2025 (6) TMI 393 - AT - Income Tax

Entitlement to benefit of Article 13(4) of the India-Singapore DTAA - Appellant is admittedly a resident of Singapore - short term capital gains on sale of shares of Indian companies - whether the amended provisions of India-Singapore DTAA apply or the pre-amended provisions of India Singapore DTAA applies in the instant case? - HELD THAT - By Notification dated 23.03.2017 paragraph 4 of Article 13 was omitted and paragraph 4A 4B 4C and 5 were inserted in Article 13 of India- Singapore DTAA. It is noted that both the omission and insertion have been made effective w.e.f 1.04.2017 and therefore relates to transactions effected on or after 1.04.2017 in respect of which the taxability has to be examined under the said provisions. In the instant case the transactions by way of alienation of shares have been effected during the financial year 2015-16 relevant to assessment year 2016-17 and therefore the amended provisions of India-Singapore DTAA will not apply and the pre-amended provisions of India Singapore DTAA will apply in the instant case. Having said that even though there is no ambiguity that the amendment will apply prospectively we find that the amendment which has been brought about in Article 13 of India-Singapore DTAA has no impact as far as the facts of the present case are concerned. In the instant case we however find that there is no discussion either by the AO or by the ld CIT(A) as to how such income on alienation of shares of Indian companies is liable to tax in Singapore and what are the taxing provisions in Singapore whether on accrual or remittance basis and onus has been entirely placed on the assessee to produce his Singapore tax filings as well as appropriate certificate from the Singapore tax authorities to the effect that such capital gains would be brought to tax in Singapore. Equally we find that the assessee in his submissions before the AO besides stating that he is assessed to tax on global income in Singapore has not corroborated the same in terms of his Singapore tax filings or any certification from Singapore tax authorities. Further nothing has been brought on record by either of the parties during the course of hearing before us. Therefore in absence of requisite information which has a bearing on the matter under consideration we are unable to decide whether second condition of Article 24(1) has been satisfied in the instant case or not. Both the conditions so prescribed in Article 24(1) need to be fulfilled cumulatively and in the instant case since the first condition has not been satisfied as we have examined supra the question of examination of the second condition becomes academic in nature and in view of the same we deem it appropriate to leave it open to be decided at appropriate stage should the need for the same arise in future. We are of the opinion that the assessee is eligible for the benefit of Article 13(4) of India- Singapore DTAA in respect of capital gains on alienation of shares in Indian companies acquired prior to 01 April 2017 as the taxing rights are with Singapore and not with India. Carry forward of short term capital losses - As we find merit in the contention advanced by the ld AR that where the assessee wishes not to claim the tax treaty benefit and seeks to be governed by the provisions of the Act the assessee be allowed to carry forward short-term capital losses incurred during the year on sale of specified listed and unlisted shares to subsequent years without setting off the same against the short term capital gains. The Assessing officer is directed accordingly to allow carry forward of short term capital losses and in respect of gross short term capital gains the Assessing officer is directed to allow the benefit of Article 13(4) of India- Singapore DTAA as we have discussed above. In the result the additional ground of appeal is allowed.

Summary

Issues Presented and Considered

1. Whether the assessee, a tax resident of Singapore, is entitled to the benefit of Article 13(4) of the India-Singapore Double Taxation Avoidance Agreement (DTAA) for capital gains arising from alienation of shares in Indian companies acquired prior to 1 April 2017, thereby exempting such gains from tax in India.

2. Whether the amended provisions of India-Singapore DTAA (effective from 1 April 2017) apply to the assessment year 2016-17 or whether the pre-amended provisions govern the taxability of capital gains in the instant case.

3. The applicability and interpretation of Article 24(1) of the India-Singapore DTAA invoked by the Assessing Officer (AO) to deny the benefit of Article 13(4) to the assessee, specifically whether the exemption under Article 13(4) can be limited by Article 24(1) based on remittance or receipt of income in Singapore.

4. Whether the assessee is entitled to carry forward short-term capital losses amounting to Rs. 53,13,457/- under the provisions of the Income-tax Act, 1961, without setting them off against short-term capital gains, particularly when claiming benefits under Article 13(4) of the DTAA for capital gains.

