Income Tax Appellate Tribunal - Delhi
Thr Infrastructure Pte Ltd, Gurgaon vs Dcit, Cir.-3(1)(1), Intl Tax, New Delhi on 12 May, 2023
THE INCOME TAX APPELLATE TRIBUNAL
DELHIBENCH 'D', NEW DELHI
Before Sh. Saktijit Dey, Judicial Member
Dr. B. R. R. Kumar, Accountant Member
ITA No. 1915/Del/2022 : Asstt. Year : 2017-18
THR Infrastructure Pte. Ltd., Vs DCIT,
C/o Aakash Uppal, BDO India LLP, Circle-3(1)(1),
The Palm Springs Plaza, Officer No. International Taxation,
1501-8, 15th Floor, Sector-54, Golf New Delhi-110002
Course Road, Gurgaon, Haryana-122001
(APPELLANT) (RESPONDENT)
PAN No. AACCF0512B
Assessee by : Sh. Ajay Vohra, Sr. Adv.
Revenue by : Sh. Gangadhar Panda, CIT-DR
Date of Hearing: 14.02.2023 Date of Pronouncement: 12.05.2023
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order dated 29.07.2022 passed by the AO u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961.
2. Following grounds have been raised by the assessee:
"1. On the facts and circumstances of the case and in law, the final assessment order ('Order') passed by the Deputy Commissioner of Income Tax, International Taxation, Circle 3(1 )(1), Civic Centre, New Delhi ('the Ld. AO') and directions passed by the Dispute Resolution Panel-2, New Delhi ('the Ld. Panel') is erroneous on facts and is bad in law.
2. The Ld. AO and Ld. Panel has grossly erred on facts and in law by denying the exemption from capital gain tax arising on sale of Compulsory 2 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
Convertible Debentures (CCDs) by alleging that the Appellant is not eligible for the beneficial provisions of Double Taxation Avoidance Agreement (DTAA) entered between India and Singapore.
2.1 The Ld. AO and Ld. Panel basis own surmises and conjectures has grossly erred on facts and in law in denying the beneficial provisions of DTAA between India and Singapore without appreciating that the Appellant has duly furnished a Tax Residency Certificate ('TRC') obtained from the Singapore Revenue Authorities evidencing its residential status of Singapore and being entitled to avail the DTAA benefits.
2.2 The Ld. AO and the Ld. Panel has grossly erred on facts and in law by alleging that the Appellant lacks economic substance in Singapore as per the Limitation of Benefit (LOB) clause in India-Singapore DTAA and denying the DTAA benefit without appreciating that the Appellant fulfills all conditions of LOB clause as prescribed under the DTAA.
2.3 The Ld. AO has grossly erred in ignoring the facts that the Appellant has obtained all necessary approvals and complied with necessary filings in reference to impugned transaction of CCDs issued by Fortis Hospotel Limited (FHTL) with regulatory authority i.e. RBI without any inquiries/objections being raised by the regulatory body.
3. The Ld. AO and the Ld. Panel has grossly erred on facts in concluding that the transaction of transfer of CCD lacks commercial rationale, without appreciating the fact (i) it is in pursuant to the put option clause embedded in the investment agreement (ii) it is in view of the restrictions imposed by the Haryana Urban Development Authority (HUDA).
4. The Ld. AO and the Ld. Panel has grossly erred on facts and in law by alleging that the control and management of the Appellant does not lie in Singapore and the Appellant Company is a part of an India centric venture which is effectively controlled and managed from India.3 ITA No. 1915/Del/2022
THR Infrastructure Pte. Ltd.
4.1 The Ld. AO and the Ld. Panel has erred on facts in alleging that the control and management of the Appellant lies in India since the directors of the Appellant were Indian residents without appreciating that both the directors were foreign residents and treated as non-residents in India for tax purposes.
4.2 The Ld. AO and the Ld. Panel has erred on facts in alleging that control and management of the Appellant lies in India merely on the basis that the directors of the Appellant were also directors of an Indian company, without appreciating the following factors:
a. All the decisions of the Appellant Company were taken outside India by the directors, who were non-resident in India.
b. In a Multi-Global entity set-up, it is a general practice to have common directors in the companies incorporated in two or more jurisdictions.
c. No supporting document has been produced by the Ld. AO in alleging that decisions are taken in India by the Directors of the Appellant.
4.3 The Ld. AO failed to appreciate that the directors of the company during the relevant year were non-
residents, stationed outside India and the board meetings were also held outside India and thus place of effective management of the Appellant during the year under consideration was not in India, hence Appellant cannot be said to be resident in India during the year under consideration.
5. The Ld. AO and the Ld. Panel has grossly erred on facts and in law by ignoring the documents furnished in connection with sale of CCDs through which the sale consideration of INR 2444 per CCD's can be substantiated.
5.1 The Ld. AO has grossly erred in alleging the fair market value was lower of CCD without appreciating that the same is backed-up with the 4 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
report of a reputed independent third valuer namely M/s Duff and Phelps.
5.2 The Ld. AO has not appreciated that the sale consideration on INR 2444 per CCD has itself been accepted by the Ld. AO while computing the capital gain on sale of CCD by the Appellant.
5.3 The Ld. AO failed to appreciate that the Ld. Panel has not provided any observation or direction to verify the fair market value of CCD.
6. The Ld. AO and the Ld. Panel grossly erred on facts and in law in treating the transaction of sale of CCD as sale of equity instruments, without appreciating that the Appellant has never claimed it as an equity instrument and has always claimed that CCDs are debt unless converted into equity.
6.1 The Ld. AO failed to appreciate that, in any case, both sale of equity as well as debt instruments were not taxable in India prior to 1st April 2017 as per Article 13(4) of DTAA between India & Singapore.
7. That the Ld. AO has grossly erred in law by enhancing the income which was not subject matter of dispute raised in draft assessment order and before Ld. Panel.
7.1 The Ld. AO has grossly erred in law by computing surcharge and cess on total assessed income of the Appellant, without appreciating that (a) interest income on CCDs and (b) Fee for Technical Services are offered to tax as per beneficial tax rate stipulated in India - Singapore DTAA and such rates shall not be further increased by surcharge & cess.
7.2 The Ld. AO has erred in computing the tax liability as annexed to final assessment order by denying beneficial tax rate as stipulated in DTAA on
(a) interest income on CCDs and (b) Fee for Technical Services, which was never subject matter of discussion by AO either at the time of passing the draft assessment order or by DRP during the proceedings before the Ld. Panel.
5 ITA No. 1915/Del/2022THR Infrastructure Pte. Ltd.
8. Without prejudice to the above, the Ld. AO has erred in computing the final tax liability on capital gains arising from sale of CCD as annexed to final assessment order by applying the tax rate of 20% (instead of 10%) as stipulated in section 115 read with section 48 of the Income tax Act (Act) without appreciating that both sale consideration and purchase consideration of CCD are denominated in Indian currency (INR) and the case of the Appellant gets covered by section 112 of the Act which provides tax rate @ 10% and not by section 48 of the Act read with tax rate scheduled in the Finance Act which provides tax rate @ 20%.
9. The Ld. AO has erred in computing interest under section 234C of the Act on the tax demand, without appreciating that the same is applicable on the returned income and not on the assessed income.
10. The Ld. AO has erred in initiating penalty proceedings under section 270A of the Act for under- reporting/mis-reporting of income without appreciating that the Appellant has duly reported this transaction of capital gain arising on sale of CCD as exempt in the income tax return form."
3. RHT Heath Trust ('RHT"), a business trust was constituted on 29 t h July, 2011 and registered on 25 t h September, 2012 under the laws of Singapore. The assessee, formerly known as Fortis Global Healthcare Infrastructure Pte. Ltd. ('FGHIPL') is wholly owned subsidiary of RHT.
4. RHT Trust formed a wholly owned subsidiary, i.e., the assessee Company (FGHIPL) now known as "THR Infrastructure Pte. Ltd." The assessee Company, incorporated in Singapore is primarily in the business of providing consultancy and management services and also act as an investment holding company for RHT Trust. In turn, FGHIPL (i.e., the COMPANY) wholly owns Fortis Healthcare Management Limited (FHML), an 6 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
Indian incorporated company. Further, as per the laws in Singapore, all assets of the Trust has to be held by the trustee manager directly in its capacity as trustee-manager or indirectly through one or more holding subsidiaries. Accordingly, RHT Trust made all the investments via the Assessee, being its 100% subsidiary through money raised from IPO and debts/ loans obtained by the Assessee.
5. The Assessee had subscribed to, inter alia, 87,04,000 CCDs of face value of Rs.1,000 each issued by Fortis Hospotel Limited ("FHTL") in October 2012 for an aggregate consideration of Rs. 870,40,00,000/-. The subscription to CCDs issued by FHTL was made by the Assessee with due intimation to Reserve Bank of India ("RBI") which was duly acknowledged and approved by the RBI vide letter dated 13th August, 2013 (enclosed at pages 116 to 117 of the paper book Volume 1).
6. 51% of the said CCDs (44,39,040 CCDs) were sold during the previous year relevant to assessment year under consideration to Fortis Healthcare Limited ("FHL") for aggregate sale consideration of Rs.1099,98,40,802/-. The surplus on sale amounting to Rs.656,08,00,802/- was claimed not liable to tax in India, in terms of Article 13(4) of the Tax Treaty.
6. In the draft assessment order, the assessing officer alleged that:
(1) No basis of adopting fair market value at the time of issue of CCDs to the Assessee in the year 2012 was furnished by the Assessee during the course of assessment proceedings;7 ITA No. 1915/Del/2022
THR Infrastructure Pte. Ltd.
(2) No commercial reason had been provided by the Assessee for the purpose of transfer of CCDs within 5 years as CCDs were to be converted into Equity instrument within 18 years;
(3) No commercial basis was provided for undertaking the transaction of transfer of CCDs by the Assessee to FHL; (4) Fair market value of CCDs and sharp rise in the value adopted at the time of disposal of CCDs remained unsubstantiated by the Assessee;
(5) For denial of benefit of the India-Singapore DTAA, the assessing officer alleged that -
(a) Control and Management of the Assessee does not lie in Singapore but lies in India;
(b) The Assessee was a conduit entity interposed in Singapore primarily to take the benefit of India - Singapore DTAA:
(c) Tax Residency Certificate is not sufficient to establish tax residency if there is no economic substance in the entity;
(d) The transfer of CCDs was a scheme of tax avoidance.
7. The Assessing Officer brought to tax the surplus on sale of CCDs as "income from other sources".
8. The Assessee filed objections before the Dispute Resolution Panel ("DRP") objecting to action of the Assessing Officer re- characterizing the surplus on sale of CCDs as "income from other sources" and in denying the exemption with respect to capital gains holding that the Assessee was not entitled to the benefit of the Tax Treaty.
8 ITA No. 1915/Del/2022THR Infrastructure Pte. Ltd.
9. The ld. DRP modified the draft assessment order to the extent of holding that the surplus earned on sale of CCDs was in the nature of "capital gains" and not "income from other sources". Furthermore, the DRP directed the Assessing Officer to look into the question of valuation / cost of acquisition of CCDs.
10. Pursuant to the direction of ld. DRP, the Assessing Officer brought to tax the surplus on sale of CCDs as income under the head "capital gains" and levied tax thereon @10% under section 112 of the Act denying the benefit of the Tax Treaty but accepting the valuation adopted by the Assessee.
