Singapore entity not conduit as satisfies PPT / LOB conditions : Grants LTCG exemption under treaty

 The Hon’ble Income-tax Appellate Tribunal, Mumbai Bench (‘Tribunal’) recently held that long-term capital gains (LTCG) arising to Fullerton Financial Holdings Pte. Ltd., Singapore (‘the taxpayer’) on the sale of shares of Fullerton India Credit Company Limited (FICCL, India) to Sumitomo Mitsui Financial Group (Japan) are exempt from tax in India, as the gains qualify for exemption under Article 13(4A) and also satisfies the conditions prescribed in Article 24A (Principal Purpose Test (PPT) and Limitation of Benefits (LOB) clause) of the India–Singapore Double Taxation Avoidance Agreement (‘India–Singapore DTAA’).

Background:

• The taxpayer, an entity incorporated in Singapore in the year 2003 and part of the Temasek Group (wholly owned by the Government of Singapore), held shares in FICCL, an Indian company, acquired prior to April 1, 2017 as a long-term strategic investment.​ Apart from this investment, the entity held investment in various other entities.
• In 2021, the taxpayer sold its entire shareholding in FICCL to an unrelated third party (Sumitomo Mitsui Financial Group, Japan) and earned capital gains.​
• The taxpayer, being a resident of Singapore with a valid Tax Residency Certificate (TRC) and substantial annual operational expenditure in Singapore, claimed exemption from Indian taxation under Article 13(4A) of the India–Singapore DTAA, as the gains arose on shares acquired prior to April 1, 2017.​
• The Assessing Officer (AO) denied the treaty exemption, alleging the taxpayer was a shell/conduit entity lacking sufficient substance in Singapore, and invoked Article 24A (LOB and PPT conditions).​
• The Dispute Resolution Panel (DRP) upheld the AO’s order, and the taxpayer appealed to the Tribunal.​

Tribunal’s Observations and Decision:

• The Tribunal accepted that Fullerton Financial Holdings Pte. Ltd. was a tax resident of Singapore, supported by a valid TRC and confirmation from the Inland Revenue Authority of Singapore that its operational expenditure exceeded SGD 200,000 for relevant periods, thus satisfying the LOB threshold.​
• The Tribunal emphasized the taxpayer’s commercial substance, noting that the incorporation of the entity was supported by commercial reason, genuine strategic decisions and operational activities were conducted in Singapore. In reaching this conclusion, it relied on supporting evidence such as board minutes, financial statements, and independent auditor certifications, and held that the taxpayer was not a mere shell entity.
• The Tribunal clarified that treaty benefits cannot be denied absent a clear finding that the principal purpose of the arrangement was merely to obtain such tax benefits. The taxpayer’s transaction had bona fide commercial rationale, consistent with long-term business objectives.​
• The Tribunal rejected the AO/DRP’s view that management fees paid to group entities, absence of direct employees, and cross-charged expenses rendered the entity a shell or conduit. It noted that the management company of the FFH group houses the employees and the assets are held by the taxpayer was a common practice in the investment management industry. Further, held that the broad definition of “operational expenditure” under the DTAA covers such arrangements if substantiated by genuine commercial evidence and arms-length pricing.​
• The Tribunal applied Section 90(2) of the Income-tax Act, reaffirming treaty override, and held that the capital gains from the sale of FICCL shares are exclusively taxable in Singapore as per Article 13(4A), given that the taxpayer satisfied the PPT/LOB tests.​

The ruling reinforces that substantive Singapore-based holding structures with demonstrable commercial purpose and adequate expenditure can avail of treaty protection under the India–Singapore DTAA, even in the post-PPT regime. It highlights that substance, control, and intent, rather than mere operational form, govern treaty eligibility, and reaffirms that pre-April 2017 investments by genuine Singapore entities remain exempt from Indian capital gains tax under Article 13(4) of the India-Singapore DTAA.

It is also noteworthy that the Tribunal has not specifically examined the interplay between the PPT provisions and the guidance on the applicability of Circular No. 01/2025 in the context of grandfathered shares, an aspect that would be of interesting to note going forward.