2026 (2) TMI 260 - AT - Income Tax

Taxability of capital gains on share sale by Singapore resident company denied DTAA benefit; gains held taxable in India due to lack of substance

Taxability of capital gains on sale of equity shares/CCDs by a Singapore incorporated subsidiary was tested against entitlement to India-Singapore DTAA ... Taxability of capital gains arising on sale of equity shares/CCDs held by the assessee Singapore company - source rule - doctrine of substance over form - shell/conduit company interposed in Singapore to take the tax-advantage - assessee, a Singapore-incorporated wholly-owned subsidiary of a Hong Kong company (ultimately owned by a Chinese parent) - Whether assessee will be regarded as resident in Singapore for income-tax purposes? - assessee has invoked Article 13(4A) of India-Singapore DTAA to claim that the aforesaid capital gain on sale/transfer of equity shares is not chargeable to tax in India as the assessee company is resident of Singapore - entitlement or eligibility to tax benefit under India Singapore DTAA HELD THAT:- Route adopted by ultimate parent company in China of creating 100% subsidiary in Hong Kong and step down 100% subsidiary in Singapore i.e. the assessee company is to take benefit of India-Singapore DTAA. There are no capital gains tax in Singapore. There is no commercial purpose or economic substance in incorporating a company in Singapore to route investment except to take benefit /advantage under India-Singapore DTAA. Had the investments been made directly by ultimate Parent company at China and/or by immediate Parent company at Hongkong, the income tax on capital gains would have been payable in India. Thus, we hold that the assessee company was created for the principal purposes of taking a tax advantage under the India-Singapore DTAA, while otherwise there is no economic substance or commercial justification for routing investment through assessee company based at Singapore. Thus, in the instant case, LOB clause 1 of Article 24A of India Singapore DTAA is attracted. Assessee company does not have any office in Singapore. There are no employees employed by assessee. The assessee has not incurred any operating expenses to run its business such as internet, communication, travels, entertainment, repair and maintenance, salary, Directors Fee/Salary, Directors Meeting Fee, Directors Travel Costs, Visa Cost, Hotel Bills etc.. It is claimed that it has some arrangement with its consultant TMF, and it leases the office space as needed from its consultant. TMF is in the business of rendering accounting and reporting services as well rendering services in connection with filing of tax returns etc. On perusal of the income statement that there are two heads of expenses, firstly, Legal and Professional fee, and secondly loss on foreign exchange. It is explained that the said legal and professional fee are paid to TMF for accounting, reporting, management of accounts, audit assistant, tax filing etc., and/or to its Auditors. There are no other expenses incurred by the assessee. There are no employees of the assessee. The assessee has claimed that its Board of Directors Meeting’s were held in Singapore. Under the circumstances enumerated above, it could be said that the place of control and management of the assessee is not situated in Singapore. The assessee, under these circumstances, could not be said to be resident in Singapore. It is claimed that the assessee holds TRC issued by Singapore Revenue Authorities, and hence the assessee would be entitled or eligible to tax benefit under India Singapore DTAA.It is now well settled that mere holding of TRC is not sufficient. The assessee is merely a shell/conduit company interposed in Singapore to take the tax-advantage of India-Singapore DTAA to avoid paying tax in Indian jurisdiction. Thus, the assessee is a see through entity to take tax-advantage of India-Singapore DTAA. Singapore does not have capital gains tax on sale/transfer of shares. Thus, the arrangement of interposing assessee(assessee being wholly owned subsidiary of Hongkong based company which in turn is wholly owned subsidiary of Chinese Company which is global leader in manufacturing solar PV module and is also supplying solar PV modules to Renew Solar Energy (Karnataka) Limited for its 60MW(AC) solar power project) as Singapore Company to invest in India in equity shares/CCDs of Renew Solar Energy(Karnataka) Private Limited, India is an impermissible arrangement to take tax-advantage under India-Singapore DTAA, and treaty benefit shall not be available. Thus, based on our aforesaid discussions, we hold that the capital gains on sale/transfer of equity shares/CCDs shall be chargeable to income-tax in India by invoking source rule under the provisions of Income-tax Act, 1961. We are of the view that the capital gain arising on the sale of equity shares and CCDs in the instance case are chargeable to tax in India based on source rule, and the assessee shall not be eligible and entitled to avail treaty benefit under the India-Singapore DTAA. Thus, we do not find any merit in the contentions of the assessee. Issues: Whether capital gains arising on sale/transfer of equity shares and compulsorily convertible debentures (CCDs) held by a Singapore resident company are taxable in India or are exempt in India under Article 13(4A)/13(5) of the India-Singapore DTAA, and whether the assessee is entitled to DTAA benefits or is excluded by Article 24A (LOB) on the facts.Analysis: The Tribunal examined the claimant's tax residency evidence (TRC), board and bank records, audited financial statements, funding and group structure showing 100% ownership by a Hong Kong company and ultimate parent in China, lack of employees or independent office, minimal operating expenses other than legal/professional fees to a consultant, bank signatories resident outside Singapore, absence of corroborative proof of directors' physical presence in Singapore, and the commercial context including supply contracts between the ultimate parent and the Indian investee. The Tribunal applied Article 13(4A)/13(5) of the India-Singapore DTAA alongside Article 24A (LOB) and relevant domestic provisions (Sections 9 and 45) and considered Explanation 4 and 5 to Section 9(1)(i). It analysed whether the arrangement had commercial substance or was primarily arranged to obtain treaty benefits, applying doctrines of substance over form, treaty shopping, piercing the corporate veil and the source rule for taxing capital gains. The Tribunal found that the Singapore company was interposed by related Hong Kong/Chinese parents to route investment and obtain treaty advantage where Singapore levies no capital gains tax; that the assessee lacked independent funds, employees, premises, regular operating activities and substantive decision-making in Singapore; and that the TRC was not conclusive. On these facts Article 24A(1) and the deeming provisions regarding shell/conduit entities applied and precluded the benefits of Article 13(4A)/13(5). Consequently the Tribunal held the gains taxable in India under domestic law invoking the source rule.Conclusion: The assessee is not entitled to India-Singapore DTAA benefits under Article 13(4A)/13(5) because Article 24A (LOB) applies; the capital gains on sale/transfer of the equity shares and CCDs are chargeable to tax in India. (Decision against the assessee.)