11. The grievance of the Assessee raised by grounds of appeal Nos. 2 to 6 is thus limited to the denial of the exemption under Article 13(4) of the Tax Treaty qua capital gains earned on sale of CCDs.
12. Facts relevant to the adjudication of the case are as under:
9 ITA No. 1915/Del/2022THR Infrastructure Pte. Ltd.
The structure of the assessee group is below:
• RHT was listed on the Singapore Stock Exchange on 19th October, 2012 with a business proposition to invest in medical and healthcare assets and services services. RHT Trustee Manager Pte. Ltd. (Trustee Manager) acts as the th Trustee 10 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
Manager of RHT whereas Fortis Healthcare International Limited (FHIL) is the Sponsor of RHT and holds 28% units in RHT. The list of other substantial unit holders of the Trust as of 26 June 2013 is as under-
S. Name o f the Unit ho lde r No. o f Units %
No.
1 Fortis He althcare Internatio nal 220,676,944 28.00
Limite d
2 DBS Nominees Pte . Ltd. 100,777,514 12.79
3 Raffles Nominees ( Pte .) Ltd. 87,805,600 11.14
4 Citibank Nominee s S ingapo re Pte . 85,192,400 10.81
Ltd.
5 HSBC (S ingapore ) Nominees Pte. 37,194,655 4.72
Ltd.
6 DBSN Services Pte . Ltd. 24,901,075 3.16
• the Assessee had made investments in various entities
operating in the healthcare segment. The list of
investments made by the Assessee directly or through subsidiaries is tabulated hereunder:
Investments made directly:
S. No. Company Name Proportion of
Ownership
interest
1 Fortis Health Management Limited 100
2 International Hospital Limited 100
3 Religare Healthtrust Services Pte. Ltd. 100
Investment held through subsidiary:
S. Company Name Proportion of
No. ownership interest
1 Hospitalia Eastern Private Limited 100
2 Fortis Hospotel Limited 49
11 ITA No. 1915/Del/2022
THR Infrastructure Pte. Ltd.
3 Escorts Heart and Super Speciality 1 0 0
Hospital Limited
B. Subscription to CCDs and subsequent sale thereof:
• At the time of listing RHT on Singapore Stock Exchange, Fortis Healthcare Management Limited (FHML) owned 49% equity interest in FHTL, an Indian incorporated company. FHTL holds the Shalimar Bagh Clinical Establishment and the Gurgaon Clinical Establishment. The land on which Gurgaon Clinical Establishment is situated was subject, inter alia, to a condition imposed by Haryana Urban Development Authority (HUDA) that FHL holds at least 51% of the issued and paid-up equity share capital of FHTL or of the land, as indicated in HUDA's letter dated 3 January 2006. A copy of the letter issued by HUDA dated 03 January 2006 is enclosed at pages 103 104 to Paper book - Volume I. It may be noted that while the letter issued by HUDA in 2006 was issued to Fortis Health & Multi Specialty Hospital whereby it approved the ownership of land to be transferred in the hands of Oscar Boitech Private Limited, it name was later changed to Fortis Hospotel Limited i.e. FHTL.
• FHML, FHL and FHTL entered into a Shareholders Agreement (FHTL Shareholders Agreement) on 17 September 2012 to govern the relationship between FHL and FHML as shareholders of FHTL. Pursuant to FHTL Shareholders Agreement, FHML has a call option (FHTL Call Option) to the remaining 51% of the issued equity shares in FHTL which are held by FHL. The FHTL Call Option is 12 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
exercisable any time FHL is entitled to transfer its 51% shareholding interest after having obtained the necessary approvals, including approval from HUDA. In the event where the FHTL Call Option is not exercised within 5 years from the date of the shareholders agreement (i.e. 17 September 2012), FHML will be entitled to exercise a put option (FHTL Put Option) requiring FHL to acquire FHML's 49% shareholding in FHTL. Refer page 17 of the Paper Book Volume-1.
• It was originally intended that RHT Group ultimately holds 100% equity interest in FHTL by acquiring remaining 51% equity interest in FHTL. For this purpose, FHL had submitted an application on 12 June 2013 to HUDA for approval to transfer the 51% equity interest in FHTL to FHML. Copy of said letter is enclosed as per pages 105- 108 to Paper book - Volume I. Despite repeated follow ups, approval has not been granted. As the requirement for FHL to hold at least 51% in FHTL was imposed from HUDA in its letter dated 3 January 2006, a waiver of this condition or approval from HUDA is required before FHL could sell its 51% interest in FHTL to FHML. The Assessee would like to categorically mention before your Honour that FHL was continuously following up with HUDA to accord their approval so that FHL could transfer its 51% shareholding in FHTL in favour of FHML so the condition with respect to maintenance of shareholding could be maintained and complied with, however after much follow-ups for around 2 years and upon no response from HUDA, the Assessee 13 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
decided to transfer the CCD's held in FHTL in favour of FHL to achieve the following objective-
(A) 5 year condition for exercise FHTL put option was drawing near, (B) that condition as imposed by HUDA with respect to minimum shareholding could be maintained.
• Taking into account the CCDs, on a fully diluted basis, legal ownership pattern of FHTL is such that FHL owns 26.7%, FHML owns 25. 65% and FGHIPL (i.e., the Assessee) owns 47.65% in FHTL. The proposed ownership pattern is such that FHML and FGHIPL (ie., the Assessee) together owns 100% of FHTL. Pursuant to CCD Subscription Agreement, FHL has undertaken that in the event FGHIPL(i.c., the Assessee) is unable to acquire, whether directly or indirectly, 100% of the issued and paid-up share capital of FHTL on or before the expiry of five years from the date of execution of the FHTL CCD Subscription Agreement for reasons beyond the control of FGHIPL (i.e., the Assessee), FGHIPL shall have the right to require FHL to purchase from FGHIPL(i.e., the Assessee) the CCDs held by FGHIPL (i.e., the Assessee) in FHTL at fair market value.
• Both FHL and the Assessee had put option to transfer the equity shares and CCDS respectively pursuant to the investment agreement dated 17th September 2012. In order not to violate the HUDA approval for the Gurgaon land, on which Gurgaon Clinical Establishment is situated, decision was taken to transfer CCDs by FGHIPL (i.e., the 14 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
Assessee). The relevant extract of the investment agreement is reproduced as under:
"7.1 Put Option The Promoter agrees and undertakes that in the event that the investor is unable to acquire, directly or indirectly, 100% of the issued and paid up Share Capital of the Company within 5 years from the date of execution of this agreement (the date falling 5 years from the date of execution of this Agreement referred to as the ("Option Commencement Date") for reasons other than attributable to the Investor or its subsidiaries, then, without prejudice to the other rights available under Law, the Investor shall, for a period of 90 Business Days thereafter ("Put Option Period"), have the right to issue the put Option Notice (as defined hereinafter), requiring the Promoter and/or its nominee to purchase from the Investor, at the Investor's sole discretion, all, but not less than all the Investor CCDs then held by the Investor in the Company ("Put Securities") to the Promoter and/or its nominee, and the Promoter and/or its nominee shall be obliged to purchase such Investor CCDs for the Put Option Consideration (defined in Clause 7.1.2)."
13. In this background of investment, earning of interest on CCDs in India and subsequent sale of CCDs, it was argued that the capital gains earned on sale of CCDs by the assessee is not liable to tax in India by virtue of the exemption available under Article 13(4) of the Tax Treaty.
15 ITA No. 1915/Del/2022THR Infrastructure Pte. Ltd.
14. The ld. AR argued that the Assessee is having valid Tax Residency Certificate (TRC) and TRC is one of the prerequisites for the non-resident's entitlement to beneficial provisions of the DTAA. As per provisions of section 90(4) of the Act, a non- resident shall not be entitled to claim any relief under the DTAA unless a certificate of his being resident of the country outside India is obtained from the Government of that country. It was argued that the TRC should be considered to be a conclusive evidence to determine whether the person is a resident of the contracting state. The ld. AR placed reliance on CBDT Circular No. 789 dated 13th April, 2000, validity of which was upheld by the Hon'ble Supreme Court in Union of India vs. Azadi Bachao Andolan (263 ITR 706) and on the decision of the Hon'ble Supreme Court in the case of Vodafone International Holdings B.V. v. Union of India [2012] 17 taxmann.com 202. It was argued that the TRC is a sufficient document to establish that the Assessee is tax resident of Singapore and entitled to claim the beneficial provisions delineated in the DTAA. The ld. AR also relied on the Press Release dated 1" March, 2013 wherein it has been clarified that " The tax Residency Certificate produced by a reside nt of a contracting state will be accepted as evidence that he is a resident o f that contracting state and the Income Tax Autho rities in I ndia will no t go behind the TRC and question his resident status."
15. The ld. AR argued that the amendment to the Tax Treaty vide Protocol is not applicable. It was argued that the Tax Treaty was amended vide Third Protocol dated 23-03-2017 w.e.f. 01-04-2017 wherein it was provided that the benefit of Tax Treaty would not be admissible to a shell company/ conduit 16 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
company. The relevant provisions of the Protocol are reproduced hereunder:
"4. A resident of a Contracting State is deemed not to be a shell or conduit company if:
(a) it is listed on a recognized stock exchange of the Contracting State; or
(b) its annual expenditure on operations in that Contracting State is equal to or more than S$ 200,000 in Singapore or Indian Rs. 5,000,000 in India, as the case may be:
(i) in the case of paragraph 4A of Article 13 of this Agreement, for each of the 12-month periods in the immediately preceding period of 24 months from the date on which the gains arise;
(ii) in the case of paragraph 4C of Article 13 of this Agreement, for the immediately preceding period of 12 months from the date on which the gains arise."
16. It was argued that Limitation of Benefit Clause (LOB Clause) has been inserted and accordingly, the DTAA was amended vide the Protocol which was made effective from 01.04.2017, meaning thereby that amended Article is applicable for assessment year 2018-19 and onwards. The Delhi bench of the Tribunal in the case of MIH India (Mauritius) Ltd. vs. ACIT has held that similar amendment made in the India Mauritius Tax Treaty w.e.f. 1.4.2017 would apply only from assessment year 2018-19 and onwards. Accordingly, it was argued that the amendment to the Tax Treaty vide the aforesaid Protocol is not applicable, at the threshold to the assessment year under consideration, viz., assessment year 2017-18. The ld. AR 17 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
submitted that by no stretch of imagination, the assessee company can be regarded as a shell company/conduit entity.
17. It was submitted that the Assessee is wholly owned by RHT, a business Trust listed on Singapore stock exchange. In that view of the matter, it is the submission of the Assessee that it should be regarded as a listed company on a recognized stock exchange of Singapore. In this connection, the Assessee seeks to draw support from the provisions of section 2(18)(B)(c) of the Act, which provides that the wholly owned subsidiary of a listed company would be regarded as "a company in which public are substantially interested". On a parity of reasoning, the Assessee, owned wholly by RHT, a business Trust listed on the recognized stock exchange in Singapore should be regarded as listed on a recognized stock exchange of Singapore, applying the Non-Discrimination Article of the Tax Treaty (Article 26), thereby satisfying the first condition.
