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TMI Blog2023 (9) TMI 317X X X X Extracts X X X X X X X X Extracts X X X X ..... as the subject matter of adjudication by the ld. DRP and the ld. DRP on perusal of the same had directed the ld. AO to give a clear finding after due verification as to whether the affairs of the Assessee company were controlled from outside Singapore. AO did not take any efforts to make further verification in this regard and simply reiterated what has been stated earlier by him in the draft assessment order and concluded against the Assessee. On the contrary, we find that the Assessee had given enough evidences to prove that its entire affairs are not controlled from outside Singapore. Since the loan borrowed from its Holding Company was subsisting in the books of the Assessee company, the assessee chose to use the sale proceeds of the shares to repay the loan dues payable to Holding Company. In case if the allegation of the ld. AO, that Assessee is a shell or conduit company and entire activities were carried out only by the BVI entity, is to be accepted, then there is absolutely no need for the Assessee to even repay the loan back to the Holding Company. In any event, the ld. AO in all fairness ought to have accepted the assessment orders of Singapore Tax Authorities which g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that the ld. AO had not adhered to the directions of the binding directions of ld. DRP with regard to denial of deduction for premium component paid on acquisition of shares of DFSPL. Short term capital gains - The Assessee had provided enough evidences to prove the case of entitlement of treaty benefits. Hence we hold that the short term capital gains on sale of shares shall not be taxable in India in the hands of the Assessee company. Long term capital loss - Acquisition of shares at premium had been duly reflected by the Assessee company in its audited balance sheets. We also find that the shares were allotted by the Indian Companies to the Assessee company at a premium and return of allotment in the prescribed form had been duly filed by those Indian Companies with the Registrar of Companies in India. We hold that the shares were acquired by the Assessee in the instant case at premium and sources for making payments for the same had been duly drawn from the books of accounts. No portion of it could be construed as unexplained by the assessee. Hence when those shares which were lying in the audited balance sheets, were sold by the Assessee during the year under c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Order demonstrates complete non- application of mind, since the same is based wholly on assumptions, surmises and conjectures and is explicitly in contradiction to the findings of facts as carried out by the DRP and is thus liable to be struck down. 5. That the Final Assessment Order passed by the AO does Same as not mention his office or designation and is therefore, not a validly authenticated electronic record in terms of section 282A(1) of the ITA read with Rule 127A(1)(b) of the Income-tax Rules, 1962. Re: Short term capital gains of INR 1,92,63,473/- on account of sale of shares of Dr. Fresh Healthcare Pvt. Ltd. by the Appellant. 6. That the AO grossly erred in denying the Appellant the benefits of India - Singapore Double Taxation Avoidance Agreement ( DTAA ) and bringing to tax the short-term capital gains of INR 1,92,63,473/- earned by the Appellant during AY 2018-19 as chargeable to tax in India. 7. That the AO grossly erred in ignoring the findings of the DRP that the Appellant had satisfied the condition as prescribed under Article 24A(4)(b)(i) of the DTAA and consequently, there arose no occasion for the AO to deny the Appellant the benefit of Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , is no ground for denying benefit of the DTAA, since that is an approach which may be applicable to brick and mortar companies and not in the case of Appellant. 16. That the finding of the AO qua verification as directed by the DRP vis- -vis the issue at hand, is wholly perverse because for the period under consideration, neither any consultancy fee was paid nor received by the Appellant from any entity and hence there was no question of any benefit having been passed on to any person. Re: Long term capital loss of INR 3,16,74,056/- on account Pvt. Ltd. by Dr. Fresh Sez Ph 1 Pvt. Ltd. by the Appellant 17. That the AO has grossly erred in disallowing the premium paid by at the time of acquisition of shares of Dr. Fresh Sez Ph 1 Pvt. Ltd. for calculating their cost of acquisition in the hands of the Appellant, thereby converting long term capital loss of INR 3,16,74,056/- into long term capital gains of INR 61,71,789/- and taxing the same in the hands of the Appellant in India. 