2023 (9) TMI 317 - AT - Income Tax

Appeal Success: Tribunal Invalidates Assessment Order, Grants Tax Benefits and Loss Carry-Forward to Singapore Resident.

The Tribunal partly allowed the appeal, ruling that the Final Assessment Order was invalid due to non-compliance with the Dispute Resolution Panel's ... Denial of tax treaty benefit due to lack of commercial substance in Singapore - Benefit of Article 13(4A) of the DTAA denied - capital gains earned on transfer of shares of DHFPL - directions of the ld. DRP rejected - as argued investments in DFHPL were made by the Appellant in 2016 and income arising on transfer thereof were specifically exempt from the purview of General Anti- Avoidance Rule as contained in Chapter X-A of the ITA read with Rule 10U(1)(d) of the Income-tax Rules, 1962 ('Rules') - as per AO scheme of arrangement employed by the Assessee is one of tax avoidance through treaty shopping mechanism - Whether the affairs of the Assessee were controlled from outside Singapore ? - HELD THAT:- 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. 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 goes to prove that the Assessee is a tax resident of Singapore and is independently carrying on its business activities in Singapore. All these documents and behavior of the Assessee collectively go to prove that affairs of the Assessee company were not controlled from outside Singapore. Hence the ld. AO erred in not following the directions of the ld. DRP in this regard thereby making the final assessment order as bad in law. AO had confirmed that no interest was paid by the Assessee on the loan to BVI entity as the loan was interest free - AO had observed that however, consultancy charges were paid to related entities of BVI entity and hence the benefit has been passed on by the Assessee company to BVI entity. We find from the financials of the Assessee company for the year under consideration, absolutely no consultancy charges had been paid to any entity during the year and there is no debit towards consultancy charges paid in the financials. The ld. AO had considered the payment of consultancy charges made by the Assessee in the earlier years and linked the same to the year under consideration. 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. Denial of deduction for premium component of cost of acquisition of shares of DFSPP - DRP observed that from the facts of the case, the amount paid towards premium is Rs. 95.45 and Rs. 90 on the two dates of transfer. Accordingly, the observation of the AO that there is a huge variation in the share premium is not correct. AO is directed to consider the premium on the shares if no other anomaly is observed. As per the provisions of section 144C(13) of the Act, the ld. AO was prohibited from granting any opportunity of being heard to the Assessee, which included any document requisition from Assessee, post directions of ld. DRP. In the instant case, the ld. AO proceeded on such basis himself and never sought any further piece of information subsequent to the directions of the ld. DRP and framed the final assessment order. Hence it could be safely concluded that there was no anomaly in the records before the ld. AO which would enable him to draw adverse conclusion on the issue of allowability of long term capital loss on sale of shares. In this factual background, we hold 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 consideration, then there is absolutely no case for the revenue to deny the benefit of such cost (including premium component) as deduction. Hence we direct the ld. AO to allow benefit of carry forward of long term capital loss to the Assessee. Applicability of General Anti Avoidance Rules (GAAR) - As we find that the same was already adjudicated by this Tribunal in Assessee’s sister concern case in Reverse Age Health Services Pte Ltd [2023 (2) TMI 1008 - ITAT DELHI] as observed that in the case of sister concern i.e. The Golden State Capital Pte Ltd (assessee herein before us), tax avoidance has been established for the same transaction conclusively. Hence it could be seen that the facts adjudicated by this Tribunal in the Reverse Age case are identical to the facts of the assessee before us. Issues Involved:1. Validity of the Final Assessment Order.2. Denial of benefits under the India-Singapore Double Taxation Avoidance Agreement (DTAA).3. Disallowance of premium paid for calculating the cost of acquisition of shares.4. Levy of interest under section 234D and initiation of penalty under section 270A of the Income Tax Act.Summary:1. Validity of the Final Assessment Order:The assessee argued that the Final Assessment Order dated 28.06.2022 was not in conformity with the Directions dated 27.04.2022 issued by the Dispute Resolution Panel (DRP) and thus liable to be quashed. The Tribunal noted that the AO did not follow the DRP's directions, particularly regarding the verification of whether the assessee's affairs were controlled from outside Singapore and whether any benefit was passed on to the parent company. The Tribunal held that the AO's failure to adhere to the DRP's directions rendered the Final Assessment Order bad in law.2. Denial of benefits under the India-Singapore Double Taxation Avoidance Agreement (DTAA):The AO denied the assessee the benefits of the India-Singapore DTAA, claiming the assessee was a conduit entity with no economic substance in Singapore. The Tribunal found that the assessee had provided sufficient evidence, including a Tax Residency Certificate (TRC), financial statements, and tax assessment orders from Singapore, to prove that it was a tax resident of Singapore and entitled to treaty benefits. The Tribunal also noted that the AO's conclusions were inconclusive and based on assumptions. Consequently, the Tribunal directed that the short-term capital gains of Rs. 1,92,63,473/- shall not be taxable in India.3. Disallowance of premium paid for calculating the cost of acquisition of shares:The AO disallowed the premium paid by the assessee at the time of acquiring shares of Dr. Fresh SEZ Ph 1 Pvt. Ltd. The Tribunal observed that the AO's basis for disallowance was not supported by any requirement under the Income Tax Act to furnish a valuation report. The Tribunal held that the premium paid was a legitimate part of the cost of acquisition and directed the AO to allow the benefit of the carry-forward of long-term capital loss of Rs. 3,16,74,056/-.4. Levy of interest under section 234D and initiation of penalty under section 270A of the Income Tax Act:The Tribunal did not find any substantial discussion on these points in the provided judgment summary, and they were not pressed by the assessee during the hearing. Hence, these grounds were dismissed as not pressed.Additional Grounds:The Tribunal admitted additional grounds raised by the assessee, which argued that the AO erred in denying the benefit of Article 13(4A) of the DTAA concerning capital gains earned on the transfer of shares. The Tribunal found that the assessee's transactions were bonafide and not a scheme for tax avoidance. The Tribunal also referred to a similar case in Reverse Age Health Services Pte Ltd vs. DCIT, where the applicability of General Anti Avoidance Rules (GAAR) was discussed, and concluded that the treaty benefits could not be denied to the assessee.Conclusion:The Tribunal partly allowed the appeal, directing the AO to grant the benefits under the India-Singapore DTAA and to allow the carry-forward of the long-term capital loss. The Final Assessment Order was held to be bad in law for not adhering to the DRP's directions.