18. With regard to the Annual expenditure, it was submitted that the assessee incurred more than $ 2,00,000 on operations in the contracting State. The expenditure incurred is as under:
S. Nam e o f E xp en s e s O ct ob e r A p ri l 2015 A p ri l 2 0 1 6 t o N o. 2014 to to Ma r ch S e p t em b e r Ma r ch 2 0 1 5 2016 2016 A m ou n t ( S G D)
1. Em p l oy e e B en e fi t 33,327 50,734 41,213 E xp en s es
2. T ru s t e e Man ag e r f e e s 3 4 , 3 1 ,0 9 8 4 1 , 8 9 ,7 1 1 ( R e f e r N ot e 1 )
3. Pr o f e s si on al f e es 83,887 1 8 , 5 0 ,0 8 9 7 ,9 1 , 6 9 2
4. R e al i z ed f o r ei g n 4 3 , 4 0 ,7 5 7 5 1 , 2 6 ,6 0 4 4 ,8 1 , 5 8 8 e xch an g e l o ss
5. A d m i n i st r at i v e/ Ot h e r 27,180 54,354 27,189 ch a rg e s p ai d t o b an k et c
6. In t e r est on B an k 2 1 , 4 2 ,9 0 1 3 8 , 0 4 ,8 7 9 2 1 , 7 3 ,5 8 5
7. Ban k Ch a rg e s 40,318 22,295 ( R e f e r N ot e 1 ) 18 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
19. It was argued that the Assessee has commercial substance as evident from the following:
(i) The Assessee has raised loans in Singapore
(ii) The Assessee has made investments in various operating entities, other than the CCDs subscribed in FHTL
(iii) The Assessee has office premises in Singapore and books of accounts are also maintained in Singapore.
(iv) The Assessee has appointed Trustee Manager to advice and manage the investments, to whom substantial Trustee Manager fees is paid.
(v) The Assessee is filing tax returns in Singapore.
(vi) The Assessee has made necessary filing with the Accounting and Corporate Regulatory Authority of Singapore Ministry.
(vii) The Assessee earns income by way of interest (on CCDs) and management fees (from assessment year 2017-18).
(viii) The Assessee has incurred substantial expenditure by way of payment of interest to independent financial institutions, Trustee Manager fees, legal and professional fees, etc.
(ix) The Assessee has an operational bank account in Singapore in its own name.
20. Invoking the rule of consistency, the ld. AR argued that the interest earned on CCDs have been offered to tax in India in the tax return filed in India @ 10% as provided under the Tax Treaty. The same was accepted by the assessing officer in the draft assessment order. The past assessments of the Assessee, 19 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
too, have been completed taxing the said interest @ 10%, thereby accepting that the Assessee was entitled to the Treaty benefits.
21. With regard to the Place of effective management ("POEM") of the assessee is in Singapore, the ld. AR argued that Prior to the amendment of section 6(3) of the Act by the Finance Act, 2016 w.e.f. 1.04.2017, a foreign company was said to be a resident in India in any previous year, if during that year the control and management of its affairs is situated wholly in India. With the amendment by the Finance Act, 2016 w.e.f. 1.04.2017, amended section 6(3) of the Act reads as under:
"a company is said to be a resident in India in any previous year, if
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India."
Explanation - For the purposes of this clause "place of effective management" means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made. " From a reading of amended section 6(3) of the Act it follows that a foreign company would be said to be not-resident in India in any previous year if its place of effective management in that year is not in India.
• POEM in the case of a company engaged in active business outside India shall be presumed to be outside India if 20 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
majority of meetings of the board of directors of the company are held outside India.
• In case of companies engaged in active business outside India, the determination of POEM would be a two stage process:
(i) Identifying or ascertaining the person(s) who actually take the key management and commercial decisions for the conduct of the company's business as a whole.
(ii) Determining the place where these decisions are being made."
22. The ld. AR argued that there were two Directors of the Assessee namely, Mr. Gurpreet Singh Dhillon and Mr. Ravi Malhotra who were tax resident of Singapore and Hong Kong respectively. It was argued that in the instant case, the place of effective management of the Assessee Company cannot be said to be in India, as the decisions by the Board of Directors were taken outside India. It was submitted that the business operations for being conducted from Singapore as Singapore is a recognized location for investors to plan their business structures as it already had a well-developed financial market and treated as a larger finance hub at the global level. Hence, it cannot be construed that any tax avoidance design was envisaged by the assessee and it cannot be said that the setting up of RHT in Singapore was motivated by consideration of tax avoidance.
23. Against the above, the ld. DR, Sh. Gangadhar Panda argued vehemently and also submitted his arguments in writing which are reproduced in toto:
21 ITA No. 1915/Del/2022THR Infrastructure Pte. Ltd.
"The appeals in the case of M/s THR Infrastructure Pte Ltd fo r AY 2017- 18 (appe llant/assessee) in respect o f ITA No . 1915/DEL/ 2022 came up for he aring on 01/11/2022 and continued till 02/ 11/2022. The main issue argued during appe al hearing is regarding taxability of capital gains income in I ndia o n the sale o f CCDs under Sec 112 o f the IT Act due to denial of Tax Treaty benefits claimed by the applicant as per A rt 13(4) of India - Singapore DTAA ( DTAA).
2. Brie f F acts:
2.1. During the ye ar, the assessee rece ived Rs. 1099,98,40,802/- from India on sale of 51% stake in CCDs ( Compulsory Conve rtible Debenture s) issue d by Fortis Hospital Limited (FHTL) . The assessee filed in its ITR for AY 2017- 18 on 30.11.2017and claimed Long Term Capital Gain (LT CG) of Rs. 656,08,00,802/- fro m the above transactio n as fully e xempt as per Article 13(5) of the India- Singapore DTAA .
2.2. The AO in its F inal Orde r, taking into account the direction of the DRP, held that the assessee com pany is not entitle d to the treaty benefits of India-Singapore DTAA as the business arrangement employed by the assessee is a scheme for tax avoidance through treaty sho pping , and the assesse e company is held not to be the real owner o f the income so generated from the transaction , thus lacke d bene ficial o wnership. The A O furthe r held that the TRC is no t sufficient to establish the tax residency as the substance of transactio n established o therwise due to contro l and management o f the assessee company is not present in Singapore , but rathe r in India. This AO he ld that the assesse e company is not entitle d to the treaty be nefits of India- Singapore DTAA, and acco rdingly income from sale o f CCDs and inte rest inco me was subject to tax as per IT Act.
3. Assessee Contention be fore Hon' ble Bench:-22 ITA No. 1915/Del/2022
THR Infrastructure Pte. Ltd.
3.1 During the pro ceeding, the assessee contended that it was eligible fo r the be nefits under the DTAA owing to the fact that it had obtaine d a valid TRC from the Singapo re Revenue autho rities. The assessee further counte red the finding of the AO to state that its business transactions are of economic substance as it incurred requisite expe nse s in the 24 months preceding of the disposal of CCDs. Finally, the assessee state d that its receipts are squarely covered under the pro vision o f the Article 13(5) o f DTAA as the Limitation of Bene fit article o f DTAA has no e ffect.
3.2 In regard to non- applicability of the LOB clause to 13(5) , the assessee argued that the LOB clause of India-Singapore DTAA came into e ffect from 01.04.2017 onwards , and the transaction took place in 2016.The AR of the asse ssee filed Paper Books to counter the findings made by the A O in the final assessment order/direction o f DRP order. The assessee also re lied on a numbe r of case laws compiled in the paper book to submit befo re the Ho n'ble Bench that the subject transaction is no t taxable in India in view of Art 13(5) o f DTAA.
3.3 Assessee's co ntentions are summarized as under:-
3.3.1 TRC:-Assessee argue d that the appellant ho lds valid TRC, there fore , it is e ntitle d to claim benefit under DTAA and place d reliance on vario us case laws.
3.3.2 Amendment to the Tax Treaty vide Protoco l-Assessee submitted that the amended Article which was made effective from 01.04.2017, is applicable fo r A.Y . 2018- 19 and onwards. Further, assessee place d reliance on decisio n of IT AT, De lhi in the case o f MIH India (Mauritius) Ltd. vs. ACIT (supra). A ccordingly, the amendment to the Tax treaty vide the aforesaid Pro tocol is not applicable, at the thresho ld to the assessment ye ar unde r conside ratio n i.e . A.Y. 2017- 18.23 ITA No. 1915/Del/2022
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3.3.3 Assessee submitted as below, why assessee company is not to be regarded as a shell company/conduit entity. The appellant should be regarde d as co mpany listed on a recognize d stock e xchange o f the Contracting State . Assessee submitted that the appellant is wholly owned by RHT , a business T rust listed on Singapore stock e xchange . Therefo re, it should be regarde d as a listed company on a re cognize d stock e xchange of Singapo re . Further, assessee in suppo rt drew a refere nce of provisions o f section 2(18)(B)(c) o f the Act and place d reliance o n decision of IT AT, Pune bench in the case of Daimler Chrysle r India Pvt. Ltd. (ITA No . 968/PN/03).
3.3.4. A nnual expenditure in Singapo re on ope rations in that Contracting State is equal to or more than S $200,000:- Assessee submitted the e xpenditure incurred by it in last 24 m onths from the date o f transfer is in excess o f the thresho ld o f Singapore $ 200,000 per year and these expenses we re incurred and booked at the ye ar end. There fore , appe llant has to be re garded as resident of Singapore and e ntitle d to Tax Treaty be nefits, even taking into account the ame ndment to the said Treaty thro ugh the Third Pro tocol.
3.3.5 Commercial Substance:-Assessee submitte d that it has commercial substance, as it has made investments in o ther than CCDs subscribed in FHTL and has done all business activities in Singapore under the law of Accounting and Co rpo rate Re gulato ry Authority of S ingapore Ministry. The refore , it cannot be regarded as a she ll company/conduit entity.
3.3.6 Rule of Co nsiste ncy:-Assessee submitte d that the inte rest earne d on CCDs have been offere d to tax in India in the tax return filed in India @ 10% as provide d under the Tax Tre aty and it was accepte d by the assessing officer in past asse ssment ye ars. Therefo re, Re venue is esto ppe l fro m taking a different view in the 24 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
matter in a late r year, without the re being any change in facts o r change in law and place re liance o n decisio n in the case of Radha Soami Satsang vs. CIT : 193 ITR 321 (SC) and CIT vs. Excel Industries : 358 I TR 295(S C).
3.3.6 Place of effective management ("POEM") is in Singapo re:- Assessee submitte d that there were two Directors of the appellant namely, Mr. Gurpreet Singh Dhillon and Mr. Ravi Malhotra who we re tax resident o f Singapore and Hong Kong respective ly and the place of effective management o f the assessee company cannot be said to be in India, as the decisio ns by the Board o f Directors were taken outside I ndia.
3.3.7 No tax avoidance involved in setting up RHT and the appe llant in Singapo re:-Assessee submitted that the choice of Singapore as a jurisdictio n by RHT as well for acquisition of CCD's in FHTL in 2012 canno t be said to be primarily fo r taking tax tre aty bene fit as Singapore is matured market and taxpayer choose Singapore as a jurisdictio n fo r re gistration of trusts since S ingapo re has a proper regulato ry framework fo r business trusts under the Business Trusts Act. Furthe r, assessee place d reliance on case of UOI vs Azadi Bachao Andolan( SC) and Vodafo ne International Holdings B.V . (supra).
4. Revenue Submission The contentions o f the Revenue argued befo re the Hon'ble Bench is summarize d as under:
4.1. Facts compiled from the Final Assessment Order, DRP Order and Pape r Books o f Assessee .
4.1.1 The assessee company is incorporate d and re gistered in Singapore on 31.03.2011. The assessee company is an investment holding company and is also engaged in pro vision of management 25 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
and consultancy services. It has submitted a Tax Residency Certificate of Singapo re in re spect of inte rest inco me earned by it from India for the year under consideration.
