2024 (9) TMI 637 - AT - Income Tax

Entitlement for benefit of the tax treaty - Allegation of tax evasion and treaty shopping - denial of benefits under the India-Singapore DTAA - HELD THAT - Tax Residency Certificate, even if it is not a conclusive evidence of a tax residency of an entity, it certainly is a statutory evidence and the burden is on the Revenue to establish from the facts and circumstance that the entity has been formed and operated in a manner that the only intention was to take benefit of the tax treaty without there being actual intention of an economic activity. As for this proposition we rely a co-ordinate bench decision in case of Tiger Global Eight Holdings, Mauritius 2024 (8) TMI 279 - ITAT DELHI It cannot be alleged that the Company is not a resident in Singapore and that it has no taxable existence in any other country. We find substance in the plea that without finding where the residence of the Assessee, it cannot be denied the treaty benefits. Further we appreciate the stance of the assessee that the company was incorporated in the year 1996 and the relevant investments were made by the Assessee in the year 2012 (which is 16 years after incorporation of Company). Also pleaded that the Assessee is an actual operating entity and is conducting business on a regular basis. The audited financials for the year 2017 reveals, it has generated revenue from sale of goods amounting to USD 2,472,828 (in 000). Further, The Assessee has employed 164 number of employees during the relevant year. The name of the employees was enclosed as Annexure 4. Assessee also pleaded that Singapore s Economic Development Board has also recognized the Company the Asia Pacific headquarters and the regional trading hub in 2016 for a period of 10 years. These aspect needed indulgence of the DRP, however, without making any enquiry the DRP has sustained the conclusion of AO. It was also pointed out that the Company has been consistently filing its return of income in India and has been availing the treaty benefits with respect to such income for all such years. The AO has not denied the treaty benefits in any of such years. We are of considered view that without assigning any reasons for drifting from the rule of consistency the DRP could not have sustained the draft addition. The aforesaid submissions of the assessee seems to have been completely left out of consideration by DRP and these submissions sufficiently establish that the transaction which the AO has alleged to be out of tax evasion and treaty shopping was, in fact, a long-term investment decision by an entity which has sufficient managerial and operational structure to run an entity based in Singapore. Assessee appeal allowed.

Issues Involved:

1. Eligibility for benefits under the India-Singapore DTAA.
2. Adequacy of documentation provided by the assessee.
3. Applicability of the principle of consistency/res-judicata in tax proceedings.
4. Burden of proof regarding tax residency and economic substance.
5. Evaluation of the assessee's business operations and economic activities in Singapore.

Issue-wise Detailed Analysis:

1. Eligibility for benefits under the India-Singapore DTAA:

The assessee, a tax resident of Singapore, claimed benefits under the India-Singapore DTAA, specifically Article 13(4) for capital gains and Article 11 for interest income. The Assessing Officer (AO) denied these benefits, arguing that the assessee did not provide sufficient documentation to prove eligibility. The Dispute Resolution Panel (DRP) upheld the AO's decision, stating that the assessee failed to furnish necessary documents to substantiate its claim.

2. Adequacy of documentation provided by the assessee:

The AO requested various documents, including financial statements, operating expenses, and tax returns filed in Singapore, to verify the assessee's claim. The assessee provided a Tax Residency Certificate (TRC) and a declaration from the company's director but did not submit the requested documents. The DRP noted that the assessee's submission was insufficient, as it did not establish that the entity was engaged in real and continuous business activities in Singapore. The tribunal emphasized that the TRC is not conclusive evidence of tax residency and that the burden is on the assessee to provide adequate documentation.

3. Applicability of the principle of consistency/res-judicata in tax proceedings:

The assessee argued that the principle of consistency should apply, as it had been granted treaty benefits in previous years. However, the tribunal clarified that res-judicata does not apply to tax proceedings. The Delhi High Court's decision in Krishak Bharati Cooperative Ltd. was cited, stating that the rule of consistency cannot be inflexibly applied, as it may lead to unequal application of laws. The tribunal concluded that the AO's decision to deny benefits for the current year was not bound by previous assessments.

4. Burden of proof regarding tax residency and economic substance:

The tribunal held that while the TRC is statutory evidence of tax residency, it is not conclusive. The burden shifts to the AO to establish that the entity is a conduit created for treaty shopping. The tribunal found that the AO did not conduct an independent inquiry to rebut the statutory evidence of tax residency. The tribunal referred to the case of Tiger Global Eight Holdings, where it was held that the AO must provide evidence to prove that the entity is a conduit.

5. Evaluation of the assessee's business operations and economic activities in Singapore:

The assessee provided detailed submissions, including financial statements, evidence of business operations, and expenditure in Singapore. The tribunal noted that the AO did not find any fault in the assessee's claim of significant business operations. The tribunal emphasized that without finding the residence of the assessee, treaty benefits cannot be denied. The assessee also demonstrated that it had been consistently filing tax returns in India and availing treaty benefits in previous years. The tribunal concluded that the DRP did not consider these submissions and failed to conduct an independent inquiry.

Conclusion:

The tribunal allowed the appeal, stating that the assessee had discharged its initial burden by providing statutory evidence of tax residency. The AO and DRP did not conduct an independent inquiry to rebut this evidence. The tribunal found that the assessee's submissions sufficiently established that the entity was engaged in real and continuous business activities in Singapore and that the transaction was a long-term investment decision. The appeal was allowed, and the order was pronounced in the open court on 05.09.2024.

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