Issue-wise Detailed Analysis

1. Entitlement to Benefit under Article 13(4) of India-Singapore DTAA for Capital Gains

Legal Framework and Precedents: Article 13(4) of the India-Singapore DTAA (pre-amendment) provides that gains derived by a resident of a contracting state from the alienation of any property other than those specified in paragraphs 1, 2, and 3 of Article 13 shall be taxable only in that state of residence. The Supreme Court and various High Courts have held that DTAA provisions override domestic tax laws to the extent they are more beneficial to the taxpayer (Section 90(2) of the Income-tax Act). The Hon'ble Bombay High Court decisions in Citicorp Investment Bank Pvt. Ltd. and APL Co. Pte Ltd. have recognized the applicability of Article 13(4) for capital gains on debt instruments and shipping income respectively, subject to conditions.

Court's Interpretation and Reasoning: The Court noted that the assessee is an admitted tax resident of Singapore and alienated shares of Indian companies acquired prior to 1 April 2017. The amended provisions of the DTAA, effective from 1 April 2017, do not apply to the assessment year 2016-17. Both pre-amended and post-amended provisions confirm that gains on alienation of shares acquired before 1 April 2017 are taxable only in the state of residence, i.e., Singapore. Therefore, the Court held that the assessee is eligible for exemption from tax in India under Article 13(4) of the DTAA for such capital gains.

Key Evidence and Findings: The alienation occurred in FY 2015-16 (AY 2016-17), prior to the effective date of the amendment. The shares were acquired before 1 April 2017. The assessee's tax residency in Singapore was not disputed.

Application of Law to Facts: The Court applied the DTAA provisions as per their effective date and found no ambiguity that the gains are taxable only in Singapore. The AO's denial of exemption was contrary to the treaty provisions.

Treatment of Competing Arguments: The AO and CIT(A) relied on distinctions with prior cases involving debt instruments and the absence of evidence regarding taxation in Singapore. However, the Court emphasized the treaty's clear language and the timing of transactions, overruling such distinctions for the facts at hand.

Conclusion: The assessee is entitled to exemption from tax in India on capital gains arising from alienation of shares acquired prior to 1 April 2017 under Article 13(4) of the India-Singapore DTAA.

2. Applicability of Amended vs. Pre-amended DTAA Provisions

Legal Framework: The amendment to Article 13 of the India-Singapore DTAA was notified effective 1 April 2017, introducing paragraphs 4A, 4B, 4C, and 5, distinguishing between equity shares and other instruments for capital gains taxation.

Court's Reasoning: Since the alienation transactions occurred before 1 April 2017, the amended provisions do not apply. The pre-amended Article 13(4) governs the taxability of capital gains in this case. Both versions, however, concur that capital gains on shares acquired before 1 April 2017 are taxable only in the resident state.

Conclusion: Pre-amended provisions apply for AY 2016-17, and the amendment has no bearing on the facts of this case.

3. Applicability of Article 24(1) of the India-Singapore DTAA

Legal Framework: Article 24(1) provides that where income is exempt or taxed at a reduced rate in the source state and taxed in the other contracting state on a remittance basis, the exemption or reduction in the source state shall apply only to the amount remitted to or received in the other state.

Court's Interpretation and Reasoning: The Court held that Article 13(4) is a taxing provision allocating exclusive taxing rights to the resident state, not an exemption provision. Therefore, Article 24(1), which applies only where income is exempt or taxed at reduced rates in the source state, is not applicable to Article 13(4). The Court relied on Coordinate Bench decisions (D.B. International (Asia) Ltd. and APL Co. Pte Ltd.) which held that Article 24(1) does not restrict the benefit of Article 13(4) because the latter confers exclusive taxing rights rather than exemption.

Regarding the second condition of Article 24(1), i.e., whether Singapore taxes the income on remittance or accrual basis, the Court noted that the assessee failed to provide any evidence or certificate from Singapore tax authorities regarding the taxability of capital gains in Singapore. Consequently, the Court declined to decide on this condition but observed that since the first condition is not met, the applicability of the second condition is academic.