4.1.2 Corpo rate Structure of the assessee's gro up:
4.1.3 RHT Health Trust: The India based Fortis Healthcare Ltd. (FHL) which is the lead member of the Fo rtis group wanted to raise funds for expanding the presence of he althcare services across India. For this purpose , it sponsored Re ligare Health Trust, a business trust in Singapore , by first creating a wholly-owne d subsidiary in Mauritius named Fo rtis Mauritius.
4.1.4 Assessee company is a who lly owned subsidiary o f Religare Health T rust (RHT). As per public domain inform ation, Religare 26 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
Health T rust is a registere d Business Trust co nstitute d in S ingapo re in J uly 2011.
4.1.5 RHT Trust's principal activity is to invest in medical and healthcare asse ts and services, in Asia, Australasia and emerging markets in the re st of the wo rld. All the investments of Re ligare Health trust namely 14 clinical e stablishments and 2 operating hospitals across I ndia are all in the Fortis gro up of hospitals in India thro ugh the assessee company. One such investment of the assessee company is in Fortis Hospital ltd.(F HTL), an Indian company whose CCDs have been sold during the ye ar unde r co nsideration.
4.1.6 There are 2 main gro ups o f unit holde rs in Religare health Trust namely the Fortis Group entities and institutional lenders. As per its we bsite, the main unit ho lders/investo rs of the RHT include Mauritius based company Fo rtis He althcare International Ltd. (Fortis Mauritius) ( 27.6% shareholding) , DB Nominees (Singapore) Pte. Ltd., Citibank Nominee s Singapo re Pte . Ltd. and Raffles Nominees Pte. Ltd.
4.1.7 The main unit holders/ investo rs in Fortis Mauritius are the Trustee Manage r, Fortis Healthcare Ltd., Fortis Healthcare Holdings Pvt. Ltd. and the individuals Malvinder Singh, J apna M alvinder S ingh, Shivinder Singh and Aditi S hivinder S ingh.
4.1.8 Thereafte r funds were gathere d at the leve l of RHT Trust by way of an IPO and pumped into the Fortis gro up co mpanies in the form of de bt and equity. I n return, the Fo rtis gro up companies provide d inte rest income and management fees to the assessee company which in turn was passed on to RHT Trust for annual distributio n to the unit ho lders.
4.1.9 Venture was originally only sponsored by Fortis India, its overall management was also take n contro l by Fortis I ndia in 2015.
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4.1.10 From public dom ain information available , Fortis I ndia established a subsidiary in the form of Stellant Capital Advisory Service s Pvt. Ltd. to acquire and in turn take ove r the management of the trust i.e . the Trustee Manage r.
4.1.11 As per the annual reports of the RHT Trust fo r the ye ars 2016 and 2017, the Trust was he ade d and managed by Ravi Mehro tra who was also a Director in Fo rtis India at the same time. RHT T rust had a se nio r management team in place in India managed by various individuals based in India which was commercially so und given that the Trust's entire portfolio comprise d of o nly Fortis ho spitals in India as its asse ts.
4.1.12 As per the assessee company's financial statements for the ye ar, its directors were Ravi Mehrotra and Gurpreeet S ingh Dhillo n. The latter is a tax reside nt of India for tax purposes and is a close associate and family member of the promoters of Fortis India at the time namely Malvinder S ingh and S hivinder S ingh. From the above , it is evident that the control and management of the assessee does not lie in S ingapore . It is part of India-centric venture and is effectively contro lled and managed from India.
4.1.13 In September 2012, the assesse e company acquired 87,04,000 fully and compulso rily convertible debe ntures (CCD) in FHTL at a value of INR 1000 per CCD. The assessee company earned inte rest on the same at the rate of 17.5% per annum. The said CCDs were conve rtible into 267,400,000 shares o f FHTL at share value of INR 32.55 within 18 years o f issuance.
4.1.14 In July 2016, the assessee com pany entered into an agreement with F ortis I ndia to se ll 51% o f the CCDs of FHTL (i.e . 44,39,040 CCDs) held by it for a consideration of Rs. 1099,98,40,802/- (SGD 2271 m illion).
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4.1.15 Immediately thereafte r, the assessee company declared a divide nd of S GD 193 million to its parent RHT Trust and also extended a loan to it. The RHT Trust in turn declared a special distributio n to all its unit holders at 24.8 Singapo re cents per unit on 28.10.2016 as against the usual distributio n rate of 3.5 Singapo re cents per unit.
4.1.16 RHT Trust continue to remain functio nal till Fe bruary 2019, which co incided with the time when Fortis India publicly declared that it had taken full co ntro l of all its assets in India there by indicating that the Trust was no longe r an investo r in the group's assets.
4.1.17 Accordingly, the Trust we bsite indicates anothe r spe cial distributio n to its unit holders on 04.02.2019 coinciding with the time when it had finally diveste d all its stakes in Fortis gro up asse ts.
4.1.18 As on date, the T rust we bsite state s that it has ceased to have any operatio nal business and it is a cash trust.
4.1.19 On the original advancement of de bt of INR 874 cro res to FHTL against issue of 87,04,000 no. of CCDs fo r a face value of INR 1000 pe r CCD, no basis o f ado pting such fair market value was furnished.
4.1.20 Though the optio n of converting the CCDs into equity was available upto 2030 ( i.e . 18 ye ars) , the co nve rsion was made in a much short time perio d. No commercial reaso n for the same was provide d for such urgency.
4.1.21 The valuatio n re port submitted by the assessee cannot be accepted as the variables taken to compute the fair market value of CCDs have no t been justifie d. The transactio n therefo re lacks commercial sense .
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4.1.22 There is no commercial sense in the transactions under conside ratio n which have been made be tween relate d parties, valuation and sharp price o f value of CCDs are unsubstantiated, the conversion o f CCDs were made within a short span of time and the gains have been treate d as e xempt unde r treaty pro visions, it may be safely infe rre d that the only motive to structure the transaction in the way defined above is to avo id payment of taxes in India.
4.1.23 The assessee company there fore was interpo sed in Singapore and CCDs of FHTL were held by assessee company in orde r to avail tax be nefit unde r the DTAA.
4.2. Summary o f A rguments of Re venue for Treaty De nial:
Based o n the facts mentione d in the AO's order and DRP's order, and taking into account contention of the AR of the applicant during the hearing, the reve nue has made fo llowing submissio ns during the course o f hearing before the Ho n'ble bench which is summarize d as below:
i. More than 30% of units RHT Trust are held through re late d parties. The trust contro l was with FHL (the pare nt company) which sponsore d the trust by setting up wholly owned subsidiary in Mauritius.
ii. There was no co mmercial rationale for FHL to inco rporate wholly owne d subsidiary in Mauritius.
iii. There are no assets in RHT pursuant to disposal and distributio n to the unit- holde rs.
iv. No need to create trust. The trust being a pass through entity no t entitle d to tre aty bene fit.
v. No commercial re ason has been provide d by the co mpany for the purpose of transfer of Compulsorily Convertible Debenture s (CCD' s) within 5 years as CCD's we re to be converted into Equity instrument within 18 years. The 30 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
reason give n regarding HUDA land co nversion rule is an alibi to perpe tuate this pre-conceived modus operandi to avoid taxation in Indian territo ry.
vi. No basis o f adopting fair market value at the time of issue of CCD to the Company in 2012 was furnished by the Company during the course o f assessment procee dings. Fair market value of CCD's and sharp rise in the value of adopted at the time of disposal of CCD's also re mains unsubstantiated by the Company. No commercial basis for unde rtaking the transfer of CCD's by the Company in Fortis Hospital Limite d ( FHTL).
vii. The appellant is a conduit entity/eco nomic sham considering that ( i) the appellant has only o ne employee ; (ii) majority of the operational expenses are in the form of Trustee Manager fee (who also re nder se rvices to other re lated e ntities) which is to a related party. F urther, in the in the protocol on LOB clause, the te rm use is "annual expenses on operation", meaning there by the annual e xpe nses for the assessee solely be in the nature of operating expense s. No other expenses passive nature like realise d and unrealise d foreign exchange loss as well as the notional losses like unrealised fair value loss on derivatives which is no t relate d to ope ration of entity but has been claimed by the assessee as operating expe nditure should be excluded while applying the thre shold e xpenditure test. Nee dless to say that minus the said no n-ope rating e xpe nses, the assessee fails to satisfy this test and turns out to be a conduit entity within the meaning o f LOB clause DTAA .
viii. In regard to the principle o f co nsistency claimed by the applicant, it is pertinent to consider the last paragraph (para 15) o f the ruling o f the Hon'ble Apex Court in Radha Soami Satsang case, an accordingly, the ruling may not be treated as a authority o n aspects which have been decide d 31 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
for gene ral obse rvatio n. The observatio n is quo ted as unde r:-
"The counse l fo r the revenue had told us that the facts of this case being very special, nothing should be said in a manner which would have general application. We are incline d to accept this submissio n and wo uld like to state in clear terms that the decision is confine d to the facts of the case and may no t be treated as an autho rity on aspects which have bee n decided for gene ral application."
Further, it is re treated that the re s judicata does not applies to IT proceedings. For a moment if it is an assumed that rule of consistency should pre vail fo r all assessment years, in that case the principle o f reope ning a case due to escapement of income afte r completio n of assessment becomes a redundant provisions. In o rde r to correct mis-appreciation of fact or law, the IT law framework provides the mechanism of reope ning or similar other pro visions to rectify such omissions which indee d becomes a deviatio n from the rule of consiste ncy rule.
ix. In regard to non- applicability of LOB clause in view of the trust being registered in Singapore Stock Exchange , it is submitted that the status of the assessee here is a Singapore company which is admittedly by the AR o f the applicant is not re giste red in the S ingapo re Stock Exchange . Since , the trust and the assessee are two separate e ntity, so the applicability of LOB to the assessee company canno t be taken away, and it square ly applies to the asse ssee . x. It is a Scheme of Tax Avo idance , Contro l and Management of the Company do es not lie in Singapore but lies in India. xi. The brain/contro l and management of the appellant is in India. Ravi Mehrotra also director of Fo rtis I ndia. Board 32 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
meetings not he ld in Singapore as Board Resolutions do not show place o f mee ting.
xii. Tax Residency Ce rtificate is no t sufficient to establish tax reside ncy if the re is no economic substance in entity. TRC not conclusive in view of the ruling of Hon'ble Supreme Court in the case of Vodafo ne(para 98) .
5. Point-wise rebuttal for assessee Legal Objections on Tax Avoidance Scheme.
5.1 TRC is no t S ufficie nt to Claim Tre aty Bene fits:
5.1.1 The assessee has state d that CBDT Circular 789 dated 13/ 04/ 2000 should be applicable on it which states that "it is here by clarified that whe rever a Ce rtificate of Residence is issue d by the Mauritian A utho rities, such Certificate will constitute sufficient evide nce fo r acce pting the status o f residence as we ll as be neficial ownership for applying the DTAC accordingly." This circular provides a general provisio n that TRC would constitute sufficie nt evidence fo r accepting the status of residence and bene ficial owne rship. Ho weve r, in the pre sent case, there is overwhe lming e vide nce (discussed unde r para 4 above and in AO/DRP o rders,) that the assessee company is failing in the principal purpose test, exists only on paper for all practical purposes and the sole purpose of creating this company was to e vade taxes. Hence the ge neral provision envisage d by the Circular 789 is not applicable in this case .
