Monday 30 September 2024

Overview of Limitation of Benefits (LoB) Clause in Double Taxation Avoidance Agreements

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 Exporterswherein 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)]

 

 

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