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2021 (3) TMI 334 - AAR - Income TaxAdvance ruling - Taxability of transfer of shares in an Indian company - Capital gains tax in India - India-Singapore DTAA - sale of shares held by Company tax resident of Singapore ( BG Asia or Seller ) in Gujarat Gas company Limited ( GGCL ), an Indian company whose shares are listed on recognized stock exchanges in India, to a buyer, a company incorporated in India (herein after referred to as the Buyer - whether the LOB conditions as prescribed in Article 3 of the Protocol are satisfied in this case? - HELD THAT - Whether the affairs of BG Asia were arranged with the primary purpose to take advantage of the benefit in Article 1 of the Protocol? - In pursuance to the general business policy decision to divest non-core business interest, the Board of Directors of BG Asia had passed a resolution dated 28/09/2012 for sale of shares of GGCL. It is also relevant to consider that similar sale of shares of non-core holding was made in other countries viz. Brazil Italy. Further, BG Asia had not divested all its share holdings in all the companies in all the countries. Rather it still continued to hold the investment in other companies. It is thus evident from these facts that the decision to sell the shares of GGCL was non-India specific decision and pursuant to bona fide business restructuring. Therefore, it cannot be said that the affairs of BG Asia in the form of sale of shares of GGCL were arranged with the primary purpose to take advantage of the benefits of Article 1 to the Protocol to India-Singapore DTAA and to avail the benefits of Article 13.4 of the Treaty. Whether BG Asia is having bonafide business activities? - No merit in contention of the Revenue that the group investment holding undertaken by BG Asia was not a bona fide business activity. It was categorically held by the AP High Court In the case of Sanofi 2013 (2) TMI 589 - ANDHRA PRADESH HIGH COURT that creation of wholly owned subsidiaries for domestic or overseas investment was a well-established business and that investment in itself was a legitimate, established and globally well recognized business. Therefore, the LOB clause in Explanation to Article 3 of the Protocol that a legal entity not having bona-fide business activities shall be covered by Article 3.1 of the Protocol is not found attracted in this case. Whether BG Asia is a shell/conduit Company? - Business activity carried on by BG Asia was not only continuous but also real. It is also not the case that BG Asia had negligible or nil business operations. The investment held by the BG Singapore was of a very high order. BG Asia has brought on record its audited account for the financial year ending 31/12/2004 onwards and it is found there from that BG Asia had disclosed considerable amount of dividend on a regular basis in all the years, which will be reproduced subsequently while examining the expenses. Therefore, it cannot be held that BG Asia had negligible or nil business operations in Singapore. As mentioned earlier the condition that the company had no real and continuous activity in Singapore was also not fulfilled in the case. Therefore, all the ingredients of shell / conduit company as prescribed in Article 3.2 of the Protocol are found missing in this case. In view of these facts, the LOB conditions of Article 3.2 of the Protocol are also not found applicable and, therefore, BG Asia is not a shell or conduit company in terms of the Protocol. Whether the total annual expenditure on operations was less than Singapore 200, 000 in immediately preceding 24 months from the date of capital gains? - In the present case the certificate regarding fulfilment of LOB clause of the Treaty in respect of annual expenditure as issued by the Singapore Tax Authority is in the realm of interpretation of the clause of the DTAA and cannot be taken as conclusive and the Revenue is entitled to rebut the same. However, the Revenue has not brought any material or evidence on record to contradict the certificate as issued by the Singapore Authority. Further, the genuineness of these certificates has also not been questioned. BG Asia was not only engaged in a continuous business activity but it was also incurring administrative expenses every year. We also find recharge of employee cost in each of the year. BG Asia was following a business model wherein one of the group companies in a particular country was making available the necessary services to all the group companies on cost sharing basis. Accordingly, the administrative expenses including the employee cost were recharged to BG Asia. It is not the case that this model was practised only in the two years prior to arise of capital gains so as to overcome the LOB clause in respect of the prescribed limit of the expenditure of operation. Rather this practice was followed all along, as is evident from the above table. It is also seen that the administrative expense in all the years was much above the prescribed limit as 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 the 24 months period prior to arising of capital gains so as to overcome the prescribed limit in the said Article. The condition in Article 3.3 of the Protocol that the total annual expenditure on operations in the contracting state should be at least S 200,000 in