TaxTMI 
TaxTMI 
2023 (9) TMI 317
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....r AY 2018- 19, is bad in law and liable to be quashed. 2. That the Final Assessment Order passed by the AO is not in conformity with the Directions dated 27.04.2022 issued by the Dispute Resolution Panel ("DRP") and is therefore liable to be quashed being in gross violation of the strict mandate of section 144C(13) of the ITA. 3. That the AO has demonstrated most callous approach while conducting the verification as directed by the DRP on very specific issues, thereby transgressing his authority under the ITA, and rendering the Final Assessment Order bad in law and liable to be quashed. 4. That the verification carried out by the AO in the Final Assessment 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....
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....n establishing that the business of the Appellant was controlled from outside Singapore, despite evidence to the contrary as analysed and recorded by the DRP in its Directions. 14. That the observation of the AO in Final Assessment Same as a Order that the business activities of the Appellant were not conducted from Singapore since no expenses on account of electricity, of electricity, employee salary, travelling. communication etc. were incurred and reported by the Appellant during AY 2018-19 is based on selective reading of financial statements of the Appellant and is therefore perverse. 15. That the over-emphasis by the AO on lack of expenses like electricity, employee salary, travelling, communication etc., 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-à-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 ....
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....HPL 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"). 24. That the AO erred in denying the benefit of the DTAA to the Appellant, disregarding that the threshold for prevention of fiscal avoidance as contained under Chapter X-A of the ITA was lower than that contained in the DTAA. 25. That the AO erred in failing to appreciate that in terms of section 90(2) of the ITA, the ITA to the extent it is more beneficial, even issues in relation to fiscal avoidance, will be applicable over the DTAA. 26. That the AO erred in denying the Appellant the benefit of Article 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 Appel....
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....f the Assessee i.e Red Cap Trading Ltd is situated in British Virgin Islands (BVI). The beneficiary of the Assessee company is Red Cap Trading Ltd, holding company of the Assessee. Red Cap Trading Ltd is tax resident of BVI. 6. A basic query was raised by the ld. AO to explain the commercial rationale behind the creaton of the Assessee company and also to prove with evidence as to whether the Assessee was engaged in real economic activity in Singapore. In response to that, the Assessee submitted that it was incorporated for the purpose of investing in various kinds of assets for generating profits through capital appreciation, dividends etc. The Assessee further stated that it holds valid TRC in Singapore and has carried out sale of securities during the year under consideration. It also 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 dis....
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.... and in DHFPL from 2016 for 126317 shares, before they were all transferred on 02.01.2018. It was pleaded vehemently that transactions of making investments and sale thereon were bonafide transactions and Assessee had not employed any scheme for tax avoidance through treaty shopping mechanism as alleged by the ld AO. The ld AO had alleged that there is lack of beneficial ownership at the level of the Assessee just due to the fact that the proceeds from sale of shares of DFHPL and DFSPPL have been used to repay the loans obtained by the Assessee from its holding company. In this regard, the Assessee submitted that the settlement agreement entered by the Assessee with the buyer of the shares proves beyond doubt that the Assessee is a beneficial owner of the shares. Further, it was pointed that TRC issued by Singapore 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 22....
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....orders passed by Revenue authorities in Singapore for last three years. 10. With regard to the observation made by the ld AO that a complex scheme of arrangement has been crafted and executed to utilize the tax advantages provided in India-Singapore DTAA, the assessee submitted a crucial fact of settlement agreement entered on 02.01.2018 between Mr. Sumeet Nanda, Mr. Puneet Nanda, Ms. Shikha Nanda, Mr. Ritesh Kumar Mittal, Dr. Fresh Assets Ltd, The Golden State Pte Ltd (Assessee herein before us), Reverse Age Health Services Pte Ltd, Mr. V. C. Burman, Mr. Abhay Kumar Aggarwal, Mr. Ajay Kumar Marwah, Mr. Arun Gupta, Mr. Pankaj Bharadwaj, Ms. Vasudha Mehra, Mr. Atul Bansal, VIC Enterprises Ltd, New Age Capital Services Pvt. Ltd, Burman Finvest Pvt. Ltd, Touchstone Fund Advisors Pvt. Ltd, Burman GSC Estate Pvt. Ltd, Dr. Fresh Healthcare Pvt. 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 Tr....
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....e following conditions are satisfied:- i. The affairs of the company are arranged with the primary purpose to take advantage of the benefit available in Article 13(4A) ii. The resident of contracting state (i.e. Singapore in the present case) is a shell or conduit company. A resident of Singapore is deemed to be a shell or conduit company if the annual expenditure on operations in that contracting state (i.e. Singapore in the present case) is less than SGD 200000 in Singapore or Rs. 50,00,000/- in India, as the case may be, for each of the 12 month periods in the immediately preceding period of 24 months from the date on which the capital gains arose. 13. It was submitted that both the aforesaid conditions are not satisfied in the instant case. The Assessee, as stated earlier, was incorporated in 2009 in Singapore as an investment company 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 ho....
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.... Rs. 3,16,74,056/- in the return. It is also pertinent to note that the entire investment made in DFHPL and DFSPPL at a premium were duly reflected in the audited balance sheet of the Assessee company and which were also part of tax assessments in Singapore. 15. The ld DRP appreciated the contention of the Assessee and held that the observation made by the ld AO that affairs and governance structure of the company were managed just to take benefit of treaty, as inconclusive. The Assessee is regularly engaged in the business for last many years and the ld AO has not brought any incidence showing that the management of affairs of the company were carried out from a place outside Singapore. Further, Article 24A of India-Singapore DTAA is a deeming provision requiring strict construction and unless it is proven otherwise, the denial of TRC may not be 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 Internationa....
