Foreign Entity Having Valid Tax Residency Certificate Is Eligible To DTAA Benefit On Long-Term Capital Gain From Sale Of Share Of Indian Entity: Delhi ITAT

The Tribunal emphasized that the burden is on the Revenue Department to establish that the entity has been formed and operated in a manner that the only intention was to take DTAA benefit without there being actual intention of an economic activity.

The transaction of sale of shares of Indian company which the AO alleged to be out of tax evasion and treaty shopping was, in fact, a long-term investment decision by the Singapore based Assessee which has sufficient managerial and operational structure to run an entity based in Singapore, added the Tribunal.

The Division Bench of Dr. B.R.R. Kumar (Accountant Member) and Anubhav Sharma (Judicial Member) observed that “the burden is on the Revenue to establish that the entity has been formed and operated in a manner that the only intention was to take DTAA benefit without there being actual intention of an economic activity”.

Facts of the case

The Appellant/ Assessee company. engaged in the business of trading of electromechanical relays, wire and wireless equipment, high performance polymeric products, highly specialized energy related products, was subject to scrutiny. During assessment, the AO disallowed Assessee's claim that being a tax resident of Singapore, Assessee is covered by the beneficial provisions of the India-Singapore DTAA under Article 11, thus interest income received from Compulsory Convertible Debentures (CCD) could not be taxed under the provisions of the Act. The AO held the capital gain on sale of shares of an Indian company to be taxable and accordingly, made addition of Rs. 211.61 Crore by applying the tax as per rates of the Act as against the beneficial rate, claimed by the Assessee.

Observation of the Tribunal

The Bench noted that the Assessee, as part of global restructuring, sold 10,37,030 shares of TE Connectivity Global Shared Services India Private Limited to a third party resulting in the long-term capital gains and claimed that it was not liable to pay any tax on the capital gains as the same was tax exempted under Article 13(4) of India-Singapore DTAA.

The Bench opined that the TRC, although not conclusive evidence of a tax residency of an entity, it certainly is statutory evidence and the burden is on the Revenue to establish from the facts and circumstance that the entity has been formed and operated in a manner that the only intention was to take DTAA benefit without there being actual intention of an economic activity.

At first instance the initial burden was discharged by the assessee by filing the statutory evidence of tax residency in the form of TRC, but, the same was not rebutted by any inquiry or evidence by the AO, added the Bench.

The Bench found that as per the applicable Limitation of Benefit clause, the Assessee fulfils the specified criterions for having significant business operations/activities in Singapore, and hence, it cannot be alleged that the Assessee is not a resident in Singapore and that it has no taxable existence in any other country.

The Bench therefore concluded that the transaction of sale of shares of Indian company which the AO alleged to be out of tax evasion and treaty shopping was, in fact, a long-term investment decision by the Singapore based Assessee which has sufficient managerial and operational structure to run an entity based in Singapore.

Thus, the ITAT deleted the addition and allowed Assessee's appeal.

Counsel for Appellant/ Assessee: Ajay Vohra and Somya Jain

Counsel for Respondent/ Revenue: Vizay B. Vasanta and Anshul

Case Title: Tyco Electronics Singapore Pte Limited versus DCIT

Case Number: ITA No.1760/Del/2022

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