2023 (2) TMI 1008 - AT - Income Tax

Income chargeable to tax in India - benefits of India-Singapore DTAA - Supremacy of law - GAAR Applicability - AO/ DRP denying the benefit of Article 13 (4A) of the DTAA to the Appellant qua capital gains earned by the Appellant on transfer of shares - Article 3 (1) of the 2005 protocol to the India- Singapore DTAA was invoked - As per AO/ DRP assessee had no economic substance or commercial substance and that it was a shell or a conduit company - whether the revenue can go behind the tax residency certificate issued by the other tax jurisdiction ? - HELD THAT - Supremacy of law made by the Parliament is beyond any doubt. However, one of the recognised exceptions to the said rule is section 90 (2) of the Act which can be termed as treaty override provision as held by the Hon ble Supreme Court in the case of Azadi Bachao Andolan 2003 (10) TMI 5 - SUPREME COURT and, therefore, this provision allows the provisions of a DTAA to supersede the provisions of the income tax Act in case their application is more beneficial. There is no dispute that GAAR is applicable to the assessment year under consideration which empowered the revenue to declare the subject transaction to be an impressible arrangement. As per section 101 of the ITA, domestic GAAR cannot be pressed into operation for denial of a tax benefit, where the case of an assessee falls within one of the conditions prescribed under Rule 10U of the IT Rules 1962. Thus in the case in hand the short term capital gain the tax on which is below the threshold set out in Rule 10 U (1) (a) (supra) further the impugned shares were acquired by the assessee on 22.08.2016 which is prior to the cut off date set out in Rule 10 U (1)(d) Assuming domestic GAAR provision are applicable but for the aforestated facts the treaty benefit cannot be denied to the assessee. AO / DRP have also invoked the doctrine substance over form to deny the benefit of Article 13 (4A). In our considered opinion the said doctrine is prior to the codification of domestic GAAR and the legislators were conscious enough when they were providing exemptions under Chapter X-A of the Act. Even the treatment of the assessee company as Shell or conduit also do not hold any water in as much as the veracity of the expenditure incurred by the assessee in Singapore was a subject matter of tax scrutiny in Singapore and the same has been accepted to be genuine by the Singapore tax authorities as per tax assessment orders mentioned elsewhere. To conclude it is not in dispute that the assessee has furnished a valid tax residency certificate issued by Inland Authority of Singapore, audited financial statements and return of income filed alongwith tax assessment orders by Singapore Tax Authority, therefore, in the light of the binding decision of Black Stone Capital Partners 2023 (2) TMI 35 - DELHI HIGH COURT we direct the AO to delete the impugned disallowance and allow the treaty benefit to the assessee as per the relevant provisions of the law/treaty. Decided in favour of assessee.

Issues Involved:
1. Denial of benefits under India-Singapore Double Taxation Avoidance Agreement (DTAA).
2. Applicability of General Anti-Avoidance Rule (GAAR).
3. Validity of Tax Residency Certificate (TRC).
4. Doctrine of "substance over form".
5. Classification of the appellant as a "shell" or "conduit" company.

Issue-wise Detailed Analysis:

1. Denial of benefits under India-Singapore Double Taxation Avoidance Agreement (DTAA):
The appellant contested the denial of benefits under the India-Singapore DTAA, specifically Article 13 (4A), which pertains to capital gains. The Assessing Officer (AO) and Dispute Resolution Panel (DRP) denied the benefits on the grounds that the appellant lacked economic and commercial substance, classifying it as a "shell" or "conduit" company. The appellant argued that the capital gains from the sale of shares should not be taxable in India as per the DTAA, and thus claimed a refund of the TDS.

2. Applicability of General Anti-Avoidance Rule (GAAR):
The AO/DRP invoked GAAR provisions to deny the treaty benefits, asserting that the arrangement's primary purpose was to obtain a tax benefit. However, the appellant contended that the transaction fell within the exemptions provided under Rule 10U of the IT Rules, 1962, which excludes arrangements where the tax benefit does not exceed INR 3 crores and investments made before April 1, 2017.

3. Validity of Tax Residency Certificate (TRC):
A crucial issue was whether the revenue could question the TRC issued by Singapore authorities. The judgment referenced the Delhi High Court's decision in Black Stone Capital Partners, which emphasized that the TRC is conclusive evidence of residency and beneficial ownership under the DTAA. The court held that the revenue cannot go behind the TRC to question the residency status, aligning with the Supreme Court's stance in Union of India v. Azadi Bachao Andolan and subsequent CBDT circulars.

4. Doctrine of "substance over form":
The AO/DRP applied the doctrine of "substance over form" to deny the treaty benefits, suggesting that the appellant's arrangement lacked genuine substance. However, the tribunal noted that this doctrine predates the codification of GAAR, which provides specific exemptions. The tribunal concluded that the appellant's case fell within these exemptions, rendering the doctrine inapplicable.

5. Classification of the appellant as a "shell" or "conduit" company:
The AO/DRP's classification of the appellant as a "shell" or "conduit" company was challenged. The tribunal highlighted that the appellant had valid TRCs, audited financial statements, and tax assessments from Singapore authorities, which confirmed the genuineness of its expenditures. Thus, the classification as a "shell" or "conduit" company was deemed unfounded.

Conclusion:
The tribunal directed the AO to delete the impugned disallowance and allow the treaty benefits to the appellant, as per the relevant provisions of the law and the DTAA. The appeal was allowed, emphasizing the binding nature of TRCs and the exemptions under GAAR. The judgment reinforced the principle that TRCs issued by foreign tax authorities are conclusive evidence of residency, and domestic GAAR provisions cannot override treaty benefits when specific exemptions apply.

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