Narendra Prasad Sinha, Chairman:— BG Asia Pacific Holdings Pte. Limited (“BG Asia” or “Seller”) is a company incorporated in 1995 under the laws of Singapore and is tax resident of Singapore. It is 100% subsidiary of BG North Sea Holding Limited, a company incorporated in the UK and functions in Singapore as the regional headquarters for the BG Group. BG Asia has made significant investments in the group companies situated in India, Singapore, Egypt, Thailand and Trinidad and was holding 83,518,750 equity shares in GGCL, an Indian company listed on the Bombay Stock Exchange and National Stock Exchange of India, which represented 65.122% of total issued 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 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 GGCL, will be taxable at the rate of 10 percent as per the proviso to section 112(1) of the Act.
3) Whether the Buyer is required to deduct lax at source under section 195 of the Act, from the sale consideration payable to the Applicant for the proposed sale of shares of GGCL; if yes, what shall be the appropriate rate at which tax would need to be withheld under section 195 of the Act.
2. The buyer in its application had raised the following questions:
1) Whether BG Asia Pacific Holdings Pte Limited (herein after referred to as the “Seller”), a tax resident of Singapore, is liable to 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 capital gains arising on account 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 GSPC Distribution Networks Limited, a company incorporated in India (herein after referred to as “the Applicant or Buyer”).
2) If the question set out in 1 is answered in affirmative, what is the applicable rate of tax on gains arising on account of the sale of shares by the Seller to the Buyer in view of proviso to section 112(1) of the Act?
3) Whether the Applicant is required to withhold tax at source in accordance with the provisions of section 195 of the Act, in relation to the payment of sale consideration for the shares; if yes, what shall be the appropriate rate at which tax would need to be withheld under section 195 of the Act?
3. Both the applications were admitted on 27.11.2013. The two applications are interlinked as the transaction involved in the two is for sale and purchase of the same set of shares. Not only the facts are identical but the questions raised in the two applications are common. The applicants had requested to club the two applications and the matter was heard together. Accordingly, the two applications are decided vide this common order.
Submission of the Applicants
4. The learned counsel Sh. S. Ganesh appearing for both the applicants submitted that the BG 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(1) of the India-Singapore DTAA, it qualifies as a resident of Singapore for the purpose of the India-Singapore DTAA. BG 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, BG 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 BG Asia on sale of shares would be covered under Article 13(4) of the India-Singapore DTAA.
5. The Ld. A.R. admitted that the eapital 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 Government of any other country for grant of tax relief, then the provision of the Act shall apply to the extent they were more beneficial to the assessee. It was submitted that this position has been upheld by the Supreme Court in the case of Union of India v. Azadi Bachao Andolan (263 ITR 706 (SC)) and in the case of Vodafone International Holdings B.V. v. UOI (204 Taxmann 408 (SC). In this connection, the Ld. A.R. has drawn our attention to Article 13 of India-Singapore DTAA which deals with taxation of capital gains and submitted that as per the provision of Article 13(4), the gain derived by a resident of the Contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of this Article shall be taxable only in that State. It was explained that the shares of a company are not mentioned in paragraphs 1, 2 and 3 of this Article and, therefore, the gain arising on alienation of shares will be guided by provision of Article 13(4). He further explained that a resident of Singapore deriving income from transfer/sale of shares in an Indian company will not be liable to tax in India by virtue of the said provision of Article 13(4) of India-Singapore DTAA but shall be subject to tax in Singapore, as per provisions and in the manner provided for under the domestic law of Singapore.
6. The Ld. A.R. submitted that the capital gain exemption under Article 13(4) of India-Singapore DTAA was introduced by the Protocol to the India-Singapore DTAA with effect from 01 August, 2005. The said Protocol also provided a Limitation of Benefit (LOB) clause in relation to Article 13 of the said DTAA. It was explained that in relation to the aforesaid exemption under Article 13(4) of the India-Singapore DTAA, the Protocol inter alia, provided that such exemption shall be subject to LOB conditions contained in Article 3(1) to 3(4) of the Protocol. The Ld. A.R. submitted that LOB conditions prescribed under the Protocol were also satisfied as the affairs of BG Asia were not structured with a primary intention of availing the benefit of the favourable capital gains tax treatment provided by the DTAA. 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 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 that business operations of the Applicant cannot be viewed as having been undertaken for obtaining the favorable capital gains tax treatment provided by the DTAA.
