2023 (10) TMI 14 - AT - Income Tax

Tax the surplus on sale of CCDs as income under the head capital gains - tax levied thereon @10% u/s 112 - denying the benefit of the Tax Treaty but accepting the valuation adopted by the Assessee - invoking the rule of consistency, AR argued that the interest earned on CCDs have been offered to tax in India in the tax return filed in India @ 10% as provided under the Tax Treaty. HELD THAT - Assessee is a tax resident of Singapore and TRC issued by the Singapore Tax Authorities is on record. The Hon ble Supreme Court in the judgment of Vodafone International Holdings B.V. vs. Union of India and Anr. 2012 (1) TMI 52 - SUPREME COURT has held that Union of India vs. Azadi Bachao Andolan 2003 (10) TMI 5 - SUPREME COURT is correct law and TRC is sufficient evidence to show residence of the contracting state. The valuation of CCDs is not in dispute. Hence, the only issue is according the benefits of India-Singapore Treaty pertaining to exemption under Article 13(4) of the Tax Treaty with regard to the capital gains earned on sale of CCDs. The revenue alleged that there is a scheme of tax avoidance as more than 30% of units in the RHT Trust are held through related parties. While it is a fact that 35.5% of shares were primarily held by FHIL, the remaining 64% was raised from public and institutional investors. The place of effective managements of the assessee is situated in Singapore owing to the conducting of Board meetings and placing of the Directors at Singapore. With regard to the contention of the revenue that there was no commercial rationale for FHL to incorporate wholly on subsidiary in Mauritius is of no relevance and commercial justification to establish the business trust in Singapore has been duly explained by the assessee. The applicant could demonstrate incurring the expenditure of more than 2,00,000 so as to come out of the allegation of being a shell entity. The circular of CBDT No. 789 dated 13.04.2000 and also the press release of 2013 mentioned above leaves no scope for the revenue to tax the amounts and deny the treaty benefits. It is also point for consideration that the interest on the CCDs has been rightly taxed by the revenue as per the treaty in the earlier years and now revenue cannot turn around and deny the benefits of the treaty in case of sale CCDs. Even considering the Limitations of benefit clause (LOB), the look through approach, doctrine of substance over form as relied by the revenue, the benefit to the assessee at this juncture cannot be denied. To conclude allegations of the revenue that a. The scheme of arrangement employed by the assessee is a tax avoidance through treaty shopping mechanism- Not proved. b. The assessee company is not the real owner of the income so generated from the transaction. Accordingly, it lacks beneficial ownership- Not proved. c. The TRC is not sufficient to establish tax residency if the substance establishes otherwise- Sufficient. d. The control and management of the assessee company is also not present in Singapore but rather in India- Not proved. e. The assessee was listed on Singapore Stock Exchange in 2011 hence it shall not be deemed to be a shell/conduit company and hence the LOB clause of Article 3 (now deleted) 2005 Protocol to the DTAA is not applicable to the assessee. Appeal of the assessee is allowed.

Issues Involved:
1. Denial of exemption from capital gains tax under the India-Singapore DTAA.
2. Allegation of lack of economic substance and beneficial ownership.
3. Place of effective management (POEM) and control of the appellant.
4. Valuation of Compulsory Convertible Debentures (CCDs).
5. Treatment of CCDs as equity instruments.
6. Enhancement of income not subject to dispute in the draft assessment order.
7. Computation of tax liability and surcharge.
8. Initiation of penalty proceedings.

Summary:

Issue 1: Denial of Exemption from Capital Gains Tax
The appellant contested the denial of exemption from capital gains tax on the sale of CCDs, arguing eligibility for beneficial provisions under the India-Singapore DTAA. The appellant provided a Tax Residency Certificate (TRC) from Singapore to substantiate its claim. The tribunal held that the TRC is sufficient evidence of residency, and the appellant is entitled to DTAA benefits.

Issue 2: Allegation of Lack of Economic Substance and Beneficial Ownership
The revenue alleged that the appellant lacked economic substance and was a conduit entity for tax avoidance. The tribunal found that the appellant demonstrated substantial economic activities, including incurring significant operational expenses and maintaining an office in Singapore. Hence, the allegation of being a shell or conduit company was not substantiated.

Issue 3: Place of Effective Management (POEM) and Control of the Appellant
The revenue claimed that the control and management of the appellant were in India. However, the tribunal noted that the board meetings were held outside India, and the directors were non-residents. Therefore, the POEM was determined to be in Singapore, not India.

Issue 4: Valuation of Compulsory Convertible Debentures (CCDs)
The revenue questioned the valuation of CCDs and the commercial rationale for their transfer. The tribunal accepted the valuation provided by the appellant, supported by a report from an independent valuer, and found the commercial rationale for the transaction valid.

Issue 5: Treatment of CCDs as Equity Instruments
The revenue treated the transaction of CCDs as the sale of equity instruments. The tribunal upheld the appellant's claim that CCDs are debt instruments unless converted into equity and noted that the sale of both equity and debt instruments was not taxable in India before April 1, 2017, under Article 13(4) of the DTAA.

Issue 6: Enhancement of Income Not Subject to Dispute in the Draft Assessment Order
The tribunal found that the assessing officer erred in enhancing the income not subject to dispute in the draft assessment order and before the Dispute Resolution Panel (DRP).

Issue 7: Computation of Tax Liability and Surcharge
The tribunal held that the assessing officer incorrectly computed the tax liability by denying the beneficial tax rate stipulated in the DTAA on interest income and fees for technical services. The correct tax rate should have been applied as per the DTAA.

Issue 8: Initiation of Penalty Proceedings
The tribunal found that the initiation of penalty proceedings under section 270A for under-reporting/mis-reporting of income was not justified, as the appellant had duly reported the transaction of capital gain as exempt in the income tax return.

Conclusion:
The tribunal concluded that the appellant is entitled to the benefits of the India-Singapore DTAA, including the exemption from capital gains tax on the sale of CCDs. The appeal was allowed, and the assessing officer's order was reversed.

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