Conclusion: Article 24(1) does not apply to restrict the benefit under Article 13(4) in this case. The AO's invocation of Article 24(1) to deny treaty benefits was improper.

4. Carry Forward of Short-Term Capital Losses Without Set-Off Against Gains

Legal Framework and Precedents: Section 70 of the Income-tax Act provides for set-off of losses against income from the same head. Section 90(2) allows application of DTAA provisions if more beneficial to the assessee. The Tribunal has consistently held that capital gains and capital losses can be segregated for the purpose of availing benefits under the DTAA or the Act, whichever is more beneficial (Matrix Partners India Investment Holdings, LLC; Joint CIT vs. Montgomery Emerging Markets Fund; IBM World Trade Corpn.; ACIT vs. J.P. Morgan India Investment Company Mauritius Ltd.).

Court's Reasoning: The Court recognized that each transaction of capital gain or loss constitutes a separate source of income under the head "capital gains." The assessee claimed exemption on capital gains under Article 13(4) of the DTAA but sought to carry forward short-term capital losses under the Act without setting them off against gains. The AO had taxed net short-term capital gains after setting off losses and denied carry forward of losses.

The Court referred to Coordinate Bench decisions that upheld the segregation of capital gains and losses for the purpose of claiming benefits under the DTAA and the Act. It was held that the tax treaty cannot be forced upon the assessee and the assessee can opt to avail benefits under the Act for losses and under the DTAA for gains, whichever is more beneficial.

The Court further relied on the Hon'ble Bombay High Court's decision clarifying that income exempt under the DTAA does not form part of total income for rate computation and losses should not be set off against exempt income, as that would amount to taxing exempt income in violation of treaty provisions.

Competing Arguments: The Revenue contended that set-off of losses against gains is mandatory under Section 70 and that the assessee cannot opt not to set off losses. The Court rejected this, emphasizing the beneficial provisions of Section 90(2) and the principle that the DTAA cannot be imposed on the assessee against their choice.

Conclusion: The assessee is entitled to carry forward short-term capital losses without setting them off against short-term capital gains exempt under Article 13(4) of the DTAA. The AO is directed to allow carry forward of losses accordingly.

Significant Holdings

"Both under the pre-amended and post-amended provisions, gains on alienation of shares of Indian companies acquired prior to 1 April 2017 are taxable only in the state of residence of the alienator, i.e., Singapore, and there is thus no ambiguity in this regard."

"Article 13(4) is clearly a taxing provision and the right of taxation has been given to the state of residence instead of state of source of such income. There is clearly a material distinction between the exemption provision and the taxability provisions and only in case of former, Article 24(1) can be invoked."

"Article 24(1) envisages a situation where income is exempt or taxed at reduced rate in the source state and taxed in the other contracting state on remittance basis. Both conditions need to be cumulatively satisfied before Article 24(1) can be invoked."

"The tax treaty cannot be thrust upon an assessee. The assessee is entitled to claim the provisions of the Act or the provisions of the DTAA, whichever is more beneficial at the option of the assessee."

"Income exempt under the DTAA does not form part of total income for the purpose of computing the rate of income tax. Setting off losses against exempt income would tantamount to taxing the exempt income and violate treaty provisions."

"Where the assessee wishes not to claim the tax treaty benefit for losses and seeks to be governed by the provisions of the Act, the assessee should be allowed to carry forward short-term capital losses without setting off against exempt capital gains."

Final Determinations

1. The assessee, being a resident of Singapore, is entitled to exemption from Indian tax on capital gains arising from alienation of shares acquired prior to 1 April 2017 under Article 13(4) of the India-Singapore DTAA.

2. The amended provisions of the India-Singapore DTAA effective from 1 April 2017 do not apply to the assessment year 2016-17; hence, the pre-amended provisions govern the taxability.

3. Article 24(1) of the DTAA is not applicable to restrict the benefit under Article 13(4) in the present facts, as Article 13(4) confers exclusive taxing rights to the resident state rather than providing exemption in the source state.

4. The assessee is entitled to carry forward short-term capital losses under the Income-tax Act without setting them off against short-term capital gains exempt under the DTAA. The AO is directed to allow such carry forward and grant exemption on capital gains under Article 13(4).