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TMI Blog2021 (3) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... or tax purpose. The proposed transfer of shares by the Seller to the Buyer was to be undertaken by way of sale under a private arrangement and to be completed outside the stock exchange as an "off-market" sale transaction. It is in connection with this transaction that two applications were filed before this Authority one by the Seller and another by the Buyer. In the application filed by the Seller the following questions were raised: 1) Whether BG Asia Pacific Holdings Pte Limited (herein after referred to as the "Applicant a tax resident of Singapore, is liable to capital gains tax in India under the provisions of the Income-tax Act, 1961 ("Act") and Double Taxation Avoidance Agreement between India and Singapore ("the India-Singapore DTAA "), in respect of the proposed sale of shares held by it in Gujarat Gas company Limited ("GGCL "), an Indian company whose shares are listed on recognized stock exchanges in India, to a buyer, , a company incorporated in India (herein after referred to as "the Buyer ? 2) If the question no 1 is answered in the affirmative, then, whether the long-term capital gains arising to the Applicant, on the proposed sale of shares held in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 4(l) Of the India-Singapore DTAA, it qualifies as a resident of Singapore for the purpose of the India-Singapore DTAA. B G Asia had acquired shares in GGCL in multiple tranches, with the first acquisition being in 1997, and continued to hold its entire shareholding (expect transfer of 200 shares to two individuals) in GGCL since 1997. Further, B G Asia did not have a PE/fixed base in India and the shares held by it did not form part of assets of any PE/fixed base in India. Accordingly, the taxability of capital gains accruing to B G Asia on sale of shares would be covered under Article 13(4) of the India-Singapore DTAA. 4. The Ld. A.R. admitted that the capital gain arising on sale of shares of GGCL was taxable as per the provisions of Income-Tax Act. As the shares of the Indian company is considered as situated in India, the capital gains arising to a non-resident from sale of shares in an Indian company is "deemed to accrue or arise in India" by virtue of Section 9(1) of the Act and, therefore, is liable to tax in India u/s 5 of the Act. However, the provision of Section 90(2) of the Act stipulates that where an agreement is made by the Central Government with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stipulated that benefit of Article 13.4 of the DTAA will not be available if the affairs were arranged with the primary purpose to take advantage of the Protocol. In this regard, the following submissions were made by BG Asia: * The Applicant is a company incorporated in Singapore and has the status of BG group's regional headquarters . Applicant has made significant investments in group companies situated in India, Singapore, Egypt, Thailand and Trinidad; details of investment, along with description of business operations of the investee entity are enclosed as Attachment 6 (at page 65 to 66) . Further, BG group employs a number of personnel in Singapore for its regional and local operations and leases significant office space in Singapore. * The Applicant acquired equity stake in GGCL in the year 1997 i.e. prior to the introduction of capital gains exemption under Article 13 (4) of the India-Singapore DTAA. Further, the Applicant continued to hold its entire investment in GGCL even after introduction of capital gains exemption since August 2005. The elapsed time gap between introduction of exemption provision in the DTAA and sale of shares by the applicant establishes th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hasize that the aforesaid annual operating expenditures for past two years as indicated above exclude financial expenditure, in the nature of foreign exchange fluctuation loss, etc. It is also pertinent to emphasis before this Authority that the T RC issued by the Singapore tax authorities clearly states that, for years ended on December 31, 2010 and December 31, 2011, the Applicant satisfies conditions specified in Article 3 of the Protocol in relation to capital gains exemption provided under Article 13 (4) of the India-Singapore DTAA (including the condition of minimum annual expenditure prescribed in the Protocol) . In other words, the TRC issued by Singapore tax authorities establishes that LOB conditions prescribed under the Protocol to the India-Singapore DTAA are adequately satisfied by the Applicant, in conformity with Article 3 (1) to 3 (4) of the Protocol. The Ld AR emphasized that since all the LOB conditions prescribed under the Protocol were satisfied BG Asia was entitled to the exemption under Article 13(4) of the India-Singapore DTAA and the capital gains arising on transfer/sale of shares in an Indian company was not liable to tax in India. 