18. That the AO has grossly erred in disregarding the premium paid for calculating cost of acquisition, in complete contradiction to the DRP Directions, thereby violating the mandate of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 13(4A) of the DTAA in disregard to Rule 10U(1)(a) of the Rules, which exempts arrangements having tax benefit not exceeding INR 3,00,00,000/- from the purview of General Anti- Avoidance Rule contained in Chapter X-A of the ITA. 27. That without prejudice to the fact that the AO has not specifically invoked Article 24A of the DTAA, since income from the transfer of investments made by the Appellant were specifically exempt from the General Anti-Avoidance Rule contained in Chapter X-A of the ITA read with Rule 10U(1)(a) and/ or (d) of the Rules, there was no occasion for the AO to invoke the test of substance over form to deny the benefits available to the Appellant under the DTAA. 28. Without prejudice, the AO erred in ignoring that the exemption from the applicability of the General Anti- Avoidance Rule as contained in Chapter X-A of the ITA read with Rule 10U(1)(a) and/ or (d) of the Rules, had an overriding effect over Article 24A of the DTAA by virtue of section 90(2A) of the ITA. 4. These additional grounds go to the root of the matter and they are merely legal issues and not requiring any verification of facts. Hence, the additional grounds are hereby admitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so submitted that it had employed qualified director to carry out its business activity. Its books are maintained and audited in Singapore and regular corporate tax returns were duly filed in Singapore. 7. The ld AO observed that the Assessee has invested only in two companies throughout its existence viz. DFHPL on 22.08.2016 and DFHPPL on 12.12.2011 and 04.03.2015. The Assessee company then disposed of these investments on 02.01.2018. Further, for the years 2016, 2017 and 2018, revenue and expenses were booked under consultancy head- meaning thereby, that revenue is for consultancy services rendered and expenses towards consultancy services taken. Moreover, both these transactions were executed with Assessee s related entities only. No operating expenses were booked by the Assessee. Based on these observations, the ld AO concluded that the Assessee company has no economic substance and no commercial rationale can be attributed to its creation. Ld AO further observed that mere legal compliances in the form of maintenance of books of accounts, appointing directors, filing tax returns are not sufficient to ascertain economic substance in Singapore. Such claim has to be backed by e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore Tax authorities would indeed serve as valid proof that Assessee is a tax resident of Singapore and accordingly eligible to claim treaty benefit of India-Singapore Treaty. Further, with regard to the financials of the Assessee for the years ending on 31.08.2016 and 31.08.2017, the Assessee submitted that it had indeed incurred operating expenses 221160 SGD for 2016 and 221277 SGD for 2017. Further, it was pointed out that there was no consultancy revenue earned and no consultancy expenditure incurred for the year 2018 by the Assessee. Admittedly, the shares were sold by the Assessee company in the year 2018 relevant to AY 2018-19. Moreover, it was pointed out before the ld DRP that expenses incurred by the Assessee in Singapore in immediately preceding 24 months preceding the date on which capital gains arose exceeds SGD 200000 and accordingly the Assessee had duly satisfied the conditions stipulated under Article 13 read with Article 24A of India-Singapore DTAA. It was submitted that the Assessee company is incorporated in Singapore in the year 2009 and had acquired the shares of DFHPL and DFSPPL prior to 01.04.2017. The allegation of the ld AO that Assessee shares its office s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd, Dr. Fresh SEZ Phase I Pvt. Ltd, Dr. Fresh Buildcon Pvt. Ltd, Burman GSC Pvt Ltd, Burman GSC Fund Management Pvt. Ltd and Burman GSC Serviced Apartments Operations Pvt. Ltd before the ld AO. On perusal of the said agreement, a plain reading would make it clear that the Assessee had filed a petition before the Hon ble National Company Law Tribunal (NCLT), New Delhi by placing the settlement agreement before it and that no company would file bogus petition before NCLT just to obtain tax benefit. This goes to prove that the dispute was a genuine dispute and to avoid any further damage to the parties involved, the Assessee entered into a settlement agreement and disposed of the shares without even being aware that the transaction would be eligible for treaty benefit under the India-Singapore DTAA. 11. It is an admitted fact that the sale proceeds of the shares were repatriated from Singapore to BVI in the form of loan repayment payable by the Assessee to its holding company. The ld AO s case is that since the said loan repayment does not suffer withholding tax in Singapore and the sale proceeds of shares would not get taxed even in BVI upon repatriation owing to the characteriz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany engaged in investing in various class of assets for generating profit through capital appreciation, dividends etc. The Assessee during the year had indeed sold the shares held by it in Indian entities for a fair consideration (which is not disputed by the ld AO) and had used the proceeds thereon for repayment of loan to its holding company which was subsisting in the books of the Assessee company. The Assessee company is doing operations in Singapore for 8 years prior to the date of transfer of shares. The Assessee company have been regularly filing its tax returns in Singapore and assessment orders for three years were indeed passed by the Singapore tax Authorities which are already on record. The Assessee had already held the shares in Indian companies prior to 01.04.2017 itself. Hence, it cannot be said that the affairs of the company were arranged with the primary purpose to take advantage of benefits of Article 13(4A) of India-Singapore DTAA. The Assessee also submitted that 24 months prior to the date of transfer of shares (i.e. prior to 02.01.2018) would be for the period 01.01.2016 to 31.12.2017. The Assessee submitted that for the period 01.01.2016 to 31.12.2016, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resorted to . The ld DRP observed