The New Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that resident of a Contracting State is not entitled to the benefits of the DTAA (Double Taxation Avoidance Agreement) if its affairs were arranged with the primary purpose of taking advantage of those benefits, as stipulated by the Limitation of Benefit (LOB) clause in Article 24A(1) of the India-Singapore DTAA.
The ITAT clarified that a company qualifies as a shell or conduit company, thereby losing treaty benefits under Article 24A(2), if it has negligible or nil business operations or no real and continuous business activities in the contracting state. The holding of a Tax Residency Certificate (TRC) is not conclusive proof of residency; and tax authorities are entitled to pierce the corporate veil and examine the surrounding facts and circumstances to determine if the control and management of the company are genuinely exercised in that state and to deny benefits in cases of impermissible tax avoidance arrangements.
Where a treaty benefit is denied on the grounds of such an arrangement, the income shall be taxed based on the source rule under the domestic tax law, i.e., the Income-tax Act, added the Tribunal, while holding that the capital gain arising on the sale of equity shares and CCDs of the Indian company is chargeable to tax in India under the provisions of the Income-tax Act, based on the source rule.
Since the taxpayer (appellant) was found to be a shell/conduit company interposed in Singapore to take undue tax advantage of the India-Singapore DTAA, with no real economic substance or commercial justification for its establishment in Singapore, the ITAT ruled that the petitioner is not eligible to avail the benefits of the India-Singapore DTAA.
The Division Bench comprising Raj Kumar Chauhan (Judicial Member) and Ramit Kochar (Accountant Member) observed that the appellant company was interposed in Singapore for routing investment into Renew Solar Energy (Karnataka) Limited, India, whereas, the ultimate parent company in China, a global leader in manufacturing solar PV modules, was concurrently supplying these modules to the same Indian entity for its 60MW solar power project.
The Bench observed that the appellant had no employees, no conventional office, and incurred no operational expenses like electricity, internet, or travel; its main expenditures were professional fees to a consultant for administrative tasks and foreign exchange losses. Moreover, the majority of the directors and the authorized signatories for the bank account were non-residents of Singapore, and no cogent evidence was produced to prove that board meetings were held in Singapore.
Accordingly, the ITAT concluded that the control and management of the appellant were not exercised in Singapore, and the company was merely a shell/conduit entity created for the primary purpose of tax avoidance.
Briefly, the appellant, a company incorporated in Singapore in 2015, claimed to be a tax resident of Singapore. It is a wholly-owned subsidiary of Hareon Solar Co. Ltd., Hong Kong, which in turn is a wholly-owned subsidiary of Hareon Solar Technology Co. Ltd., China, the ultimate holding company. In July 2015, the appellant invested in equity shares and Compulsorily Convertible Debentures (CCDs) of an Indian company, M/s Renew Solar Energy (Karnataka) Pvt Ltd.
During the assessment year 2020-21, the appellant sold these investments to M/s Renew Solar Power Pvt Ltd., resulting in a long-term capital gain of Rs. 17.67 Crores, and claimed this gain as exempt from tax in India under Article 13 of the India-Singapore Double Taxation Avoidance Agreement (DTAA). The Assessing Officer (AO) denied the treaty benefit, assessing the income at Rs. 18.58 Crores against the returned income of Rs. 90.95 Lakh, a decision that was subsequently upheld by the Dispute Resolution Panel (DRP).
Appearances:
Advocate Ritesh Bajaj and CA Mamta Verma, for the Appellant/ Taxpayer
CIT M.S. Nethrapal, for the Respondent/ Revenue