7. As regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tute income chargeable to tax under the Act. Reliance in this regard was placed on the judgment of the Supreme Court in the case of GE India Technology Centre vs CIT (327 ITR 456). Submission of the Revenue 10. Shri G. C. Srivastava, the Ld. Special Counsel for the Revenue submitted that LOB provision in the Protocol to India-Singapore DTAA was an anti-abusive provision, the purpose of which was to limit the ability of third country residents to claim undue benefits under the treaty by creating structures in the treaty state. He referred to the LOB provisions of India-Singapore DTAA in respect of capital gains and submitted that in order to avail the benefit of Article I of the Protocol, the conditions as stipulated in Article 3 of Protocol must be satisfied. He further submitted that the LOB conditions must be construed strictly; otherwise the intent of the contracting parties will not be fulfilled. The Revenue has submitted that the intention behind these provisions was to curb the use of holding companies that do not have bona fide business activities in India/Singapore from being granted treaty benefits. It was argued that the basic issue to be decided was whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have any employee in Singapore and by itself it had not incurred any expenditure under any head. The payroll cost of UK Pound 5446 was also not borne by BG Asia, but was borne by its subsidiary company and recharged to BG Asia. It was submitted that the administrative recharge was allocation of expense by the associates of BG Asia, ostensibly of administrative nature. The Revenue has also cast a doubt on recharge of administrative expense allocated to BG Asia and submitted that it was not known whether the expenditure related to administrative activities in Singapore or whether the recharge pertained to services rendered somewhere outside. According to the Revenue, no evidence was brought on record to support that the operational expenses of the Seller were incurred in Singapore. Further, it was submitted that from the statement of accounts/financial statements of BG Asia, it was apparent that only expenses of administrative nature were debited to accounts and there were no expenses relating to any 'operational activity' 13. The Ld. Special Counsel emphasized that BG Asia did not have any employee on its payroll and that the payroll cost was borne by a subsidiary an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trol and management will be exercised in Singapore cannot be treated as sufficient evidence that the control and management was exercised in Singapore. Further that in-spite of the TRC, BG Asia had to meet the other conditions as specified in Article 3 of the Protocol. 16. The Revenue has submitted that the break-up of administrative expenses allocated to the Seller was not available and no contractual agreement with associates in Singapore was submitted to evidence the obligation of the associate to handle administrative work and incur the expenditure in Singapore. According to the Revenue, the expenditure as attributed by other associates cannot be adopted as expenditure of BG Asia for the purpose of Article 3 of the protocol. According to Ld. Counsel the word 'operating activities' means "the principal revenue-producing activities of an enterprise and other activities that are not investing or financing activities " as defined in P Ramanatha Aiyar's Advanced Law Lexicon. He further contended that the expenses necessary for statutory compliances cannot be considered as operational activities. According to Revenue the condition of real and continuous business ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gapore, Egypt, Thailand and Trinidad, engaged in business activities relating to the oil and gas industry. The total value of these shareholdings was in excess of 4.5 billion Singapore dollars. BG Asia had started purchases of shares in GGCL as far back as in 1997 and completed its share purchases in this company in 1999. Thereafter, the GGCL share acquisitions by BG Asia were involuntary in nature, arising only from share splits and bonus issues. It was only on 18/7/2005 that Article 13(4) was introduced into the DTAA (with effect from 1/8/2005) and the benefit of exclusion from capital gains taxation in India was granted for the first time. The Ld AR emphasized that BG Asia had completed its share purchases six years earlier, i.e., in 1999 itself and it was absolutely clear that the purchases of GGCL shares were not made for the purpose of availing of tax benefit under the India-Singapore DTAA. 20. The Ld AR explained that the decision to sell the GGCL shares was as part of a general policy decision reached in 2012 that the BG Group should focus on its core business areas of gas exploration and production and divest its interests in associate as well as subsidiary companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and not to third party customers. These investments and also the businesses to which they relate require