5.1.2. The plea o f the assessee is that it has been issued a TRC by the Singapore Tax Authority. Whether the TRC is conclusive to decide the tax re sidency, it was decided in a num ber of rulings referring to the case of Vodafore BV case , i.e . Tige r Globals (AAR) , BID Co , (AAR) and Redington (Chennai High Court) . The rele vant observations made by the Hon' ble A pex Co urt in the Vo dafo ne Case , in regard to sufficiency o f TRC, at para-98, is reproduced as unde r:-33 ITA No. 1915/Del/2022
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Hon'ble Supreme Court in the case of Vodafone Intl. Holding v. Unio n of I ndia [ 2012] 17 taxmann.com 202/204 Taxman 408 state d that, "98. I t is to be noted that LOB and look through provisio ns canno t be read into a tax tre aty but the question may arise as to whethe r the TRC is so conclusive that the Tax Department canno t pierce the veil and look at the substance of the transactio n. DTAA and Circular No 789 date d 13.04.2000, in o ur view, it would no t preclude the Income Tax De partment from denying the tax treaty benefits, if it is establishe d, on facts, that the Mauritian Company has bee n interposed as the owner of the shares in India, at the time of dispo sal of shares to a third party, so lely with a vie w to avo id tax without any commercial substance . T ax De partment, in such a situation, no twithstanding the fact that the Mauritian company is require d to be treated as a beneficial o wner of the shares under Circular No 789 and the Treaty is entitled to took at the entire transaction of sale as a whole and if it is established that the Mauritian company has been interposed as a de vice , it is open to the I ncome Tax Department to discard the device and take into consideration the real transaction between the partie s, and the transaction maybe subjecte d to tax. In other words, T RC does no t pre ve nt enquiry into a tax fraud, for example, where an OCB is used by an Indian reside nt for ro und-tripping or any other illegal activitie s, no thing preve nts the Re venue from looking into special agreements, contracts o r arrangements made or effected by Indian resident or the role of the OCB in the e ntire transaction."
5.1.3 The recent ruling of the AAR in AB Mauritius ( 2018) 402 ITR 311 and obse rvations made by the Bombay High Court in Indo star Capital v. CIT also held on similar view based o n 'substance over the form' principle .34 ITA No. 1915/Del/2022
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5.1.4 The place o f inco rporation argument is based on the premise that fo rm is required to be recognized fo r deciding taxatio n issues. The Azadi Bachao Andolan of the Hon'ble S upreme Court is also based on this argument. Howeve r, the primacy of form of the taxpayer in deciding tax liability has not been approved under a tax treaty framewo rk. For instance , under a dual residency situatio n always the econo mic substance overrides the form. Under the tie breake r rule fo r tax residency o f companies, the country where the "control and management" o f the co mpany is situated gets the right to tax and not where the company is inco rpo rated. The "contro l and management" test for tax residency of companies is basically base d on the principle o f "substance ove r form".
5.1.5 The assessee has tried to justify the rationale o f establishing a company in Singapore . Howe ver, none of the cause s mentione d by the assessee justify establishing a paper company with pape r directors. It is an undoubtable co nclusio n derive d fro m the facts o f the case that the company was established with the sole and principal purpose of tax avoidance.
5.1.6 It is rele vant to conside r he re that though the tax residency is state d to be establishe d to take benefit o f Singapore tax treaty netwo rk with vario us countries and not just India, in effect the entire investment made by the assessee was with India only, in re spect of which the bene fit of India- S ingapore DTAA is being claimed. As is evide nt from their financial statements filed with the assessee, It had made investment mostly in India. T hus, the re al intention of the assessee is to avail the bene fit o f India- Singapore tre aty.
5.2 Look through approach where DT AA contains LOB Clause 5.2.1 The look- thro ugh approach: In "look through approach" the real beneficiary of the income is found out. It means to ignore the 35 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
corporate structure and look thro ugh the re alities of the transactio ns. It may also be called to look into the substance igno ring the legal form . Unde r this appro ach, a co mpany will be denie d treaty be nefits if the company is owne d or contro lle d, directly or thro ugh one or more othe r companies, by a Third-S tate Reside nt.
Following provisio n is suggested in the OECD Commentary fo r DTAA:
"A company that is a Resident of a Contracting State shall not be entitle d to relief from taxation unde r this Co nventio n with re spect to any item of income, gains o r pro fits if it is owned o r contro lle d directly o r thro ugh one o r more co mpanies, where ve r Resident, by perso ns who are not Residents o f a Contracting State".
Par a 14 Article 1 OECD MC C ommentary suggest following indicator to infer look through approach:
"The 'look-thro ugh approach' underlying the abo ve provisio n seems an adequate basis for tre atie s with countries that have no or very low taxatio n and where little substantive business activities would normally be carrie d on. Even in these cases it might be necessary to alte r the pro vision or to substitute fo r it another o ne to safeguard bona fide business activities"
5.2.2 Thus, to infer look through approach one may look for following indicato rs:
a) There is a common management o r substantially a common contro lling mechanism exercised o ver the inte rmediary entity in the Resident S tate.
b) Such contro lling mechanism is mo re than ro utine guidance and supervision.
c) There is very little discre tion with the management of inte rmediary concern and all the m ajor decisio ns are taken by the contro lling company and passed on to the entity.36 ITA No. 1915/Del/2022
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d) Funds re ceive d are immediately transferred to the holding company and funds only to the e xtent of requirement are remitte d by the ho lding company.
e) There is very little infrastructure or, employees or business activities with the inte rmediary concern.
f) There is no or very low taxatio n in the Country o f Residence of the intermediary concern.
5.2.3 In this regard, it is useful to re fer the observations of Hon'ble Apex Court in Vo dafo ne Case at para- 67 is ve ry re levant, which is repro duce d as under:-
"67. "I t is gene rally accepted that the gro up parent company is invo lve d in giving principal guidance to gro up co mpanies by providing general policy guidelines to gro up subsidiaries. However, the fact that a parent co mpany e xercises shareho lde r's influe nce on its subsidiaries does not ge nerally imply that the subsidiaries are to be deemed Residents of the State in which the pare nt company resides. Further, if a company is a parent company, that co mpany's executive directo r(s) sho uld lead the group and the company's shareho lder's influe nce will generally be employed to that end This o bviously implies a restriction on the auto nomy of the subsidiary's e xecutive directo rs. Such a restriction, which is the inevitable consequences of any group structure, is gene rally accepted, bo th in corpo rate and tax laws. However, where the subsidiary's exe cutive directors' competences are transferre d to othe r pe rsons/ bo dies o r where the subsidiary's executive directors' decision making has become fully subordinate to the Ho lding Company with the conse quence that the subsidiary's executive directors are no more than puppe ts then the turning point in respect of the subsidiary's place o f re side nce comes about. Similarly, if an actual contro lling N on- Resident Ente rprise (NRE) makes an indirect transfer through "abuse o f 37 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
organization form /legal fo rm and without reaso nable business purpose" which results in tax avoidance or avoidance of withholding tax, then the Reve nue may disregard the form of the arrangement or the impugne d action thro ugh use of Non-Reside nt Holding Company, re characterize the equity transfer according to its eco nomic substance and impo se the tax on the actual contro lling Non-Resident Ente rprise." (Page 61 of 341 ITR:
"Certainty is integral to rule of law. Certainty and stability form the basic foundation of any fiscal system. Tax po licy certainty is crucial fo r taxpayers ( including foreign investors) to make rational e conomic choice s in the most efficient manner. Legal doctrines like 'limitation of bene fits' and ' look through' are matters o f po licy. It is fo r the Government of the day to have them inco rporate d in the T reaties and in the laws so as to avoid conflicting vie ws. Investo rs should know where they stand. It also helps the tax administratio n in enforcing the pro visions o f the taxing laws..."
Further, similar view taken in ano ther landmark case as re pro duced below:
"In any view, "lo ok thro ugh" provision canno t shift situs of a transactio n in the absence of an in-built pro visio n "......... as decide d in Fede ral Commissio n of Taxation v. Lamesa Holdings BV(LN)[1998] 157 ALR 290".
5.2.4 Thus, to invoke lo ok thro ugh appro ach one has to find the facts which should indicate:
i. The decision-making process is transferred to the holding company.
ii. In Management of inte rmediary entity is acting as puppet. iii. There is no reasonable business purpose in running the inte rmediary entity.38 ITA No. 1915/Del/2022
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In view of the above, the le gal positio n and based o n the facts and circumstances analysis in para- 4 above , it is intended to use the legal doctrine o f substance .
5.3 Substance Over Form squarely the Doctrine Applicable to assessee:
5.3.1 The doctrine of substance ove r the form means to brush aside and disregard the deeds, legal structure, the legal rights and liabilities arising unde r a contract between the parties, and decide the questio n of taxability and non-taxability indepe ndent of rights and the liabilities of the parties what the y are in law. Eve n though significance of le gal form of a transactio n has be en given due importance in several English cases but later a balanced approach was ado pte d by English Courts where it was he ld that one has to look at the whole transaction to asce rtain the true character o f the payment. In Indian cases also impo rtance was earlier given to legal form. Ho weve r, subsequently the Courts have no t hesitated to extract substance over the fo rm as is evident in follo wing cases.
5.3.2 Hon'ble ape x Co urt in Vodafone's case o bserved about the concept of Substance ove r the fo rm as unde r:
"When it comes to taxatio n of a holding structure , at the threshold, the burden is on the Revenue to allege and establish abuse , in the sense of tax avo idance in the cre ation and/or use o f such structures. In the application of a judicial anti avoidance rule , the Revenue may invoke the "substance ove r form "principle or "pie rcing the corporate ve il" test only after it is able to establish on the basis o f the facts and circumstances' surro unding the transaction that the transaction in questio n is a sham or tax avoidant."39 ITA No. 1915/Del/2022
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5.3.3 Doctrine of substance o ver fo rm: The tax do ctrine of "substance over form" is a judicial creation applied in many countries. I t is o ften used by the courts in cases where a taxpaye r has constructed a scheme of transactional relationships on documents only or primarily to obtain tax bene fits. If the tax motivatio n outwe ighs the business purpose and/o r profit objective o f the transactio n, courts will decide that "form"(written contracts and arrangements) does not re flect the "substance"(the real deal/ picture) and on that basis may deny the intende d tax be nefits. This is primarily applicable to the asseseee case under consideration.
(a) In this case, place of e ffective management is not in Singapore and Control and Management e xercised by Ultimate Bene ficial Owner of the assessee base d under Fortis group outside Singapore .
(b) Assessee's submission that it is beneficial owner of capital gain and therefo re eligible fo r India- Singapore T ax tre aty is not tenable as discussed in the Assessment Order , there fore contro l and management of the assessee company is outside Singapore. Hence it is not eligible for I ndia- Singapore DTAA and Capital taxable as per Income Tax Act, 1961.
5.4 Conduit Compan y Ar gument:
Thus as no substance has been demonstrate d by the assessee company it can at best be treated as Conduit company based on the arguments made in para 8 to 10. Conduit company i.e. our assessee company mere ly forwards passive income to perso ns who are not reside nts of one of the states that are parties to the tre aty in question. On the facts o f the current case , when the role o f the inte rmediary i.e. assessee company in question is taken into account, the inte rmediary sho uld be denie d treaty be nefits acco rding 40 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
to the po licy of double tax tre aties because it does not satisfy the requirement of be ing the bene ficial o wner of the incom e at issue .