that in order to deny the benefits available to the Assessee in the treaty, there has to be some cogent evidence, rather than conjecture, with the revenue and the onus is on the revenue to prove otherwise. The ld DRP relied on the decision of the Hon ble Supreme Court in the case of Vodafone International Holding Vs. Union of India reported in 17 taxmann.com 202 and by quoting the relevant observations made thereon, held that revenue has power to lift the corporate veil in case of sham transactions, however, the revenue may invoke the substance over form principle or piercing the corporate veil test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the impugned transaction is a sham or tax avoidant. The ld DRP accordingly, observed that in the instant case, the ld AO has not established that the beneficial owner in this case was the BVI company. Accordingly, the ld DRP directed the ld AO to verify :- (emphasis supplied by us) i. Whether the affairs of the Assessee were controlled from outside Singapore ? ii. Whether the benefits arising out of the transactions are passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Later the ld. AR also filed a rejoinder to the submissions made by the ld. DR. Considering all these submissions that are placed on record, our findings are as under:- a) At the outset, we hold that the ld. AO while passing the final assessment order had not followed the directions of the ld. DRP. As per the provisions of section 144C(10) of the Act, every direction issued by the ld. DRP shall be binding on the ld. AO and that the ld. AO is not empowered to raise any new issue in the giving effect proceedings and continue the addition based on some other reasoning. b) With regard to the claim of long term capital loss of Rs 3,16,74,056/-, we find that the ld. AO in the draft assessment order had not doubted the quantum of sale consideration but had only doubted the cost of acquisition of unlisted equity shares. We find that the ld. AO took the view that because there was huge variation in the amount of premium paid by the Assessee while acquiring the shares of DFSPL in two tranches, the entire amount of premium paid at the time of acquisition deserved to be disallowed while computing capital gains/ loss in the hands of the Assessee. The ld. DRP had directed the ld. AO to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment order viz. a) Whether the affairs of the Assessee were controlled from outside Singapore and b) Whether any benefit in the form of interest, dividend or otherwise had been paid by the Assessee to BVI entity. With regard to first direction of ld. DRP to the ld. AO to check whether the affairs of the Assessee were controlled from outside Singapore, the ld. AO simply reiterated what has been stated by him in the draft assessment order. The draft assessment order was the subject matter of adjudication by the ld. DRP and the ld. DRP on perusal of the same had directed the ld. AO to give a clear finding after due verification as to whether the affairs of the Assessee company were controlled from outside Singapore. The ld. AO did not take any efforts to make further verification in this regard and simply reiterated what has been stated earlier by him in the draft assessment order and concluded against the Assessee. On the contrary, we find that the Assessee had given enough evidences to prove that its entire affairs are not controlled from outside Singapore. It s holding company is situated in BVI. The BVI entity had advanced interest free loan to the Assessee company. The Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration. We find that the ld. AO had approached the entire issue with a pre-conceived mind in order to reach the pre-determined destination of denying the treaty benefits somehow to the Assessee. e) With regard to the short term capital gains in the sum of Rs 1,92,63,473/- earned by the Assessee, we find that the Assessee had claimed that in view of Article 13(4A) of India Singapore DTAA, the same would be liable to be taxed only in Singapore and not taxable in India. The ld. AO had denied the treaty benefits to the Assessee. The ld. DRP had observed that the conclusions of the ld. AO for denying the treaty benefit to be inconclusive. Once the first direction given by the ld. DRP to the ld. AO as stated supra had not been addressed by the ld. AO in the final assessment order because the ld. AO had merely reproduced the draft assessment order. Whatever has been stated by the ld. AO in the draft assessment order with regard to the status of the Assessee and denial of treaty benefits had been observed by the ld. DRP as inconclusive. Hence the reliance placed by the ld. DR on the conclusions of the ld. AO does not serve any purpose in the facts of the instant case. The Assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f this Tribunal in the case of Reverse Age Health Services Pte Ltd are as under:- 9. At this stage it would be pertinent to refer to the decision of the Hon ble High Court of Delhi in the case of Black Stone Capital Partners, Singapore in W.P.(C) 2562/2022 decided on 30.01.2023 and the most relevant observations of the Hon ble High Court pertinent to the facts of the appeal under consideration read as under :- 73. In the objections dated 28th December, 2021, the petitioner has furnished the details of compliance with the LOB clause to the India- Singapore DTAA. The Assessing officer has not questioned the satisfaction of the LOB clause or the Independent Chartered Accountant certificate at any stage except in the present proceedings. Consequently, the petitioner is a bonafide entity and not a shell/conduit entity as it complies with the LOB clause to the India- Singapore DTAA as the expenditure has been incurred in Singapore and the same has been certified by an independent chartered accountant and accepted by the authorities in Singapore i.e. Income Tax authorities, Monetary Authority of Singapore. Accordingly, the allegation of treaty shopping is irrelevant in the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eligible to claim DTAA benefits. 80. Article 1 of the India-Singapore DTAA states that the tax treaty applies only to one or more person who is a resident of one or more contracting state. Article 3(l)(j) of the said DTAA defines a person to include an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States. The relevant extract of Article 3(1) (j) is provided below: (]) the term person includes an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States 81. Further, as per Article 3(l)(d) of the India-Singapore DTAA, a Company has been inter-alia defined as any body corporate or any entity which is treated as a company or body corporate under the taxation laws in force in the respective Contracting States . 82. Article 4 of the India-Singapore DTAA states that the term resident of a Contracting State means any person who is a resident of a Contracting State in accordance with the taxation laws of that State. As per Singapore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice was issued was that the recipients of the show cause notice were mostly 'shell companies' incorporated in Mauritius, operating through Mauritius, whose main purpose was investment of funds in India It was alleged that these companies were controlled and managed from countries other than India or Mauritius and as such they were not residents of Mauritius so as to derive the benefits of the DTAC. These show cause notices resulted in panic and consequent hasty withdrawal of funds by the FIIs. The Indian Finance Minister issued a Press note dated April 4, 2000 clarifying that the views taken by some of the income-tax officers pertained to specific cases of assessment and did not represent or reflect the policy of the Government of India with regard to denial of tax benefits to such FIIs. Thereafter, to further clarify the situation, the CBDT issued a Circular No. 789 dated 13.4.2000. Since this is the crucial Circular, it would be worthwhile reproducing its full text. The Circular reads as under.... xxx xxx xxx xxx 49. As early as on March 30, 1994, the CBDT had issued circular no. 682 in which it had been emphasised that any resident of Mauritius deriving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s developing itself as a base for investments in South East Asia and China. Mauritius today provides a suitable treaty conduit for South Asia and South Africa. In recent years, India has been the beneficiary of significant foreign funds through the Mauritius conduit . Although the Indian economic reforms since 1991 permitted such capital transfers, the amount would have been much lower without the India-Mauritius tax treaty. 124 Overall, countries need to take, and do take, a holistic view. The developing countries allow treaty shopping to encourage capita and technology inflows, which developed countries are keen to provide to them. The loss of tax revenues could be insignificant compared to the other non-tax benefits to their economy. Many of them do not appear to be too concerned unless the revenue losses are significant compared to the other tax and non-tax benefits from the treaty, or the treaty shopping leads to other tax abuses . xxx 134. We may also refer to the judgment of Gujarat High Court in Banyan Berry v. CIT (1996) 222 ITR 831/84 Taxman 515 where referring to McDowell Co. Ltd.'s case (supra), the Court observed: ... The facts and circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tute sufficient evidence of residency and shall not be binding on the authorities. Sub-Section 5 of Section 90 of the Act sought to be introduced by way of proposed amendment is reproduced hereinbelow: 21. In section 90 of the Income Tax Act,- (a) to (b) ** (c) after sub-section (4) and before Explanation 1, the following subsection shall be inserted, namely: (5) The certificate of being a resident in a country outside India or specified territory outside India, as the case may be, referred to in subsection (4), shall be necessary but not a sufficient condition for claiming any relief under the agreement referred to therein. 90. However, serious concerns were expressed by the Foreign investors with regard to the aforesaid proposed amendment. On the very next day, namely 1st March, 2013 the Finance Minister vide Press release clarified, The Tax Residency Certificate produced by a resident of a contracting state will be accepted as evidence that he is a resident of that contracting state and the Income Tax Authorities in India will not go behind the TRC and question his resident status . 91. Consequently, the Government of India vide Pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,63,473/- 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) (supra). 18. On these undisputed facts it can be safely concluded that assuming domestic GAAR provision are applicable but for the aforestated facts the treaty benefit cannot be denied to the assessee. 19. The 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. 20. 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. 21. To conclude it is not in dispute that the assessee has furnished a valid tax reside ..... X X X X Extracts X X X X X X X X Extracts X X X X
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