• There is a substantial lapse of time (from 1997 to 2012) between date/s of acquisition of shares in GGCL by the Applicant and sale of shares in GGCL.
• The operations of GGCL would continue even after sale of Applicant's stake in GGCL.
• GGCL was incorporated in January 1980 and has generated taxable revenues over the years.
7. It was further submitted that the conditions under Article 3.2 to 3.4 of the Protocol were also satisfied in this case as BG Asia was not a shell/conduit company and it had incurred the prescribed expenditure on its operations. As regarding fulfilment of these conditions the following submissions were made:
i. 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. BG group employs a number of personnel in Singapore for its regional and local operations and leases significant office space Singapore. This fact establishes that the Applicant along with its group companies has significant business operations in Singapore. Also, the TRC obtained by the Applicant explicitly bears a declaration by the Singapore Revenue authorities that the Applicant conducts its business activities of investment holding in Singapore. Also, it is pertinent to mention that as on December 31, 2011, the net assets of the Applicant aggregated to more than UK Pound 2 Billion.
ii. The amount of expenditure incurred by the Applicant in the last two year i.e., years ended on December 31, 2011 and December 31, 2010 exceed the threshold (i.e., SGD 200,000 per year) specified in Article 3 of the Protocol and, therefore, the Applicant cannot be deemed to be a ‘shell/conduit’ company. The total expenditure incurred during the said two years amounted to SCD 324,670 (UK Pounds 161,215) and SGD 310,227 (UKP Pounds 147,769) respectively. (Copy of financial statements (in UK Pounds) 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 TRC 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.
8. 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.
9. As regarding question No. 2, it was submitted that in case the capital gain arising to the BG Asia was held as chargeable to tax, the rate of tax on long term capital gain was prescribed u/s 112 of the Act. The Ld AR explained that in the present case capital gains arising on transfer of shares was long term capital gains and BG Asia was not covered within the exemption provided u/s 10(38) of the Act as the sale being “off market transaction” was not chargeable to Security Transaction Tax (STT). It was also admitted that the benefit of indexation as provided under second proviso to Section 48 of the Act was not available to the non-resident Seller. The Ld. AR explained that as the shares of GGCL were listed on stock exchange, the capital gain resulting to the Seller will be taxable as long-term capital gain on listed securities covered under proviso to Section 112(1) of the Act and such gains will be taxable at the rate of 10% as stipulated in the said proviso. According to the Ld. A.R. the tax rate of 10% as prescribed in the said proviso was applicable to long term capital gain derived by all tax payers including non-residents, as it was a special provision in respect of listed shares. He contended that the non-applicability of the second proviso of section 48 will not refrain BG Asia to avail the relief of lower rate of tax of 10 percent. Reliance was placed in this regard on the ruling of this Authority in the case of Timken France v. DIT (294 ITR 513 (AAR)).
10. Without prejudice to the above contention, it was submitted that even if it is assumed that proviso to Section 112(1) was not applicable in case of shares acquired in foreign currency; in case of shares allotted to the Seller under the bonus issue the proviso to Section 112(1) would be applicable. The Ld. A.R. explained that no funds were utilised by BG Asia in relation to acquisition of bonus shares and, therefore, first proviso to section 48 would not be applicable while computing capital gain accruing on sale of bonus shares. Therefore, the capital gain derived by the Seller on bonus shares should be chargeable to tax at the rate of 10% in accordance with proviso to Section 112(1).
11. 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 v. CIT (327 ITR 456).