5.4 Beneficial Owner ship:
(a) However, in the light of the traditio nal legalistic view of companies, and o f the meaning o f "ownership", it see ms that fore ign courts decide d that the y we re unable to apply the bene ficial ownership test literally. As a result, in o rder to pre vent reside nts of non-contracting states from obtaining treaty bene fits by means o f the interposition of conduit com panies, fo reign courts adopted surro gate tests in place of the literal bene ficial o wnership test.
These surrogate tests focus not o n ownership o f income by the company in que stion but on some other factual matter such as "dominion".
(b) The test of dominion is a surro gate form of reaso ning that foreign courts have used to apply the beneficial o wnership test in conduit company cases. The wo rd "dominio n" is no t a term of art. This article uses the word "dominio n" to represent an incide nt that exhibits o wne rship.
Salmond describes rights and libe rties that belong to this incident of ownership as follo ws:
"The owner no rmally has the right to use and enjoy the thing owned:
the right to manage it, i.e ., the right to decide how it shall be used; and the right to the income from it. these rights are in fact liberties: the owner has a liberty to use it, in contrast with o thers who are unde r a duty not to use o r interfere with it."
(c) The assessee company has no t demonstrated dominion ove r eithe r of the pro perty. It is cate gorically bro ught out the bank account cannot be operate d independently and ne ither part time Singapore directo r has acte d independently and the key decisions 41 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
which are require d to addre ss the share transactio ns are actually taken by ultimate parent in British Virgin Islands and bene ficially owned by Mr. Sandeep Murthy who is claimed to be citizen o f USA . Further fund actually pass thro ugh Singapo re entity without actual retention. Thus the dominion te st has not been satisfie d by the assesee company claimed to be resident in S ingapo re.
(c) OECD positio n on such conduit companies:
Reliance is also place d on the OECD Committee on Fiscal Affairs report titled "Double T axatio n Conventio ns and the Use of Conduit Companies" International Tax Avo idance and Evasio n: Four Re late d Studies, Issues in International Taxatio n No 1 (OECD, Paris, 1987) . In this regard attention invited to page 87at para 4(1) uses the absence o f dominion o ver passive income that it receives as a criterio n for de termining that a recipient company is no t the beneficial owne r o f the income in question.
6. TAX EVASION SC HEMEHIT BY LOB CLAUSE OF SINGAPORE DTAA 6.1. As per the judicial rulings, re ferred above , a look-thro ugh approach is perfe ctly justified to go to the underlying purpose o f a transactio n under the tax treaty where the re are specific LOB clause in the re levant DTAA. In regard to applicability of the LOB clause to Art 13( 5) of DTAA, the assessee argued that the LOB clause of I ndia- Singapore DTAA came into effect fro m 01.04.2017 o nwards and since the subject transaction took place in 2016, thus Revenue does no t have a case to look through the transactio n for tax evasion for reasons o f - substance o ver form doctrine , Co nduit Company rule , Beneficial Ownership and Dominion Rules, and consequently, production of TRC issued by S ingapore Tax Autho rity sufficed the conditio n to enjoy DTAA benefits by assessee as per sec 90( 2) of IT Act re ad with DTAA.
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6.2. However, contrary to insistence o f assessee, the LOB clause would square ly apply to the assesse e's transaction e xecuted in 2016. Even though the latest amending Protocol o f Indo-S ingapore DTAA came into effect from 01.04.2017 for applicability of Art 12 (4A) on capital gain inco me for LOB Clause as state d by the AR o f the assessee, but the fact remains that the LOB Clause as introduced in the year 2005, ( which was re pro duced in new amending Pro tocol o f 2017) , be ing applicable w.e.f. 01.04.2005 continues to operate in respect o f income unde r Article 12, 13, 11 of DTAA .
6.3. The LOB Clause as applicable from 01.04.2005 and as appe ared in the Pro tocol to DTAA is reproduced below for ready refere nce:
"AGREEMENT FOR AVOIDANCE OF DOUBLE TAXATION A ND PREVENTION OF FI SCAL EVASI ON WI TH FOREI GN COUNTRIES -
SINGAPORE Whereas the annexed Agreement between the Go vernment of the Republic of India and the Government of the Republic of Singapore for the avoidance of do uble taxation and the preve ntio n of fiscal evasio n with respect to taxes on income has ente re d into fo rce on 27th May, 1994 o n the notificatio n by both the Contracting S tates to each o ther of the completion of the proce dures require d by the ir respective laws, as re quired by the said Agreement;
Now, there fore , in exercise o f the powers co nfe rred by section 90 o f the Income-tax A ct, 1961 ( 43 of 1961) , the Central Gove rnment hereby directs that all the pro visions of the said Agre ement shall be give n e ffect to in the Union o f India.
Notificatio n : No. GSR 610( E), Dated 8- 8- 1994 As Amended by Notificatio n No . S O 1022( E), Date d 18-7- 2005; No . S.O. 2031(E) , Date d 1- 9-2011 and No . S .O. 935(E), Dated 23-3- 2017 43 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
ANNEXURE AGREEMENT BETWEEN THE GOVERN MENT OF THE REPUBLIC OF INDIA AND THE GOVERN MENT OF THE REPUBLIC OF SINGA PORE F OR THE AVOIDANCE OF DOUBLE TAXATION A ND THE PREVENTI ON OF FISCA L EVASION WITH RESPECT TO TAXES ON INCOME The Government o f the Re public of I ndia and the Go ve rnment o f the Republic of S ingapore , desiring to conclude an Agreement for the avoidance of double taxatio n and the pre vention of fiscal evasion with respect to taxes o n income, Have agreed as fo llows:
The preamble of I ndia-Singapore DT AA is reproduced as under:
"Where as the annexed A greement between the Gove rnment of the Republic of India and the Government of the Republic of Singapore for the avoidance of do uble taxation and the preve ntio n of fiscal evasio n with respect to taxes on income has ente re d into fo rce on 27th May, 1994 o n the notificatio n by both the Contracting S tates to each o ther of the completion of the proce dures require d by the ir respective laws, as re quired by the said Agreement."
.................................... .................................... ................................... ................................... .................................... ...................................
Pro tocol:
3. Article 3 omitted by Notificatio n No. SO 935(E) [No. 18/2017 (500/139/2002-FT D-II], dated 23- 3-2017, w.e .f. 1- 4-2017. Prio r to its omissio n, said Article read as under:
" Article 1...............
Article 1................44 ITA No. 1915/Del/2022
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ARTICLE 3
1. A resident of a Contracting State shall not be entitle d to the benefits o f A rticle 1 o f this Pro tocol if its affairs we re arranged with the primary purpo se to take advantage o f the be nefits in Article 1 of this Proto col.
2. A shell/conduit company that claims it is a resident of a Contracting State shall not be entitled to the be nefits of Article 1 o f this Protoco l. A shell/co nduit company is any legal entity falling within the definition of resident with ne gligible or nil business operations or with no real and continuous business activities carried out in that Co ntracting S tate.
3. A resident of a Contracting State is deemed to be a shell/co nduit com pany if its total annual expenditure on operations in that Co ntracting State is less than S $200,000 or Indian Rs. 50,00,000 in the respective Contracting State as the case may be, in the immediate ly preceding perio d o f 24 months from the date the gains arise.
4. A resident of a Contracting State is deemed no t to be a shell/co nduit company if--
(a) it is listed on a recognize d stock exchange 3 of the Contracting S tate; or
(b) its total annual expenditure on operations in that Contracting State is equal to or more than S $200,000 or Indian Rs. 50,00,000 in the respective Contracting S tate as the case may be , in the immediate ly preceding period of 24 months from the date the gains arise .
Explanation.--The cases of legal entities no t having bo na fide business activities shall be cove red by Article 3.1 o f this Protoco l." [Bold highlights/ to lay Emphasis ] 45 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
[Full text of Pro tocol of 2005, 2011 and 2017 is reproduced as an Annexure) 6.4. It may be seen from the heading of the DTAA , preventio n of tax evasion is one of the main o bje ctives of this Tax Treaty , which furthe r amplified by incorporatio n of the same phrase in the Preamble as well as in the recital of A nne xed text of the Treaty. Therefo re, while inte rpreting a T reaty, the essential object and purpose of the DT AA i.e. preventio n of tax evasio n must be factore d into a subject transaction, but under no circumstances be igno red while applying a DTAA pro vision.
6.5 This principle is further le gally aligned with the "Vienna Conventio n on the Law of Treaties 1969". For re ference, Article 31 of Section- 3 is repro duced be low:
"SECTION 3. INTERPRETATION OF TREATIES Article 31: General rule of inte rpretation
1. A tre aty shall be interprete d in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in the ir co ntext and in the light of its object and purpose.
2. The context for the purpose o f the interpre tation of a treaty shall comprise , in addition to the text, including its preamble and annexes:
(a) any agreement relating to the treaty which was made between all the parties in co nnectio n with the co nclusion of the tre aty;
(b) any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrume nt relate d to the treaty.46 ITA No. 1915/Del/2022
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3. There shall be taken into acco unt, toge the r with the context.
6.6. In this background, if the present case of the assessee is examine d on the taxability of capital gain income as per Article 12 (5) of DTAA, read with the Preamble of the Tax Treaty and , specifically intro duced LOB Clause in the Protoco l of 2005 to reinforce the o bject of the DTAA to preve nt tax evasion , it became abundantly clear that the factual matrix o f the asse ssee's case for this AY strongly made out a case fo r limitation o f Treaty Bene fits as the main purpose of its business structure and transactions were designed fo r tax e vasio n . The same is discusse d as under.
6.7. From the facts o f this case fo llowing features of LOB clauses are trigge red:
• affairs were arranged with the primary purpose to take advantage of the benefits • Explanation.--The cases of legal entities no t having bona fide business activitie s shall be co vered by Article 3.1 of this Pro tocol:
• A shell/conduit co mpany is any le gal entity falling within the definitio n of resident with negligible or nil business operations or with no real and continuous business • Annual expe nditure on operations in that Contracting State is less than S $200,000 • Thus it shall not be entitled to the benefits o f Article 1 of this Pro tocol • DTAA Preamble on the pre vention of fiscal evasio n is also violate d, and the refore as per V ienna Convention, it breaches the object and purpose of the Tre aty. Thus, the assessee by not adhe ring to the o bjects o f the DTAA in good faith, has thus forfeite d to procee d further to avail any bene fits of DT AA. Since the DTAA is no more applicable to the assessee , the be nefits o f 47 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
DTAA automatically do not flo w to the assesse e. Thus, existence o f TRC has no meaning and applicability, as the assessee failed in threshold test o f the preamble and object clause o f DTAA, thus resulting no n- applicability of DT AA which in turn denies the assessee to take any bene fit o f DTAA.
7. RULINGS BY INDIAN JU DICIARY ON TAX E VASION PRINCIPLE S 7.1 In view o f the above arguments, it is no ted that assessee company in Singapore does no t have dominion ove r any transactions, it is actually by ultimate parent in India and be neficially owned by Fortis who has dominio n ove r such transactions. Therefo re, the conduit company i.e. assessee company shall no t be provided treaty benefit.
7.2 In India, the McDowell case in 1985 had proceede d on the lines o f Ramsay and Burmah Oil and refe rred to "colo urable de vices"
and "dubious me thods" to avo id tax. The McDo well case was effectively the tre nd se tte r in I ndian jurisprudence to establish that the "ghosts o f Fisher and Duke of Westminster" were not existe nt in India. I t was felt then that India would be harsh with tax avoidance and an extremely thin line would run be tween ho w tax evasio n and tax avoidance co uld be inte rpreted and distinguished.