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....ar as first direction given by ld DRP (supra). With regard to second direction given by ld DRP, the ld AO observed that the Assessee company did not pay any interest on loan to BVI entity as the loan was interest free, but other benefits were provided to the other entity in the form of consultancy fee through related party entities, which in turn were related to BVI entity. With regard to non-grant of deduction for premium component in the cost of acquisition of shares, the ld AO observed that Assessee has not submitted any documentary evidence like valuation report to justify the share premium on both the transaction of share acquisition. Accordingly, the share premium component in both the transaction was not considered by the AO. 19. The ld. AR filed written submissions on 29.11.2022. The ld. DR also filed his written submissions dated 06.12.2022. 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....
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....rtunity 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. c) We find that the ld. DRP had directed the ld. AO to examine two aspects before framing the final assessment 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 fro....
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..... 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. d) For the second question, the ld. AO had confirmed that no interest was paid by the Assessee on the loan to BVI entity as the loan was interest free. The ld. 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. 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 cla....
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....ditional grounds raised by the Assessee and other arguments advanced by both the sides on the applicability of General Anti Avoidance Rules (GAAR), we find that the same was already adjudicated by this Tribunal in Assessee's sister concern case in Reverse Age Health Services Pte Ltd vs DCIT in ITA No. 1867/Del/2022 dated 17.02.2023 for Asst Year 2018-19. Infact the Assessing Officer in the case of Reverse Age Health Services Pte Ltd for Asst Year 2018-19 in page 5 of his order thereon had 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. The operative portion of the decision of 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....
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....able tax being levied in any one of the Contracting States. 78. The Act recognized and gives effect to the DTAAs. Section 90 (2) of the Act stipulates that in case of a non-resident taxpayer with whose country India has a DTAA, the provisions of the Act would apply only to the extent the same are more beneficial than the provisions of such DTAA. Accordingly, the taxability of income derived by petitioner would governed by the provisions of India-Singapore DTAA to the extent at it is more favourable than the Act. 79. Section 90(4) of the Act provides that a non-resident taxpayer to whom a DTAA applies, shall not be entitled to claim any relief under DTAA unless a certificate of it being a resident (i.e. Tax Residency Certificate) of such country is obtained from the Government of that country. Section 90(4) of the Act clarifies that a non-resident taxpayer is 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 ....
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.... Supreme Court emphasised that the tax authorities were obliged to grant tax treaty relief to Mauritius entities so long as they were tax resident in Mauritius as confirmed by the Mauritius Revenue Authorities and that this was the only condition required to be satisfied to claim treaty relief; that there were no other provisions either in the domestic law or the tax treaty that permitted the tax authorities to exercise any discretion in disregarding the provisions of the treaty. The relevant portion of the Supreme Court judgment in Union of India v. Azadi Bachao Andolan (supra) is reproduced hereinbelow: - "9 Sometime in the year 2000, some of the income tax authorities issued show cause notices to some FIIs functioning in India calling upon them to show cause as to why they should not be taxed for profits and for dividends accrued to them in India. The basis on which the show cause notice 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 ot....
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....oreign enterprises and offshore activities. Some of them favour treaty shopping for outbound investment to reduce the foreign taxes of their tax residents but dislike their own loss of tax revenues on inbound investment or trade of non-residents. In developing countries, treaty shopping is often regarded as a tax incentive to attract scarce foreign capital or technology. They are able to grant tax concessions exclusively to foreign investors over and above the domestic tax law provisions. In this respect, it does not differ much from other similar tax incentives given by them, such as tax holidays, grants, etc. 123. Developing countries need foreign investments, and the treaty shopping opportunities can be an additional factor to attract them. The use of Cyprus as a treaty haven has helped capital inflows into eastern Europe. Madeira (Portugal) is attractive for investments into the European Union. Singapore is 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"....
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....ia v. Azadi Bachao Andolan (supra). 88. Subsequently, the Supreme Court, in Vodafone International Holdings B.V. (supra) reiterated the law in Union of India v. Azadi Bachao Andolan (supra) and held that what is rightly not acceptable is the use of artificial devices to avail treaty benefits, resulting in double non-taxation. The Supreme Court in the said judgment emphasised that in view of Circular No. 789 dated 13th April 2000, the TRC certificate is sufficient evidence to show residence and beneficial interest/ownership and the Revenue cannot at the time of sale/disinvestment/exit from such FDI, deny benefits of the DTAA. 89. In the Finance Bill, 2013 as introduced in the Lok Sabha on 28th February, 2013, the Union of India sought to insert sub-Section 5 in Section 90 of the Act to stipulate precisely what the learned counsel for the respondent had argued namely that TRC shall be a necessary eligibility condition but shall not constitute 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 ....
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....ter-alia, is entered into, or carried out by means or in a manner which is not ordinarily employed for bona fide purposes." 15. However, as per section 101 of the ITA, domestic GAAR cannot be pressed into operation for denial of a tax benefit, where the case of an assessee falls within one of the conditions prescribed under Rule 10U of the IT Rules 1962. Chapter X-A not to apply in certain cases, Rule 10U(1)(a) read as under :- "an arrangement where the tax benefit in the relevant assessment year arising in aggregate, to all parties to an arrangement does not exceed the sum of Rs. 3 crores". 16. Further Rule 10 U (1) (d) provides :- "any income accruing or arising to or deemed to accrue arise to or received or deemed to be received by any person from transfer of investments made before the first day of April, 2017 by such person." 17. In the light of the aforementioned relevant provisions and rules, in the case in hand the short term capital gain is Rs. 1,92,63,473/- 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 cu....