Submission of the Revenue
12. 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 1 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 ‘holding for the group’ was a business activity that attracted the provisions of LOB clause of Article 3.1. According to the Ld. Counsel, the ‘investing business’ was complete negation of Article 3.1 of the Protocol, as the condition of real and continuous business activity in Singapore was not satisfied and further that the expenses incurred by SG Asia were also not in the nature of operating expenses. In this regard he referred to Klaus Vogel on Double Taxation Conventions and submitted that the treaty benefits should be granted in bona-fide cases only. One of the conditions for such bona-fide case was “Activity provision” which stipulated that the company should be engaged in substantive business operations in the Contracting state of which it was a resident and the relief for taxation claimed from the other Contracting state was in respect to income that was connected with such operation. The Ld. Counsel pointed out that as per this commentary the business of making or managing investments was not a substantive business activity as evident from the following:
OBSERVATIONS ON THE COMMENTARY
27. The United States believes that the business activities referred to in sub-paragraph (b) of paragraph 21 of Commentary should exclude “the business of making or managing investments, unless these activities are banking or insurance activities carried on by a bank or insurance company”. Absent this language, a third country resident could set up a classic treaty shopping conduit operation - a personal investment company - and argue that the company is engaged in a substantive business operation (the managing of the third country owner's personal portfolio) and the income in respect of which benefits are claimed (dividends and interest) is connected with those business operations.
13. The Revenue has submitted that the tax resident status of a company depends on where the control and management of its business lies and is exercised. It was submitted that the Singapore branch of a foreign company cannot be treated as a Singapore tax resident since its control and management was vested with the overseas parent company. According to Revenue the applicant falls in a similar situation.
14. 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 no expenses relating to any ‘operational activity’.
15. 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 and recharged to the company. Thus, BG Asia had no salary expenditure of its own. He submitted that the employees of the BG Group as a whole in Singapore cannot be considered for examining the fulfilment of LOB conditions in the case of BG Asia. According to the Revenue, the Seller company having no employees and incurring no administrative expense on its own behalf and earning only dividend income was liable to be treated as a shell company existing/created merely to take advantage of the Singapore treaty with other countries. It was further submitted that the Seller Company was not involved in any substantive business activities in Singapore as it was earning only dividend income. The Seller Company had not made any operational expense and only administrative cost was recharged from Singapore related party for administrative support. Further that the administrative recharge was allocation of the expense ostensibly of administrative nature and that it was not in the nature of operating expense.
16. The Revenue has also referred to the TRC dated 06/06/2012 issued by Singapore Tax Authorities and submitted that the said TRC only mentions ‘total annual expenditure’ of BG Asia and not its ‘annual operating expenditure in Singapore’. According to the Revenue, since the amount does not represent ‘expenditure by BG Asia on its operations in Singapore’, the amount cannot be included as part of the amount referred in Article 3 to the protocol; and once these amounts were excluded, there was hardly any expense left as contemplated under Article 3 of the protocol. The Revenue has submitted that the operational expenditure of the BG Asia incurred in Singapore was very meagre and far less than S$200,000 as required in Article 3.3 of the Protocol. The Revenue has contended that it was apparent from these facts that BG Asia had negligible business operation with no real business activities carried out in the contracting state of Singapore.
17. The Ld. Counsel submitted that the TRC was conditional to certain assurances given by BG Asia to Singapore Revenue authority and, therefore, cannot be treated as sufficient evidence of tax residency 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.
18. 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 activity in Singapore was not satisfied in this case and that the other conditions of LOB as enshrined in Article 3 of the Protocol were also not fulfilled.
19. Regarding Question No. 2 the Revenue has submitted that as per proviso to Section 112(1) of the Act, the tax rate of 10% on long term capital gain was applicable only before giving effect to the provisions of second proviso to Section 48 of the Act. It was submitted that had the Legislature intended to cover the cases falling under the first proviso to Section 48, it could not have used the words “second proviso to Section 48” in the proviso to Section 112(1). Thus, the Legislature never intended to give benefit of the proviso to Section 112(1) to those cases where long term capital gain was required to be computed under the first proviso of Section 48. It was further submitted that the proviso to Section 112(1) was inserted to give an option to resident investors and not to a non-resident. Therefore, the proviso to Section 112(1) was not applicable to the Seller Company and long-term capital gain was taxable at the rate of 20% only. It was further submitted that the proviso to Section 112(1) does not make any distinction between original and bonus shares. Regarding Question no. 3 it was submitted that as the capital gain arising to the Seller was chargeable to tax in India the provision of Section 195 of the Act was squarely attracted.
