shareholding in an
Indian Co. (listed on BSE) to another Indian Co. (buyer) in 2013 under a
private arrangement to be completed outside the stock exchange as an
"off-market" sale transaction. AAR observes that the shares
of Gujarat Gas Company Ltd. (GGCL) were acquired 6 years prior to
introduction of tax exemption provision in Article 13(4) and the decision to
divest non-core business interest not limited to India but extended to
investments in Brazil and Italy pursuant to bonafide business
restructuring, thus, holds that it cannot be said that the affairs of the
assessee-company were arranged with a primary purpose of availing
treaty benefits; Rejects Revenue’s contention that assessee’s group investment
holding was not a bonafide business activity, relies on SC ruling
in Vodafone and Andhra Pradesh HC ruling in Sanofi to hold
that investment in itself is a legitimate, established and globally
well recognised business; Further, notes that the assessee not only had
continuous but a real business as evidenced by the audited
accounts submitted by the assessee, therefore opines that “all the ingredients
of shell/conduit company as prescribed in Article 3.2 of the Protocol are found
missing in this case”; As regards the condition that the total annual
expenditure on operations should be at least SGD 200,000 in the
contracting state for 24 months preceding the date of capital gains, AAR refers
to the Tax Residency Certificate (TRC) and also certificate
issued by Tax Authority of Singapore certifying the total
expenditure for the purpose of LoB clause relied on P&H HC ruling
in Serco BPO; Further considers assessee’s submission summarising the
dividend income, administrative expenses and payroll cost as per audited
accounts for past 10 years and opines that “the administrative expenses in
all the years was much above the prescribed limit stipulated in Article 3.3 of
the Protocol to the DTAA. Thus, there cannot be a case that these expenses were
artificially jacked up in 24 months prior to arising of capital gains so as to
overcome the prescribed limit…”; Accepts Revenue’s contention that
statutory expenses should not be considered as operational expenditure, states
that a company may incur statutory expense such as director's fee,
filing fee, etc. but still may not carry on any business, explains that “what
is relevant to consider is the expenditure incurred on operations in the
contracting state”; However, rejects Revenue’s stand to exclude
administrative recharges (included under sales, general and admin
expenses in P&L), states that employee recharge was part of such
administrative recharge and thus it had to be considered as operational expense,
immaterial of whether it was incurred directly or through subsidiary; Rejects
Revenue’s contention that the intention of LoB clause was to curb the use of
holding companies, not having any bonafide business activity in
India/Singapore, from getting any treaty benefits, states that “We do not
find any such condition that the benefit of Article 13(4)… will not be
available to holding companies. We cannot read the DTAA and the Protocol beyond
what is provided therein … contention of the Revenue that the company
earning only dividend income is liable to be treated as a shell company under
the Protocol is found to be preposterous as we do not find any such provision
in the DTAA or the Protocol”. [In favour of assesse] – [BG Asia Pacific Holding Pte. Ltd. v. CIT(International Taxation) [TS-95-AAR-2021] – Date of Judgement : 25.02.2021 (Authority for Advance
Rulings, (NCR Bench Delhi)]
Capital-gains to Singaporean Co.
from trading in Indian securities, non-taxable; LOB clause inapplicable
B. International (Asia) Ltd.
(assessee) is a tax resident of Singapore and is carrying on its business
operation including trading in securities from Singapore. For the Assessment
year 2011-12, assessee filed its return of income declaring total income of Rs.
10.80 crores. During the assessment proceedings, Assessing Officer noticed that
though, the assessee derived capital gain on sale of shares, debt instruments
and derivatives, however, it claimed the same as exempt under Article-13(4) of
the India-Singapore Tax Treaty. Assessing Officer, thus, sought the explanation
for alleged claim of exemption. Assessee submitted that alleged gain was liable
to tax in Singapore on its worldwide income and hence, as per Article-13(4) of
the Tax Treaty, the capital gain was taxable in Singapore. Thus, assessee contended
that the remittance of such income to Singapore was of no relevance for the
purpose of claiming benefit under the India Singapore Tax Treaty. However, Assessing
Officer observed that since the income from capital gain was not repatriated to
Singapore in terms of Article-24 of the Tax Treaty, it would be taxed in India
under the Indian Income Tax Act and exemption under Article-13(4) of the Tax
Treaty could not be allowed. Thus, Assessing Officer brought to tax the short
term capital gain (STCG) of Rs. 455.70 crores.
However, DRP observed that once it
was held that the capital gain was to be taxed in the country of residence of
the assessee, the applicability of Article-24 became redundant, since, the
income was taxable in Singapore with reference to full amount and not with reference
to the amount remitted or received in Singapore. Thus, DRP directed the Assessing
Officer to delete the addition. Aggrieved, Revenue filed an appeal before
Mumbai ITAT.
Mumbai ITAT rules that capital gains
of Rs. 455.70 Cr. arising to assessee-company (a tax resident of Singapore),
pursuant to trading in Indian securities during Assessment year 2011-12, not
taxable in India under Article 13(4) of India-Singapore DTAA; Rejects Revenue's
stand that in view of Article 24 (Limitation of Benefit clause), capital gains
exemption under Article 13(4) cannot be allowed since income was not
repatriated to Singapore, ITAT clarifies that Article 24 does not have much
relevance insofar as it relates to applicability of Article 13(4); Observes
that in view of Article 13(4), gains derived by the assessee from sale of
shares can only be taxed in Singapore, also takes note of the pre-requisite for
invoking Article 24 i.e. income derived from a contracting State, should either
be exempt from tax or taxed at a reduced rate in that contracting State; ITAT
remarks that Article 13(4) in clear and unambiguous terms
expresses itself as not an exemption provision but it speaks of taxability of
particular income in a particular State by virtue of residence of the
assessee”, further states that the expression ‘exempt’ has been
loosely used, relies on co-ordinate bench ruling in Citicorp Investment Bank
Singapore Ltd. in this regard. (Related Assessment year : 2011-12) – [D.B. International (Asia) Ltd. v. DCIT(International
taxation) [TS-321-ITAT-2018(Mum)] – Date of Judgement : 20.06.2018 (ITAT Mumbai)]