the immediately preceding period of 24 months from the date the gain arises is also found fulfilled in this case. The fact that BG Asia had fulfilled the limit of operational expense of S 200,000 is also confirmed by the appraisal of independent evidences brought on record, as already discussed earlier. Therefore, the contention of the Revenue that the applicant was not having enough operational expense and that the LOB bar in Article 3.3 of the Protocol was attracted in this case is found to be without any basis. As the total annual expenditure on operations of BG Asia in Singapore was more than Singapore 200,000 in immediately preceding 24 months from the date of capital gains the bar in Article 3.3 of the Protocol to Singapore DTAA is not found attracted. LOB conditions as prescribed in Article 3 of the Protocol of the India-Singapore DTAA are satisfied and BG Asia is eligible to avail the exemption under Article 13(4) of the India-Singapore DTAA. As BG Asia is resident of Singapore, the capital gains arising to it on sale of shares of GGCL will be liable to tax in Singapore only in accordance with the provisions of Article 13(4) of the India Singapore DTAA. The capital gain on sale of shares of GGCL is liable to tax in India under the provisions of the Income Tax Act. However, as per section 90(2) of the Act the provisions of the Act will apply to the extent they are more beneficial vis- -vis the provisions of the tax treaty. Ruling - As in the present case the provisions of DTAA between India and Singapore are more beneficial to BG Asia, the chargeability of capital gains on sale of shares of GGCL will be guided by the provisions of the DTAA and not that of the Act. Accordingly, the capital gain on sale of shares of GGCL cannot be taxed in India under the provisions of the Income Tax Act. Therefore, the answer to Question No. 1 raised by the applicants is given in favour of BG Asia. No questions in respect of rate of tax on such capital gain and the applicability of TDS provisions thereon, are no longer relevant and need not be answered.
Issues Involved:
1. Tax liability of BG Asia on capital gains from the sale of shares under the Income-tax Act, 1961 and India-Singapore DTAA. 2. Applicable tax rate on long-term capital gains if taxable. 3. Obligation of the Buyer to deduct tax at source under section 195 of the Act. Detailed Analysis: Issue 1: Tax Liability of BG Asia on Capital Gains The primary issue was whether BG Asia, a tax resident of Singapore, is liable to capital gains tax in India under the Income-tax Act, 1961 and the India-Singapore DTAA for the proposed sale of shares in GGCL to GSPC. Article 13(4) of the India-Singapore DTAA stipulates that gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2, and 3 shall be taxable only in that State. Since shares are not mentioned in paragraphs 1, 2, and 3, the gains from their sale will be taxable only in Singapore. However, the Protocol to the DTAA introduced a Limitation of Benefit (LOB) clause effective from 1st August 2005, which sets conditions for availing the benefits of Article 13(4). The crux of the matter was whether BG Asia met these LOB conditions, which include: - The affairs should not be arranged with the primary purpose of taking advantage of the benefits. - The entity should not be a shell/conduit company with negligible or nil business operations or no real and continuous business activities. - The total annual expenditure on operations should be at least S$200,000 in the preceding 24 months from the date the gains arise. The Authority found that BG Asia was incorporated in 1995, made significant investments in various countries, and acquired shares in GGCL between 1997 and 1999, well before the introduction of Article 13(4) in 2005. The decision to sell the shares in 2012 was part of a global restructuring policy and not specifically to take advantage of the DTAA benefits. BG Asia was also found to be engaged in bona fide business activities as an investment holding company, managing investments worth approximately 4.5 billion Singapore dollars, which required significant business operations and expertise. Issue 2: Applicable Tax Rate on Long-Term Capital Gains Since the capital gains from the sale of GGCL shares were not taxable in India under the DTAA, the question of the applicable tax rate on such gains became irrelevant. Issue 3: Obligation to Deduct Tax at Source Similarly, as the capital gains were not taxable in India, the Buyer was not required to deduct tax at source under section 195 of the Act. Findings and Ruling: The Authority concluded that BG Asia satisfied all the LOB conditions and was entitled to the benefits under Article 13(4) of the DTAA. Consequently, the capital gains arising from the sale of shares in GGCL were not taxable in India. The answers to the questions posed were: 1. BG Asia Pacific Holdings Pte Limited is not liable to capital gains tax in India under the provisions of the Income-tax Act, 1961 and Article 13.4 of the India-Singapore DTAA read with Article 3 of the Protocol. 2. The query regarding the applicable tax rate on long-term capital gains became infructuous. 3. The query regarding the obligation to deduct tax at source also became infructuous. The ruling was pronounced on the 25th day of February, 2021.
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