Rejoinder of the Applicant
20. In rejoinder, the Ld AR submitted that the basic contention of the Revenue was that the BG Asia did not fulfil the conditions laid down by Article 3 of the Protocol dated 18/7/2005 to the said DTAA, on the following grounds:—
(a) That the Seller allegedly had no bonafide business activities or business operations as it was only a holding company which had shareholdings in various group companies, but did not itself carry on business activities.
(b) That the Seller's total annual expenditure on operations was less than the required amount of S$ 200,000 in the period of 24 months prior to the date of the share sale. As a consequence, the Applicant was deemed to be a shell or conduit company which cannot claim the benefit of Article 13(4).
21. 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.
22. 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 companies operating in non-core businesses. This was a general policy decision which was taken in respect of the Applicant Group's operations all over the world and it was not specific to India, nor did it have anything at all to do with the India-Singapore DTAA. This general business policy decision was explained in detail in the Group Annual Report for 2012, relevant extract of which was brought on record. The Ld AR stressed that this policy decision was taken about seven years after the benefit of exclusion of capital gains from Indian taxation was first provided by Article 13(4) of the DTAA in July 2005. He further pointed out that pursuant to the general world-wide policy decision, the Board of Directors of the BG Asia had passed a resolution on 28/9/12 for sale of the GGCL shares and this general policy decision to divest non-core business interests was implemented by sale of shareholdings in other countries also, like Brazil and Italy. Therefore, the decision to sell GGCL shares was a non-India specific decision and a bonafide business restructuring and had nothing at all to do with any arrangement of the BG Asia's affairs with the object of availing of DTAA benefits. Further, BG Asia continued to hold shares in other companies even today, seven years down the road and continued to function as a group investment holding company with huge investments in group and subsidiary companies in as many as five countries.
23. On the objection of the Revenue that the activity of being a group investment holding company was not a business activity and that DG Asia had no business operations and consequently cannot be said to have incurred expenditure on operations of the required amount of S$ 200,000 per annum; the Ld AR argued that this contention was based on a complete misconception and misunderstanding, both factually and legally, regarding the activity of an investment holding company. He explained that the proper and competent management of investments of an aggregate value of about 4.5 billion Singapore dollars required skills, expertise and management of a high order. A portfolio management firm with customers' investments of this magnitude would undoubtedly be considered to be a huge business undertaking with very large business operations. This basic position docs 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 v. 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 v. Department of Revenue, Ministry of Finance - (2013) 354 ITR 316 (AP).
24. 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 activity will qualify for consideration under Article 3 of the Protocol to determine whether the requirement of annual expenditure on operations was S$ 200, 000 or more. He emphasized that for this purpose, all expenditure properly incurred for operating BG Asia must necessarily be taken into consideration. The Seller Company could not have continued to exist without all statutory compliances like payment of filing and other fees under the corporate laws of Singapore, getting its accounts audited and having Board meetings. The expenditure incurred on all these matters must necessarily be taken into consideration for the purpose of compliance with the requirements of Article 3 of the Protocol. He explained that the crucial words in Article 3(3) were “total annual expenditure on operations in that Contracting State” and, therefore, administrative expenditure, including all expenditure on statutory compliances, have to be taken into account, because the Seller Company couldn't have continued to exist and carry on its business activities and operations without incurring such expenditure. The Ld AR submitted that the words “total” and “operations in that State” were very wide and cannot be limited only to expenditure on executing business transactions as such.