to be monitored continuously, carefully and meticulously in an informed manner, which necessarily required business and management skills of a high order. The Ld AR submitted that this position was clearly recognized and explained by the Supreme Court in Vodafone International Holdings BV vs Union of India case (2012) 341 ITR 1 (SC), on which reliance was placed. He explained that the Vodafone judgment makes it absolutely clear that such holding companies are essential for the proper management of a MNC's worldwide business interests and that the activity of such an investment holding company is a bonafide business activity and business operation. Reliance in this regard was also placed on the judgment of the A.P High Court in the case of Sanofi Pasteur Holding SA Vs Department of Revenue, Ministry of Finance - (2013) 354 ITR 316 (AP). 22. On the objection of the Revenue in respect of expenditure on operations, the Ld AR submitted that the activity of BG Asia was a bonafide business activity and, therefore, the entire expenditure incurred by it for carrying on this ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onafide business expenditure the reimbursement made by the assessee company in India of the appropriate portion of the expenditure paid by the group company and then apportioned among the group companies as per the said Cost Allocation and Time Writing Policy. In this regard reliance was placed on the following decisions of the ITAT:- (a) B.G. Exploration and Production India Ltd Vs J.C.I.T - [2017] 82 Taxmann.com 446 (Delhi - Trib) (b) B.G. India Energy Solutions Pvt Ltd vs Dye C.I.T - [2019] 101 Taxmann.com 360 (Delhi - Trib) (c) B.G. India Energy Solutions Pvt Ltd vs Dy. C.I.T - [2020] 119 Taxmann.com 319 (Delhi - Trib) The Ld AR submitted that the break-up of expenditure on operations incurred on account of time writing cost and debit notes received by BG Asia from its wholly owned subsidiary (which provided the required services to the Seller) were placed on record and the total expenditure incurred by BG Asia, including the Time Writing expenses were considerably above the limit of S$ 200,000 per annum and, therefore, the requirements of Article 3 of the Protocol was satisfied. 24. The Ld AR pointed out that the Tax Residency Certificate (TRC) iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale of shares of GGCL was taxable as per the provisions of Income-Tax Act. BG Asia has merely sought to avail the benefit under Section 90(2) of the IT Act, which stipulates that provisions of the DTAA shall apply to the extent they are more beneficial to the assessee. Article 13 of India-Singapore DTAA which deals with taxation of capital gains is found to be as under ARTICLE 13 CAPITAL GAINS 1. Gains derived by a resident of a Contracting State from the alienation of immovable property, referred to in Article 6, and situated in the other Contracting State may be taxed in that other State. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services , including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such fixed base, may be taxed in that other State. 3. Gains from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l/ conduit company is any legal entity falling within the definition of resident with negligible or nil business operations or with no real and continuous business activities carried out in that Contracting State. 3. A resident of a Contracting State is deemed to be a shell/ conduit company if its total annual expenditure2 on operations in that Contracting 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 immediately preceding period of 24 months from the date the gains arise. 4. A resident of a Contracting State is deemed not to be a shell/ conduit company if- (a) is listed on a recognised stock exchange3 of the Contracting State; 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 State as the case may be, in the immediately preceding period of 24 months from the date the gains arise. Explanation. -The cases of legal entities not having bona fide business activities shall be covered by Article 3.1 of this Protocol. 29. In order to avail the exemption u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy decision in respect of the BG Group operations all over the world and it was not specific to India. In pursuance to the general business policy decision to divest non-core business interest, the Board of Directors of BG Asia had passed a resolution dated 28/09/2012 for sale of shares of GGCL. It is also relevant to consider that similar sale of shares of non-core holding was made in other countries viz. Brazil & Italy. Further, BG Asia had not divested all its share holdings in all the companies in all the countries. Rather it still continued to hold the investment in other companies. It is thus evident from these facts that the decision to sell the shares of GGCL was non-India specific decision and pursuant to bona fide business restructuring. Therefore, it cannot be said that the affairs of BG Asia in the form of sale of shares of GGCL were arranged with the primary purpose to take advantage of the benefits of Article 1 to the Protocol to India-Singapore DTAA and to avail the benefits of Article 13.4 of the Treaty. 