7.3 The Indian Co urts have recently de cided a number o f cases on the basis o f principle o f "substance over form", particularly when the structure is asce rtaine d as one of tax avo idance . Some decisio ns are discussed below where the facts are ide ntical to the facts of this case.
(i) "The Hon'ble AAR, New DELHI in the case of Tiger Glo bal International Ho ldings group re ported in [ 2020] 116 taxmann.com 878 (AAR - Ne w Delhi) he ld that:-48 ITA No. 1915/Del/2022
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"Where re al control of applicant-Singapo re company was with US reside nt who was beneficial o wner of group structure and applicant de rived no capital gains by alie nation of shares o f any Indian company, rather gains arose on sale of a Singapo re Company's share, value of which was derive d substantially from assets locate d in India, such arrangement was for avoidance o f tax in I ndia; applicatio n for advance rulings were to be rejecte d."
(ii) AAR, MUMBAI in case of Bid Se rvice s Division (Singapore) Ltd [2020] 114 taxmann.com 434 he ld that "One can claim that ho lding company will always be predominantly co ntro lling all vital de cisions of subsidiary company and that latte r may be implementing such decisio ns. This may be true but if an entity claims treaty benefits it must establish the economy rationale and substance for treaty entitlement. Treaty sho pping is we ll known for internatio nal tax planning where by an entity is interpose d in a co untry with favo urable tax laws. Late ly, the world o ver it is re ckoned that imprope r nature of treaty sho pping structure is created if the following factors are satisfie d i.e ., the be neficial o wner o f the treaty shopping entity does no t reside in the co untry where entity is create d; the interposed entity has minimal or no economic activity in the jurisdiction where it is locate d and lastly its income is subject to minimal tax in the country o f location. [ Para 62]"
AAR Mumbai further stated that "The doctrine of substance o ver form mandates taxing transaction pursuant to its eco nomic effect rather than its form and that a valid transactio n must have both a substantial purpo se apart from reductio n of tax liability."
Consequently, AAR Mumbai denie d the benefits of India-Singapore DTAA to the assessee in this case ."
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7.4 Hon'ble Madras High Co urt in the case of Redington I ndia [122 taxmann.com 136] has ruled that tax bene fits can be withdrawn if the investment is merely do ne to circumvent domestic tax laws. Hence the intent or the principal purpose be hind such structures need to be analyzed befo re it can be seen if the purpose was to avoid double taxation or tre aty abuse .The reve nue can strike do wn or disallo w any benefits perm itte d under income tax act o r tax treaties if the structures do no t have substance.
Assessee in its reply has trie d to differe ntiate its facts from the judgment o f Hon' ble Madras High Court in case o f Redington India. However, what ne eds to be taken away from the judgment is the broad principal and ratio which is mentioned above cases can be absolute ly similar, but the ratio o r legal principle to be applied provides a lens thro ugh which the facts o f the case sho uld be analyzed. Applying the ratio o f Hon'ble Madras High Co urt in the case of Redington India clearly establishe s that artificial structures or set- ups create d so lely fo r the purpose of tax- avo idance need no t be allo wed by the tax autho rities.
7.5 From the abo ve discussion, it is fairly evide nt that the applicant company has no commercial substance. Mere possession of a TRC alo ne is no t sufficient proo f of contro l and management of the applicant company in S ingapo re. The refore , it may be safely inferre d that the applicant company is a mere conduit/shell co mpany. V arious recent decisio ns as cite d above including the AB Singapore case , Tiger Holding cases, Bidvest case , Redingto n India Ltd case of Madras High Court, Indostar Capital case o f the Bombay High Court have declined to give treaty bene fits merely on the basis of TRC. T he courts in I ndia and in all parts of the wo rld have resorted to the doctrine o f "substance ove r fo rm" in deciding upon the taxatio n of inte rnatio nal transactio ns.
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8 RULINGS BY FOREIGN JUDICIARY ON TAX EVASION PRINCIPLE S 8.1 In the assessment order, AO as well as DRP have refe rred to a number o f case laws to show the judiciary po sitions on tax evasio n, and as to how assessee's case is co vered by principle s laid down in those cases . All these rulings have square ly discussed/ referred to the findings of the Hon'ble A pex Co urt cases re lie d by the AR of the assessee in the cases of A zadi Bachao Andolan and Vodafo ne BV , and went o n to deal with the issue s of tax evasio n by laying down the impo rtant pricoples to be followed to deal with such tax evasion cases.
8.2 Furthe r, attentio n is also invited to the foreign j urisprudence laid out in this regard. Case C- 196/ 04 Cadbury S chweppes Pic. Cadbury Schwe ppes Overseas Ltd. V. Commissioners of Inland Revenue was adjudicated be fore UK courts and it was finally re ferred to ( Euro pean Co urt o f Justice) wherein the ECJ pronounced the landmark decision and laid down the judicial ratio based o n the concept of wholly artificial arrangements with reference to CFC legislation in UK . However, the judicial ratio could be applie d he re to examine whe ther assessee company is wholly artificial arrangements. A wholly artificial arrangement doe s not exist where an assessee company carrie d on genuine e cono mic activities in the Contracting State . T he taxpayer must be give n an opportunity to pro ve such genuine economic activity on the basis of o bjective factors (e .g. premises, staff and equipment of the assessee company in Contracting S tate) 8.3 Applying the abo ve judicial ratio it is note d that there is only one employee , no effective resident director o r ne ither any asse ts apart from meager operatio n of bank account in Singapore . Furthe r all assets held are in the form of shares primarily located in India without any real intimate co nnection to Singapore. Furthe r the 51 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
dominio n ove r such shares o r asse ts are also not demonstrated by the asseessee co mpany to be in Singapore . Thus, the ratio of wholly artificial arrangements laid do wn by ECJ in Cadbury Schweppes Pic is squarely applicable to the assessee company and it can at best be treated as who lly artificial arrangements without any underlying economic re ality.
9. Conclusion:
Therefo re, in view of above , assessee company made tax arrangement with the dominant purpose to avoid tax in India, and acted as conduit/ wholly artificial arrangements for routing investment thro ugh Singapore to get bene fit of I ndia- S ingapo re DTAA. In view o f above discussio n, it is prayed befo re the Ho n'ble bench that the tre aty bene fits unde r India-Singapore DTAA be denie d to the assessee o n account of fiscal evasion of taxes by means of treaty sho pping and the income be taxed as pe r the provisions of the Income Tax Act, 1961."
Sd/-
(Gangadhar Panda) Commissioner of I ncome Tax (DR) Intl. T axn. Bench, ITAT, New Delhi
24. Rebuttal of the Authorized Representative of the assessee is as under:
"The funds for investment are sourced substantially from financial institutions o r unrelated partie s via IPO in the nam e of RHT . The Assessee was inco rporate d to make and manage the investments out of the funds raise d by RHT and also funds borrowed independently by the Assessee, in accordance with Singapo re Business T rust Laws.52 ITA No. 1915/Del/2022
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In this respe ct, the Assessee seeks to refe r to Explanato ry Brie f release d by Monetary Authority of Singapore ("MAS") at the time of introduction o f Business Trust Bill in 2004. Paragraph of Explanato ry Brie f reads as under:
"The BT Bill is a new piece of legislation which regulates the governance o f BT S. BTs are busine ss enterprises set up as a trust structure, as opposed to a co rporate structure . They are essentially hybrid structures with elements of both companies and trusts. A BT differs from a company as it is not a legal entity. It is created by a trust dee d under which the trustee has le gal o wnership of the assets of the business enterprise and manages the business for the benefit of the bene ficiaries o f the trust. Purchasers of units in the BTs, be ing bene ficiaries o f the trust, ho ld be neficial interest in assets of the BT. BTs also differ from other traditional trusts such as a private family trust or a unit trust as they active ly unde rtake business operations. These unique characte ristics of BTs call for a new regulato ry framework that is set out in the BT Bill."
In accordance with Business T rust Laws in S ingapore, the investments o f the Assessee Company in he alth care sector we re managed by the Trustee Manager and a substantial fee is paid to trustee manager in this respect. Furthe r, fo r day to day operations, Assessee has one employee on its payroll. The management consultancy activities we re rendere d by hiring external co nsultants directly by the Assessee.
It is submitte d that merely because the Assessee has one employee only cannot be a ground to hold that the Assessee has no commercial substance when the Assessee has appo inted separate T rustee Manager to make and manage investments, to whom substantial fees is paid. Furthe r, the issue whethe r the Assessee is a shell/conduit 53 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
entity has to be seen in the light o f the cumulative circumstances, discussed at pages 9 to 12 of this written submissio n.
There is no mention in the law that the trustee manager fee paid to the related party cannot be considered as ope rational expenses. Apart from truste e manager fee also, the re are sufficient e xpenses like interest on bo rrowings, which are incurred by the Assessee. Even afte r excluding trustee manager fees, the Assessee company e xceed the threshold of S$ 200,000 in terms of interest paid by it to financial institutio n fo r the purpose of raising loans for investments in health care sector. A list o f operatio nal expe nses incurred by the Assessee in last 24 months from the date o f transfer of CCD's is mentione d below:
October 2014 to April 2015 to April 2016 to
S. No. Nature of expenses March 2015 March 2016 September 2016
Amount (SGD)
1 Employee Benefit Expenses 33,327 50,734 41,213
2 Trustee Manager fees 34,31,098 41,89,711 (Refer Note 1)
3 Professional fees 83,887 18,50,089 7,91,692
4 Realised foreign exchange loss 43,40,757 51,26,604 4,81,588
5 Administrative / Other charges 27,180 54,354 27,189
paid to bank etc
6 Interest on Bank 21,42,901 38,04,879 21,73,585
7 Bank Charges 40,318 22,295 (Refer Note 1)
Note 1 these expe nses were incurre d and booke d at the year end and hence not sho wn separate ly fo r the period A pril 2016 till Septembe r 2016. Refe r pages 95-102 for such details of the paper book Volume
- I. Even if the Truste e Manager fee is to be exclude d as contende d by the Ld. CIT DR (which is disputed) , then, too the remaining e xpe nses are in excess o f the thresho ld of S $ 200,000. The Assessee cannot, 54 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
there fore , be re garded as shell / conduit e ntity, not entitle d to the Treaty benefit, even go ing by the argument of the Ld. CIT DR.
DR's Contention - No need to create trust Assessee's Rebu ttal -
As mentioned hereinabove , the gro up intende d to raise funds from institutional investors in o rde r to make investments in the healthcare sector. Accordingly, in 2012 seve ral jurisdictions in A sia region such as Hong Kong, M alaysia, S ingapo re , Taiwan and South Korea were evaluated fo r setting up a trust structure . Among these jurisdictions, the maximum number of business trusts we re functio nal in Singapore . Co nsidering the comparative business advantages, Singapore was se lected for making investments in healthcare secto r.
RHT was set up as a poo ling vehicle for attracting funds from institutional investors. Listing of RHT on Singapore Stock Exchange helpe d raise substantial funds from repute d and large institutio nal investors, which was invested through the Asse ssee in vario us operating e ntities in the healthcare sector. The Revenue cannot question the co mmercial ratio nale for setting up the trust structure in Singapore , conside ring the substantial funds mobilized by RHT through the IPO, the investments made by the Assessee out of the funds raise d through the I PO by RHT as also the funds bo rrowe d by the Assessee directly, the income earned by the Assessee by way of intere st o n the CCDs, the surplus generate d on dispo sal o f investments and distributio n the reof to the unit ho lders of RHT .