25. The Ld AR explained that throughout the world, the Seller's Group has been following the uniform and standard business model and cost-efficient practice of having in one group company all the resources required to carry on operations by all the group companies in a particular country or business location and arranging for that company to make available all necessary services, (including, in particular, the services of different kinds of employees) to all the group companies in that location on cost sharing basis. The exact basis for working out the sharing of costs was laid down in a “Cost Allocation and Time Writing Policy” for each location. He submitted that the ITAT in India had, in its three appellate orders in respect of Indian companies belonging to the same group, carefully and meticulously analyzed the Cost Allocation and Time Writing Policy for India and the apportionment thereunder of the expenditure 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.C. Exploration and Production India Ltd. v. J.C.I.T - (2017 J 82 Taxmann. com 446 (Delhi - Trib)
(b) B.G. India Energy Solutions Pvt. Ltd. v. Dy. C.I.T - [2019) 101 Taxmann.com 360 (Delhi - Trib)
(c) B.G. India Energy Solutions Pvt. Ltd. v. Dy. C.I.T - [2020] 119 Taxmann.com 319 (Delhi - Trib)
26. 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.
27. The Ld AR pointed out that the Tax Residency Certificate (TRC) issued by the Singapore tax authorities also concluded the matter in favour of the Applicant. The said TRC expressly stated on the basis of the assessments made in Singapore on BG Asia and its accounts, that the Seller's principal activity was that of an investment holding company, and that the Seller was not dormant during the relevant years and that the Seller's total annual expenditure on operations in Singapore was in excess of S$ 200,000 for each year. The Ld AR submitted that, in law, it was not permissible for the Revenue to question or dispute, on any ground whatsoever, the said TRC, in respect of any statement or declaration contained therein and reliance in this respect was placed on the following judgements:—
(a) Union of India v. Azadi Bachao Andolan - (2003) 263 ITR 706 (SC)
(b) Scrco BPO Pvt. Ltd. v. AAR - (2015) 379 ITR 256 (P&H)
(c) Imerys Asia Pacific (P) Ltd. v. Dy. D.I.T - [2016] 180 TTJ 544 (Pune - Trib)
(d) M.T. Maersk Mikage v. D.I.T - (2017) 390 ITR 427 (Guj)
28. The Ld AR submitted that the abovementioned judgments clearly state that refusal to accept a TRC was destructive of the mutual trust and confidence between the two contracting Governments, which lies at the heart of the DTAA.
29. The Ld AR urged that this was not at all a fit and appropriate case for applying the LOB clause in Article 3 of the Protocol. That clause could justifiably have been applied if the Seller was incorporated in Singapore after Article 13(4) was inserted into the DTAA in July 2005, and if the GGCL shares had been purchased thereafter and sold shortly thereafter, and if the Seller Company had no other investments or holdings in any other group companies, so that, after the sale of the shares in question, the Seller company virtually became dormant. He submitted that none of these conditions existed in the present case.
Findings and Ruling;
30. We have carefully considered the facts of the case, the materials brought on record, the objections raised by the Revenue and the response of the Applicant. The first issue to be decided is whether sale of shares held by BG Asia in Gujarat Gas Company Limited (“GGCL”), an Indian company, to GSPC is liable 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 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 the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State of which the alienator is a resident.
4. Gains derived by resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of this Article shall be taxable only in that State, (emphasis supplied)
31. Article 13(4) of the DTAA stipulates that the gain derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of this Article shall be taxable only in that State i.e. in the State of residence. As the “shares of a company” are not mentioned in paragraphs 1, 2 and 3 of this Article, the gain arising on alienation of shares will be guided by provision of Article 13(4). Thus, if a resident of a Contracting State e.g. Singapore derives income from sale of shares in an Indian company, such gain shall be taxable only in that State i.e. in Singapore.