31. Whether BG Asia is having bonafide business activities? According to the Revenue, the activity of group investment holding company was not a business ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are essential for management of an MNC's worldwide business interest and that the activity of such an investment holding company was a bona fide business activity and business operation. To quote from the order: Holding Company and Subsidiary Company 56 . Position in India and elsewhere is that the holding company controls a number of subsidiaries and respective businesses of companies within the group and manage and integrate as whole as though they are merely departments of one large undertaking owned by the holding company. But, the business of a subsidiary is not the business of the holding company (See Gramophone & Typewriter Ltd. v. Stanley (1908-10) All ER 833 at 837) . 57 Subsidiary companies are, therefore, the integral part of corporate structure. Activities of the companies over the years have grown enormously of its incorporation and outside and their structures have become more complex. Multi National Companies having large volume of business nationally or internationally will have to depend upon their subsidiary companies in the national and international level for better returns for the investors and for the growth of the company.... 58 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not find any merit in contention of the Revenue that the group investment holding undertaken by BG Asia was not a bona fide business activity. It was categorically held by the AP High Court that creation of wholly owned subsidiaries for domestic or overseas investment was a well-established business and that investment in itself was a legitimate, established and globally well recognized business. Therefore, the LOB clause in Explanation to Article 3 of the Protocol that a legal entity not having bona-fide business activities shall be covered by Article 3.1 of the Protocol is not found attracted in this case. 32. Whether BG Asia is a shell/conduit Company? The Article 3.2 of the Protocol stipulates that any legal entity with negligible or nil business operations or with no real and continuous business activity carried out in the Contracting state shall be considered as shell / conduit company. As already mentioned earlier, BG Asia was setup in the year 1995 in Singapore and since then it is continuously engaged in the business activity of holding the investments. As held by the AP High Court in the case of Sanofi (supra), "investment is of itself a legitimate, established a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired to be considered in the LOB Clause 3.3 was not the "total annual expenditure" but the "total annual expenditure on operations" in the Contracting state i.e. in Singapore. The applicants have contended that it was not open to Revenue to question the declaration as contained in the TRCs, in support of which reliance was placed on certain judicial pronouncements. Before we examine the issue of expenditure as stipulated in clause 3.3 of the Protocol it will be relevant to examine the judgements relied upon by the applicants on the issue of acceptability of TRCs. 33.1 In the case of UOI v. Azadi Bachao Andolan [supra] the Supreme Court had dealt with the interpretation of treaties with respect to 'treaty shopping' in considerable detail. It was observed that section 90 was specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement and the provisions of such an agreement would operate even if inconsistent with the provisions of the Income-tax Act. The issue before the Hon'ble Court was validity of Circular No. 789 issued by the CBDT in respect of taxation of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian ports was not taxable at Singapore on basis of remittance but on basis of accrual. The Assessing Officer had held that the Shipping company was not entitled to benefit of article 8 by virtue of the provisions contained in Article 24 as the freight receipts were remitted to London and not to Singapore. The assessee had furnished a Certificate issued by the Inland Revenue Authority of Singapore which certified that the income in question derived by ST Shipping would be considered as income accruing in or derived from the business carried on in Singapore and such income would be assessable in Singapore on accrual basis. It was elaborated that the full amount of income would be assessable to tax in Singapore not by reference to the amount remitted to or received in Singapore. Further, the certifying authority had also opined that Article 24.1 of the DTAA would not be applicable and consequently, Article 8 would apply. The Hon'ble Gujarat High Court had observed on the acceptability of such certificate as under: 18. To this later opinion of the