MUMBAI: The Delhi bench of the Income-tax Appellate Tribunal (ITAT) has ruled on a case involving the taxation of gains from the sale of shares in India and provided relief to The Golden State Capital Pte Ltd, a Singapore entity. Based on several key principles in the India-Singapore treaty, the entity was held eligible to treaty benefits, consequently tax on capital gains did not arise in India.
The moot point in the ITAT order is that the significance of a tax residency certificate, issued by the jurisdiction, where the taxpayer is a resident (in this case Singapore) has been upheld.
Golden State Capital (the taxpayer) contended that it was eligible for the benefit of the tax treaty provisions. Article 13 of the India-Singapore tax treaty provides for taxation of gains arising out of the sale of shares acquired before 1 April 2017, in the resident jurisdiction (in this case: Singapore) only.
During the financial year 2017-18, the taxpayer disposed of shares held by it in Dr Fresh Healthcare Pvt. Ltd ( DFHPL) and Dr. Fresh SEZ Ph 1 Pvt. Ltd. (DFSPPL). It earned short-term capital gains of Rs. 1.92 crore on sale of shares in the former company and incurred a long-term capital loss of Rs. 3.16 crore- on account of sale of shares of the other company. In its Income-tax (I-T) return it claimed that the short-term capital gains were exempt as per Article 13 of the tax treaty and carried forward the long-term capital loss to subsequent years.
During assessment, the tax benefits were denied on the grounds that the transaction was routed through Singapore for tax avoidance. The Singapore entity was not the beneficial owner of shares, and the taxpayer lacked commercial substance in Singapore. The I-T officer also denied the deduction of premium towards the cost of acquisition and invoked the General Anti Avoidance Regulations (GAAR).
On the other hand, Golden State Capital contended that it satisfied the conditions of the LOB clause in the tax treaty, the transaction was genuine, and the premium paid should be considered in computing the cost of acquisition of the shares. It stated that the sale of shares was not covered by GAAR provisions.
The key points of this order are as follows:
The moot point in the ITAT order is that the significance of a tax residency certificate, issued by the jurisdiction, where the taxpayer is a resident (in this case Singapore) has been upheld.
Golden State Capital (the taxpayer) contended that it was eligible for the benefit of the tax treaty provisions. Article 13 of the India-Singapore tax treaty provides for taxation of gains arising out of the sale of shares acquired before 1 April 2017, in the resident jurisdiction (in this case: Singapore) only.
During the financial year 2017-18, the taxpayer disposed of shares held by it in Dr Fresh Healthcare Pvt. Ltd ( DFHPL) and Dr. Fresh SEZ Ph 1 Pvt. Ltd. (DFSPPL). It earned short-term capital gains of Rs. 1.92 crore on sale of shares in the former company and incurred a long-term capital loss of Rs. 3.16 crore- on account of sale of shares of the other company. In its Income-tax (I-T) return it claimed that the short-term capital gains were exempt as per Article 13 of the tax treaty and carried forward the long-term capital loss to subsequent years.
During assessment, the tax benefits were denied on the grounds that the transaction was routed through Singapore for tax avoidance. The Singapore entity was not the beneficial owner of shares, and the taxpayer lacked commercial substance in Singapore. The I-T officer also denied the deduction of premium towards the cost of acquisition and invoked the General Anti Avoidance Regulations (GAAR).
On the other hand, Golden State Capital contended that it satisfied the conditions of the LOB clause in the tax treaty, the transaction was genuine, and the premium paid should be considered in computing the cost of acquisition of the shares. It stated that the sale of shares was not covered by GAAR provisions.
The key points of this order are as follows:
- Eligibility for the India-Singapore tax treaty: The ITAT in its order emphasized that tax treaty access cannot be denied to the taxpayer by invoking the doctrine of substance over form without considering the availability of the Tax Residency Certificate (TRC) and other corroborative evidence. Additionally, the satisfaction of the limitation of benefit (LoB) clause must be considered, as the Singapore entity had met the expenditure threshold.
- GAAR exemption: If the subject transaction is specifically exempt from GAAR, the I-T officer cannot use the doctrine of substance over form to deny the benefits of the tax treaty.
- Computation: The ITAT concluded that the premium paid for the acquisition of shares cannot be ignored when calculating the cost of acquisition of the shares purchased, which were sold during the year.
- DRP directions: The ITAT also stressed that the directions issued by the Dispute Resolution Panel (DRP) are binding on the I-T officer, and he cannot make disallowances on a new basis that contradicts the DRP’s directions.