32. This Article 13(4) of India-Singapore DTAA providing for taxability of gains derived by resident of a Contracting State in the country of residence was introduced by the Protocol to the India-Singapore DTAA vide Notification No. SO 1022(E), dated 18-7-2005, effective from l August, 2005. The said Protocol provided a Limitation of Benefit (LOB) clause in relation to Article 13 of the DTAA. Article 1 of the Protocol reproduced the newly introduced Article 13.4 of the DTAA and provided that “Gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of this Article shall be taxable only in that State.” However, Article 3 of the Protocol provided certain conditions tor availing the benefits of Article 1 of the Protocol. The Limitation of Benefit (LOB) clauses as stipulated in Article 3 of the Protocol were as under:
ARTICLE 3 - 1. A resident of a Contracting State shall not be entitled to the benefits of Article 1 of this Protocol if its affairs were arranged with the primary purpose to take advantage of the benefits in Article 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 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) it is listed on a recognised stock exchange 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.
33. In order to avail the exemption under Article 13(4) of the India-Singapore DTAA, BG Asia has to satisfy the conditions as contained in Article 3, including the Explanation, of the Protocol. Thus, the crux of the issue to be decided is whether the LOB conditions as prescribed in Article 3 of the Protocol are satisfied in this case. If these conditions are found satisfied, BG Asia will be eligible to claim the benefit of Article 13.4 of the DTAA and vice versa. In order to examine the applicability of LOB conditions we have to find answer to the following questions:
a) Whether the affairs of BG Asia were arranged with the primary purpose to take advantage of the benefit in Article 1 of the Protocol?
b) Whether BG Asia is having bona fide business activities?
c) Whether BG Asia is a shell/conduit company?
d) Whether the total annual expenditure of BG Asia operations was S$200,000 in immediately preceding 24 months from the date of capital gains?
34. Whether the affairs of BG Asia were arranged with the primary purpose to take advantage of the benefit in Article 1 of the Protocol?
35. BG Asia was incorporated in Singapore in 1995 and it has made significant investments in group companies situated in India, Singapore, Egypt, Thailand and Trinidad. The investment in the shares of GGCL was made for the first time in 1997 and the purchase of shares of this company was completed in 1999. The subsequent acquisitions in the shares of GGCL were on account of split of shares in 2007 and allotment of bonus shares in 2009 which were involuntary in nature. The provision of Article 13.4 of India-Singapore DTAA whereby the capital gain derived by resident arising on sale of shares was made taxable in the state of residence of the person was introduced with effect from 01 August, 2005. Thus, the shares of GGCL were acquired six year prior to the introduction of the tax exemption provision of Article 13.4 of India-Singapore DTAA in the year 2005. Therefore, it cannot be held that the shares of GGCL were purchased by BG Asia only for the purpose of availing the tax benefit under Article 13.4 of India-Singapore DTAA introduced in 2005. It is also relevant to consider that the shares were not sold immediately after introduction 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.
36. Whether BG Asia is having bona fide business activities?
37. According to the Revenue, the activity of group investment holding company was not a business activity and that BG Asia was not having any bona fide business and was covered in Explanation to Article 3 of the Protocol. On the other hand, the applicants have submitted that BG Asia was setup in 1995 with primary purpose to hold investment in group companies in India, Singapore, Egypt, Thailand and Trinidad. According to the applicants, the aggregate value of investment of BG Asia was about 4.5 billion Singapore dollars and to manage investment of such a magnitude required skill, expertise and management of high order. The management of investment of the order as in the case of BG Asia has to be considered as a specialised business operation. As rightly pointed out by the applicants, a portfolio management firm with customer's investment of such a magnitude would certainly be considered as a large business operation. The nature of such a business activity would not change merely because the investment belongs to BG Asia itself and not to third party customers. We have large number of asset management companies and investment companies operating in India which is a specialised business activity. The business of “Investment activities” has been identified as a sub-sector of the sector ‘Financial Intermediation Services’ and assigned a separate Business Code - 13010 - for the purpose of describing the ‘nature of business’ in the Income-tax return Forms. The Revenue has relied upon the example of United States wherein the business of making or managing investments is not considered as substantive business operations to grant treaty benefits. While examining the treaty provisions between India and Singapore we can't be guided by the US example. The provisions of the treaty including the LOB clauses have to be strictly interpreted and we don't find any provision in India-Singapore DTAA that the benefit of treaty will be denied if a Company is engaged in business of making or managing investments. Further, whether business of making or managing investments is a substantive business operation or not has to be considered in the context of practice in India and the judicial interpretations by the Indian Courts. The meaning of operating activity cannot be guided by its dictionary meaning but by the interpretations as provided by the Courts.
38. 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 upon their subsidiary companies in the national and international level for better returns for the investors and for the growth of the company….
58. Legal relationship between a holding company and WOS is that they are two distinct legal persons and the holding company does not own the assets of the subsidiary and, in law, the management of the business of the subsidiary also vests in its Board of Directors.
39. It was observed by the Apex Court that it is a common practice in international law and is the basis of international taxation, for foreign investors to invest in Indian companies through an interposed foreign holding company or operating company (such as Cayman Islands or Mauritius based) for both tax and business purposes. In doing so, foreign investors are able to avoid the lengthy approval and registration processes required for a direct transfer, (i.e., without a foreign holding or operating company) of an equity interest in a foreign invested Indian company. It was further held that holding structures are recognized in corporate as well as tax law. Special purpose vehicles (SPV) and holding companies are legitimate structures in India, be it in Company law or takeover code under the SEBI and provisions of the Act. It is thus well-settled that a subsidiary and its parent are distinct taxpayers and for tax treaty purposes also a subsidiary and its parent are totally separate and distinct entities. Merely because a group parent company gives principle guidance to group companies by providing generic policy guidelines to group subsidiaries and the parent company exercises shareholder's influence on its subsidiaries, does not legitimize the assumption that subsidiaries are to be deemed residents of the State in which the parent company resides.
40. In the case of Sanofi (supra) relied upon by the Applicants, the Hon'ble AP high Court had held as under:
No curial or academic authority is placed before us to hazard a conclusion that a corporate entity must necessarily involve itself either in manufacture or marketing/trading in/of goods or services to qualify for the ascription of being in business or commerce. Creation of wholly owned subsidiaries or joint ventures either for domestic or overseas investment is a well established business/commercial organizational protocol; and investment is of itself a legitimate, established and globally well recognized business/commercial avocation.
41. 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.
42. 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 and globally well recognized business/commercial avocation”. Thus the business activity carried on by BG Asia was not only continuous but also real. It is also not the case that BG Asia had negligible or nil business operations. The investment held by the BG Singapore was of a very high order. BG Asia has brought on record its audited account for the financial year ending 31/12/2004 onwards and it is found there from that BG Asia had disclosed considerable amount of dividend on a regular basis in all the years, which will be reproduced subsequently while examining the expenses. Therefore, it cannot be held that BG Asia had negligible or nil business operations in Singapore. As mentioned earlier the condition that the company had no real and continuous activity in Singapore was also not fulfilled in the case. Therefore, all the ingredients of shell/conduit company as prescribed in Article 3.2 of the Protocol are found missing in this case. In view of these facts, the LOB conditions of Article 3.2 of the Protocol are also not found applicable and, therefore, BG Asia is not a shell or conduit company in terms of the Protocol.
43. Whether the total annual expenditure on operations was less than Singapore $200,000 in immediately preceding 24 months from the date of capital gains?
The shares of GGCL were transferred by BG Asia on 12/06/2013. Therefore, the 24 months period preceding the date of gain has to be reckoned from 01/06/2011 to 31/05/2013. BG Asia has filed Certificate dated 30 April, 2013 from Comptroller of Income-Tax, Singapore regarding its principal activity and the annual expenditure of the Company which reads as under:
I refer to the letters from Deloitte & Touche LLP dated 3 Apr 2013 and 19 Apr 2013.
Based on the financial statements for the year ended 31 Dec 2011, the principal activity of the company is investment holding.
The draft management accounts for the period 1 Jan 2012 to 31 Dec 2012 showed that the total annual expenditure of the company was at least $200,000.
An identical certificate was filed for the financial years ending 31 December, 2010 and 31 December, 2011 wherein the total annual expenditure was certified to be at least S$200,000 in each year. It transpires that 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.