Revenue authority of Singapore, we may not be fully guided since it falls within the realm of interpretation of the relevant clauses o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its audited account for the Financial Year ending 31/12/2004 onwards. It is found that the expenses debited in 'Income Statement' were 'administrative expenses' and 'finance expenses'. Further, it is noticed from the 'Notes to the Financial Statements' that the Company did not have any employees on its payroll and the payroll cost of the employees in all the years was initially borne by a subsidiary and recharged to the Company, which was part of administrative expense. The dividend income, the administrative expense and recharge of employee cost as appearing in the audited accounts in different years, are found to be as under: F.Y. ending on Dividend Income Administrative Expense Payroll Cost Recharged 31/12/2004 GBP 8,310,677 GBP 4,144,715 GBP 9,790 31/12/2005 GBP 4,936,502 GBP 142,354 GBP 2,934 31/12/2006 GBP 241,901,655 GBP 435,083 GBP 4,952 31/12/2007 GBP21,504,601 GBP 128,927 GBP 958 31/12/2008 GBP 5,787,677 GBP 143,253 GBP 7,835 31/12/2009 GBP255,752,586 GBP 140,627 GBP 4,400 31/12/2010 GBP 103,049,339 GBP 147,769 GBP 5,446 31/12/2011 GBP 89,253,735 GBP 161,215 GBP 4,705 31/12/2012 GBP 39,188,011 GBP 290, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 01.01.2012 - 31.12.2012 A.Y. 2014 (01.01.2013 - 31.12.2013 Director's fee 4,705 4 817 4,635 Secretarial and accounting fee 13,618 Legal & Professional fee 406 20,666 15,863 Audit fee 38,802 39 402 39,320 Bank charges 442 559 4,659 Administrative recharges 1,03,160 1,02,643 98,898 It was also certified in the P & L account that administrative recharges was paid to a Singapore tax resident. 33.8 The Revenue has contended that the statutory expenses should not be considered as 'expenditure on operations'. On the other hand, the applicants have submitted that what is required to be considered in Article 3.3 of the Protocol is "total annual expenditure on operations in that Contracting state". Therefore, the expenditure on statutory compliances cannot be excluded because the Seller Company could not have continued to exist and carry on its business activities and operations without incurring such expenditure. We do not agree with the submission of the applicants in this regard. A company may incur statutory expenses on account of statutory compliance such as Director's fee, filing fee, audit fee etc. so as to remain in existence i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me tax computations filed with our office for Years of Assessment 2012 to 2014, BGAPH has been assessed on the following basis for Singapore income tax purposes : 1) BGAPH' s principal activities are of an investment holding company during the Years of Assessment 2012 to 2014 as per the audited accounts for the Relevant Years. 2) BGAPH's is not dormant during the Relevant Years. 3) BGAPH's detailed Profit and Loss Accounts show that the total annual expenditure on the operations of BGAPH in Singapore was at least S$ 200, 000 for each of the Year of Assessment. Based on BGAPH' s management accounts for financial year ended 31 December 2014, we note that same for points 1) to 3) above." This certificate categorically states that the principle activity of BG Asia was investment holding, it was not dormant and that the total annual expenditure on operations of BG Asia in Singapore was at least S$ 200,000 for each of the year of assessment. The fact that BG Asia had fulfilled the limit of operational expense of S$ 200,000 is also confirmed by the appraisal of independent evidences brought on record, as already discussed earlier. Therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n record a copy of the minutes of Boards of Directors of BG Asia all held in Singapore to substantiate that the control and management of the Seller company was located in Singapore only. Thus we do not find any merit in the contention of the Revenue that the control and management of BG Asia was not in Singapore. Apart from making such an allegation, the Revenue has been unable to bring on record any substantive evidence to support this contention. 35. The Revenue has also contended that the intention of LOB clause in India-Singapore DTAA was to curb the use of holding companies, which do not have bonafide business activity in India / Singapore, from being granted treaty benefits. We do not find any such condition that the benefit of Article 13.4 of India-Singapore DTAA will not be available to holding companies. We cannot read the DTAA and the Protocol beyond what is provided therein. Similarly, the contention of the Revenue that the company earning only dividend income is liable to be treated as a shell company under the Protocol is found to be preposterous as we do find any such provision in the DTAA or the Protocol. The Revenue vide letter dated 10/03/2006 had intimated ..... X X X X Extracts X X X X X X X X Extracts X X X X
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