DR's Contention - The Trust as pass through entity not entitled to Treaty benefit Assessee's Rebuttal -
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The setting up of the trust structure as a pooling vehicle for making investments thro ugh special purpose vehicles ("S PV") is an accepte d trade practice. T he trust is only intended to poo l resources from various investors, which are invested through the SPV and distributes the surplus through the unit ho lders fro m time to time and on liquidation of the trust.
It is inte rnatio nally accepte d that taxes levied at the level of the SPV and in the hands of the unit holders, to the e xte nt applicable under the e xtant laws of the particular jurisdiction. In our respectful submission, it is not ope n to the Revenue to question the commercial rationale of setting up RHT and to suggest that the disposal of investments should have happe ned at the leve l of RHT which wo uld not have bee n entitled to the Treaty be nefit, conside ring that (i) RHT was set up fo r commercial/business purposes e laborated above; (ii) the investments had to be held by the Assessee company as per the business trust laws of Singapo re and ( iii) the dispo sal of investments could o nly have been done by the Assessee, which he ld the investments in its o wn name.
DR's Contention Mr. Ravi Mehrotr a also director of Fortis India Assessee's Rebu ttal-
A common director in a fo reign company and an I ndian Company does not mean that fo reign company will become the tax resident in India. To dete rmine the residential status o f a fore ign company, POEM is to be fo und out, which has been discusse d supra.
Further. Mr. Ravi Mehrotra was a non-executive director o f Fo rtis India, which had more than 30 dire ctors o n its Board during the ye ar unde r consideratio n. Hence, having a non-executive Bo ard Member in Fortis India will not lead to creatio n of POEM for Assessee Company 56 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
in India, as all its decisions we re taken by its own Board of Directors outside I ndia.
DR's Contention - Mr. Gurpreet Singh Dhillon is tax resident in India Assessee's Rebu ttal -
Mr. Gurpreet S ingh Dhillon is tax resident of Singapore . The reside nce of Mr. Dhillon can be pro ved from the documents submitted at pages 128-134 subm itte d as Paper-bo ok Volume- 1. From documents, it is clear that he resides outside I ndia and hence not tax resident in India.
Rebuttal to judicial precedents relied upon by L d. CIT DR-
The Ld. CIT DR relied upo n the decision of the Ho n'ble S upreme Court in the case of Vodafo ne International Holdings B.V. v. Union of India (supra), specifically para 67 of the said judgment for the principle of lifting of co rporate ve il o r the doctrine of substance over form.
The Assessee, to o, is seeking to rely upo n the said judgment in extenso . I t is further submitted that it is no t pe rmissible to read a sentence in a j udgment in iso lation, de hors the conte xt/the facts in which the judgme nt was rendere d (Refer CIT vs. Sun Engineering Works P. Ltd.: 198 ITR 297 (SC) @pg 320) The Assessee is seeking to re fer to the dictum of the Supreme Court judgment in the case of Vodafo ne International Ho ldings B.V . v. Unio n of I ndia (supra) in the se parate, co ncurring judgments by the Hon'ble Judges in suppo rt of its case of availability o f Treaty be nefit to the Assessee.
57 ITA No. 1915/Del/2022THR Infrastructure Pte. Ltd.
The Ld. CIT DR has relied upon the following case laws mentione d by the assessing officer in the assessme nt o rde r:
• Tiger Global I nternational Holdings (AAR/04/ 05/ 07/ 2019) • Bid Services Division (Mauritius) Limited (275 Taxman. 244) • AB Mauritius (AAR-402 ITR 311) At the outset, it may be pointed o ut that the decision of the AAR is binding qua the Applicant (be fore the AAR) and the Revenue , insofar as that A pplicant is concerned. The same canno t be regarded as a binding prece dent, much less, binding on the Ho n'ble T ribunal.
Furthermore , the said decisions are distinguishable o n facts. In e ach of the abo ve cases, the Treaty bene fit was denied on the ground that the Applicant was a conduit entity inte rpose d to take advantage o f the India substance in Mauritius. - Mauritius Tax Treaty, without any economic/commercial The fore ign case laws on tax planning/ tax avoidance mentione d in para 8.4 of the impugne d order have been discusse d in detail by the Apex Court in the case of Azadi Bachao Ando lan (supra). The Hon' ble Supreme Court in that decision, afte r analysis of foreign jurisprudence held that legitimate tax planning/tax avoidance without the frame work of law was permissible . The aforesaid dictum was re ite rate d in the later decision rendere d in the case of Vodafone International Holdings B.V . v. Unio n of India (supra) .
The Ld. CIT DR referre d to Article 31 of the Vie nna Convention to emphasize the po int that tax treatie s are ente red in o rder to pre vent fiscal evasion.
There is no dispute to the submissio n made by the Ld. CIT DR. It is the case o f the Assessee that the Revenue has failed to make o ut any case o f fiscal evasio n, be fore se eking to deny the Treaty be nefit 58 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
to the Assessee, a company incorporate d in Singapo re and having substantial econo mic/commercial substance in Singapore.
DR's Contention - Boar d meetin gs not held in Singapor e as Board Resolution s do not show place of meeting:
It was contende d by the Ld. CIT DR that the bo ard resolutions place d in the paper boo k do not specifically show place o f the meeting and furthe r that passing of Circular Resolutio n was not pe rmissible.
Assessee's Rebu ttal-
The Board reso lutions we re signe d by the Directo rs, who resides outside India in accordance with the documents enclosed at pages 128-134 of Paper Book Volume 1. T his is sufficie nt to proof that the Board meetings were held o utside India and not in India. In that view o f the matte r, POEM of the A ssessee canno t be said to be in India.
DR's Contention-TRC not conclusive It was the submission o f the Ld. CI T DR that the TRC was issue d by the tax authoritie s in S ingapo re on the basis of the represe ntatio n made by the Asse ssee and was no t based on reco rds. In that view o f the matte r, it was claimed that the TRC cannot be regarded as conclusive . I n support the reof, the Ld. CIT DR re lied upon para 98 of the Hon'ble Supreme Court judgment in the case of Vodafone International Holdings B.V . v. Unio n of India (supra) . Assessee's Rebu ttal -
Issuance of TRC is an annual exercise done by the re venue authorities across the globe , of the Assessee Company. TRC is issued on an annual basis, considering the past reco rds also and has never been denie d to the Assessee. It is, there fore , incorrect to alle ge that TRC is issued basis only the co nfirm atio n from the Assessee. Further, 59 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
TRC issued to the Assessee has bee n duly acce pte d while concluding the assessment proceedings for the previous assessment years; no doubts were raise d on the validity of the TRC while concluding such assessment pro ceedings in the case of the Assessee.
The arguments raised by the Ld. CIT DR are contrary to the admitted facts of the case and the settle d position in law. The same do not merit acceptance. Accordingly, Ground Nos. 2 to 6 raised by the Assessee deserve to be allowe d and the Assessee he ld entitle d to the benefit of the Tax Treaty with respect to capital gains earne d on sale of CCDs.
RE: GROUND OF APPEAL N O. 7 TO 7.2 The Assessee file d return of inco me disclosing income by way of inte rest on CCDs in an amount of Rs.341,50,87,837/ - and fees fo r technical services in an amount of Rs.90,00,000/- . Tax on the aforesaid amounts had been withheld @ 10% under the India Singapore DTAA .
The assessing officer in the draft assessment o rde r accepted the aforesaid incomes as returned, the reby ho lding that the benefit of the Tax T reaty was admissible with regard to the levy o f tax with respect to such incomes.
Since the re was no grie vance with regard to the treatment of the aforesaid incomes, the Assessee did no t file objections be fore the DRP with respect there to. Accordingly, no directio ns were issue d by the DRP qua such incomes.
The assessing office r while passing the final assessment order subjecte d the afo resaid income to tax at the rates provide d under the Act, presumably on the basis that the DRP had upheld the finding of the assessing office r in the draft assessment order that the Assessee was no t entitle d to the benefit o f the T ax Tre aty.60 ITA No. 1915/Del/2022
THR Infrastructure Pte. Ltd.
The action o f the assessing o fficer in levying tax o n the afo resaid incomes at the rates provide d under the Act is in excess of jurisdictio n in as much as the final assessment order is no t in consonance/in conformity with the binding dire ctio ns o f the DRP. The assessing o fficer erred in varying the treatment of the aforesaid incomes in the draft assessment o rder without any direction in that behalf by the DRP.
Independent of the above , once it is held that the Assessee is entitle d to the Treaty benefit, the rate o f tax applicable to such incomes wo uld have to be as per the Tax T reaty.
For the aforesaid reasons the order passed by the assessing o fficer bringing to tax the aforesaid incomes at the rates pro vided under the Act calls for be ing reverse d."
25. Heard the arguments of both the parties and perused the material available on record.
26. As per the facts on record, the assessee is a tax resident of Singapore and TRC issued by the Singapore Tax Authorities is on record. The Hon'ble Supreme Court in the judgment of Vodafone International Holdings B.V. vs. Union of India and Anr., has held that Union of India vs. Azadi Bachao Andolan (supra) is correct law and TRC is sufficient evidence to show residence of the contracting state. The valuation of CCDs is not in dispute. Hence, the only issue is according the benefits of India-Singapore Treaty pertaining to exemption under Article 13(4) of the Tax Treaty with regard to the capital gains earned on sale of CCDs. The revenue alleged that there is a scheme of tax avoidance as more than 30% of units in the RHT Trust are held through related parties. While it is a fact that 35.5% of 61 ITA No. 1915/Del/2022 THR Infrastructure Pte. Ltd.
shares were primarily held by FHIL, the remaining 64% was raised from public and institutional investors. The place of effective managements of the assessee is situated in Singapore owing to the conducting of Board meetings and placing of the Directors at Singapore. With regard to the contention of the revenue that there was no commercial rationale for FHL to incorporate wholly on subsidiary in Mauritius is of no relevance and commercial justification to establish the business trust in Singapore has been duly explained by the assessee. The applicant could demonstrate incurring the expenditure of more than $ 2,00,000 so as to come out of the allegation of being a shell entity. The circular of CBDT No. 789 dated 13.04.2000 and also the press release of 2013 mentioned above leaves no scope for the revenue to tax the amounts and deny the treaty benefits. It is also point for consideration that the interest on the CCDs has been rightly taxed by the revenue as per the treaty in the earlier years and now revenue cannot turn around and deny the benefits of the treaty in case of sale CCDs. Even considering the Limitations of benefit clause (LOB), the look through approach, doctrine of substance over form as relied by the revenue, the benefit to the assessee at this juncture cannot be denied.
27. To conclude, The allegations of the revenue that, (refer page no. 38 DAO) a. The scheme of arrangement employed by the assessee is a tax avoidance through treaty shopping mechanism- Not proved.
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b. The assessee company is not the real owner of the income so generated from the transaction. Accordingly, it lacks beneficial ownership- Not proved.
c. The TRC is not sufficient to establish tax residency if the substance establishes otherwise- Sufficient. d. The control and management of the assessee company is also not present in Singapore but rather in India- Not proved.
e. The assessee was listed on Singapore Stock Exchange in 2011 hence it shall not be deemed to be a shell/conduit company and hence the LOB clause of Article 3 (now deleted) 2005 Protocol to the DTAA is not applicable to the assessee.
28. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 12/05/2023.
Sd/- Sd/-
(Saktijit Dey) (Dr. B. R. R. Kumar)
Judicial Member Accountant Member
Dated: 12/05/2023
*Subodh Kumar, Sr. PS*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR