TMI Blog2021 (3) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... ies 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. Whether BG Asia is having bonafide business activities? - No 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 In the case of Sanofi [ 2013 (2) TMI 589 - ANDHRA PRADESH 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d only in the two years prior to arise of capital gains so as to overcome the LOB clause in respect of the prescribed limit of the expenditure of operation. Rather this practice was followed all along, as is evident from the above table. It is also seen that the administrative expense in all the years was much above the prescribed limit as stipulated in Article 3.3 of the Protocol to the DTAA. Thus, there cannot be a case that these expenses were artificially jacked up in the 24 months period prior to arising of capital gains so as to overcome the prescribed limit in the said Article. The condition in Article 3.3 of the Protocol that the total annual expenditure on operations in the contracting state should be at least S$ 200,000 in the immediately preceding period of 24 months from the date the gain arises is also found fulfilled in this case. 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 contention of the Revenue that the applicant was not having enough operational expense and that the LOB bar in Article 3.3 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sued and paid-up equity share capital of GGCL. BG Asia proposed to sell its entire shareholding in GGCL to GSPC Distribution Network Limited ( GSPC or Buyer ), a company incorporated under the Companies Act, 1956 and a resident company for 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 compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh appearing for both the applicants submitted that the B G Asia is a company incorporated under the laws of Singapore, holds a TRC issued by the Singapore tax authorities qualifies as a tax resident of Singapore and in view of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The control management of BG Asia was located in Singapore and the meeting of the Board of Directors were all held in Singapore only, where day-to-day as well as strategic decisions were taken. Article 3.1 of the Protocol 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds) and profit and loss account (in SGD) of the Applicant for the years ended on December 31, 2011 and December 31, 2010 is attached enclosed as Attachment 7 at page 67 to 124) . The Applicant respectfully wishes to emphasize 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 wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1). 9. On the issue of deduction of tax, it was submitted that the buyer was not required to withhold tax u/s 195 of the Act since the consideration receivable in relation to sale of shares of GGCL would not constitute 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 thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Revenue the applicant falls in a similar situation. 12. The Revenue has referred to the 'Note to the Financial Statement' for the financial year ended 31/03/2011 and submitted that BG Asia did not 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncy in absence of evidence that BG Asia had indeed exercised control and management of its business in Singapore. According to the Revenue, a mere confirmation before the Singapore authority that the control 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 L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Article 13(4). 19. The Ld AR reiterated that the BG Asia was incorporated in 1995 in Singapore and had made significant investments in the shares of Group companies situated in India, Singapore, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered to be a huge business undertaking with very large business operations. This basic position does not at all change merely because the investments in question belong to BG Asia 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e incurred. The ITAT had given categorical and unequivocal findings upholding the said Policy and also the apportionment of expenditure made thereunder and had accordingly allowed as bonafide 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to capital gains tax in India under the provisions of the Income-tax Act, 1961 ( Act ) and India-Singapore DTAA. There is no dispute to the fact that the capital gain arising on sale 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 su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 of this Protocol . 2. A shell/ conduit company that claims it is a resident of a Contracting State shall not be entitled to the benefits of Article 1 of this Protocol. A shell/ 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 expenditure 2 on operations in that Contracting State is less than S$200, 000 or Indian ₹ 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 exchange 3 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 ₹ 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. E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduction of this tax exemption provision of Article 13.4 of the DTAA. The decision to divest the shares of GGCL was taken in the year 2012 under a general policy 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. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning but by the interpretations as provided by the Courts. 31.1 It was held by the Supreme Court in the case of Vodafone (supra) that holding companies 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 upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed and globally well recognized business/ commercial avocation. 31.4 In view of the above facts and judicial pronouncements, we do 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat Singapore Authority had issued these certificates on the basis of financial accounts of BG Asia. The Revenue has contended that what was required 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Inland Revenue Authority of Singapore, entire income earned by a Singapore based shipping company, from shipping business carried out at Indian 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 opinio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ences brought on record in respect of the expenditure incurred by BG Asia in different years. 33.5 BG Asia has filed a copy of 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 8,310,677 4,144,715 9,790 31/12/2005 4,936,502 142,354 2,934 31/12/2006 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese years were as under: A.Y. 2012 (01.01.2011- 31.12.2011 A.Y. 2013 (01.01.2012- 31.12.2012 A.Y. 2014 (01.01.2013 - 31.12.2013 Sales, General and Administrative Expenses S$ 315,196 S$ 610, 241 S$ 374, 315 Director fee Self S$ 9,475 S$ 9,551 S$ 9,099 Thus Sales, General and Administrative Expenses are found to be above the prescribed limit in each of the year. It is also found that a Profit and Loss Account in respect of Singapore operations was enclosed as Statement B along with the returns filed before the Singapore authorities. The details of expenses as appearing in such P L Account for Singapore operations is found to be as under: All figures in A.Y. 2012 (01.01.2011 - 31.12.2011 A.Y. 2013 (01.01.2012 - 31.12.2012 A.Y. 2014 (01.01.2013 - 31.12.2013 Director's fee 4,705 4 817 4,635 Secretar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence to the fact that these expenses were incurred in Singapore only and not outside. If we take into account the administrative recharge as disclosed in P L account for Singapore operations enclosed with the returns filed before the Singapore Tax authority, then the operational expense incurred during 24 months preceding the month in which the capital gain had arose is found to be as under: S. No. Period Expense 1. Proportionate Administrative Recharge from 01/06/2011 to 31/12/2011 (7 months) 60,177 2. Administrative expense during the period 01/01/2012 to 31/01/2012 102,643 3. Proportionate Administrative Expenditure during the period 01/01/2013 to 31/05/2013 (5 months) 41207 Total 204,027 Thus, the condition in Article 3.3 of the Protocol that the total annual expenditure on operations in the contracting state should be at least S$ 200,000 in the immediately preceding period of 24 mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ency certificate for the Assessment Year 2014 (calendar Year 2013) is found to be as under: CERTIFICATE OF RESIDENCE FOR THE PRUPOSE OF CLAIMING BENEFIT UNDER THE SINGAPORE/ INDIA DTA FOR CAPITAL GAIN I refer to your request dated 01 Apr 2013. Based on your confirmation that the control and management of your business for the whole of 2013 will be exercised in Singapore, it is confirmed that your company will be regarded as resident in Singapore for income tax purposes for the Year of Assessment 2014. An identical residency certificate for the Assessment Year 2013 (calendar Year 2012) was also filed. It is found that the certificate for year of Assessment 2014 (calendar Year 2013) was issued by Singapore tax authority on 30/04/2013. As the entire accounting year was not over when this certificate was issued in the middle of the year, it was imperative that the certificate had to be issued on the basis of assurance of the BG Asia that its control and management for the whole of 2013 will be exercised in Singapore. Therefore, we do not find anything wrong in the TRC as issued by Singapore tax authorities. In fact BG Asia has subsequently filed a TRC certificate dated 29/01/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale of shares of GGCL will be liable to tax in Singapore only in accordance with the provisions of Article 13(4) of the India Singapore DTAA. The capital gain on sale of shares of GGCL is liable to tax in India under the provisions of the Income Tax Act. However, as per section 90(2) of the Act the provisions of the Act will apply to the extent they are more beneficial vis- -vis the provisions of the tax treaty. As in the present case the provisions of DTAA between India and Singapore are more beneficial to BG Asia, the chargeability of capital gains on sale of shares of GGCL will be guided by the provisions of the DTAA and not that of the Act. Accordingly, the capital gain on sale of shares of GGCL cannot be taxed in India under the provisions of the Income Tax Act. Therefore, the answer to Question No. 1 raised by the applicants is given in favour of BG Asia. Further, as the capital gain on sale of shares of GGCL is not found taxable in India the questions in respect of rate of tax on such capital gain and the applicability of TDS provisions thereon, are no longer relevant and need not be answered. 37. In view of the foregoing, the questions posed to us for a Ruling are answe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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