Under Article 13(4A) of the India–Singapore DTAA, capital gains from the transfer of shares of an Indian company acquired by a Singapore resident before 1 April 2017 are taxable only in Singapore. Article 13(5) similarly provides that capital gains from transfer of any other property not covered specifically under any other Para of the said article, including Compulsorily Convertible Debentures (CCDs), are taxable in the country of residence of the transferor, i.e., Singapore. However, Article 24A denies these treaty benefits to a shell or conduit company that has negligible business operations or lacks real and continuous business activities in Singapore, even if the prescribed expenditure threshold specified therein is satisfied.
In a recent ruling, the Delhi ITAT has held that a Singapore-incorporated entity, which lack commercial and economic substance in Singapore and was interposed primarily to obtain treaty benefits, will not be entitled to capital gains exemption under the India–Singapore DTAA. The Tribunal ruled that mere possession of a Tax Residency Certificate is not conclusive, denying treaty benefits on account of the Limitation of Benefits provisions, and held that the capital gains arising from the sale of shares and CCDs of an Indian company were taxable in India under the source rule.
The assessee, a Singapore-incorporated company (April 2015), is a wholly owned subsidiary of a Hong Kong entity, ultimately owned by a Chinese parent engaged in solar PV manufacturing. It invested in equity shares and CCDs of an Indian company in FY 2015–16 and sold them in June 2019, earning long-term capital gains. The assessee claimed exemption under Article 13 of the India–Singapore DTAA based on a valid TRC. The AO denied treaty benefits, holding the assessee to be a shell entity lacking commercial substance, with control and beneficial ownership outside Singapore, and alleged treaty shopping.
The assessee contended that it is a tax resident of Singapore, supported by a valid TRC. It argued that it is an investment holding company with key decisions taken at board meetings held in Singapore, where directors were physically present, establishing Singapore as its place of effective management. It further contended that it was not a shell or conduit entity, having satisfied the prescribed expenditure threshold under Article 24A. The assessee relied on India–Singapore DTAA to contend that capital gains should be taxable only in Singapore (where capital gains on shares are not taxed under domestic law), and that DTAA provisions more beneficial than the IT Act should apply.
The Tribunal found that the assessee was entirely funded by its Hong Kong parent, had negligible assets, and derived income mainly from investment disposals and interest, with no independent operations. It noted that the Chinese ultimate parent directly supplied PV modules to the Indian investee company and was contractually committed to invest, indicating no commercial necessity to route investments through the Singapore entity. On substance, the Tribunal observed absence of employees, conventional office premises, and routine operating expenses, with control and key decisions resting with non-resident directors and no reliable evidence of board meetings in Singapore. It held that a TRC is not conclusive and, based on surrounding facts, concluded that effective management was not in Singapore for treaty purposes. The Tribunal held that the structure was primarily aimed at availing treaty benefits and treated the assessee as a shell/conduit entity. Further, the expenditure incurred by assessee was viewed as merely compliance related. Accordingly, the capital gains were held taxable in India under the source rule.
The ruling reaffirms that mere possession of a TRC is not sufficient to claim benefits under a tax treaty. It underscores that substance over form prevails, and that treaty benefits can be denied where an entity lacks real commercial substance, effective control and management in the claimed jurisdiction, or is interposed primarily for obtaining tax advantages. The decision also reiterates the applicability of the Limitation of Benefits (LOB) clause under the India–Singapore DTAA.
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