44. 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 income from dividends and capital gains tax under Indo-Mauritius DTAC, which was held ultra virus by the Delhi High Court. The Apex Court had held the decision of the Hon'ble High Court on this issue as erroneous. There was no observation in this decision on the TRC issued by the Treaty country. However, in the case of Serco BPO (P.) Ltd. (supra) the Punjab & Haryana High Court had given a categorical finding on the acceptability of such TRC. To quote from the order:
30. In view of the circular, it is incumbent upon the authorities in India to accept the certificates of residence issued by the Mauritian authorities. Circular No. 789 is a statutory circular issued under section 119 of the Act. It is obviously based upon the trust reposed by the Indian authorities in the Mauritian authorities. Once it is accepted that the certificate has been issued by the Mauritian authorities, the validity thereof cannot be questioned by the Indian authorities. This is a convention/treaty entered into between two sovereign States. A refusal to accept the validity of a certificate issued by the contracting States would be contrary to the convention and constitute an erosion of the faith and trust reposed by the contracting States in each other. It is for the Government of India to decide whether or not such a certificate ought to be accepted. Once it is established that it has been issued by the contracting State i.e. Mauritius, a failure to accept the residence certificate issued by the Mauritian authorities would be an indication of breakdown in the faith reposed by the Government of India in the Government of Mauritius and the Mauritian authorities reiterated in and evidenced by statutory Circulars issued under section 119 of the Act.
45. The above observation of the P&H High Court was in respect of “certificates of residence” issued by a treaty country. In the case of Imerys Asia Pacific (P.) Ltd. (supra) the Ld. ITAT, Pune had held that benefits available under the treaty should be granted to the assessee based on a valid TRC. This was a case of Singapore company and the TRC was issued by the Singapore tax authorities. In the case of M.T. Maersk Mikage (supra) the issue involved was whether as per certificate issued by 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 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 of DTAA. However, in absence of any rebuttal material produced by the Revenue, we would certainly be guided by the factual declaration made by the said authority in the said certificate and this declaration is that the income would be charged at Singapore considering it as an income accruing or derived from business carried on in Singapore. In other words, the full income would be assessable to tax on the basis of accrual and not on the basis of remittance…….
The contention of Shri. Mehta for revenue that the certificate of the Singapore revenue authorities is opposed to provisions of section 10 of the Singapore Income Tax Act also cannot be accepted. The Revenue does not question genuineness of the certificate. It cannot dispute the contention on the ground that the same are opposed to the statutory provision.
46. It thus emerges from the above decisions that TRC in respect of “certificates of residence” may not be questioned but the position may not be same in respect of certificate regarding interpretation of any clause of the DTAA. In the case of Vodafone (supra) the Supreme Court had considered the issue whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at the substance of the transaction and held as under:
In other words, TRC does not prevent enquiry into a tax fraud, for example, where an OCB is used by an Indian resident for round-tripping or any other illegal activities, nothing prevents the Revenue from looking into special agreements, contracts or arrangements made or effected by Indian resident or the role of the OCB in the entire transaction. [Para 98]
47. In the present case the certificate regarding fulfilment of LOB clause of the Treaty in respect of annual expenditure as issued by the Singapore Tax Authority is in the realm of interpretation of the clause of the DTAA and cannot be taken as conclusive and the Revenue is entitled to rebut the same. However, the Revenue has not brought any material or evidence on record to contradict the certificate as issued by the Singapore Authority. Further, the genuineness of these certificates has also not been questioned. Nevertheless, in the interest of justice it will be prudent to examine the other evidences brought on record in respect of the expenditure incurred by BG Asia in different years.
48. 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
£ 241,901,655
£ 435,083
£ 4,952
31/12/2007
£ 21,504,601
£ 128,927
£ 958
31/12/2008
£ 5,787,677
£ 143,253
£ 7,835
31/12/2009
£ 255,752,586
£ 140,627
£ 4,400
31/12/2010
£ 103,049,339
£ 147,769
£ 5,446
31/12/2011
£ 89,253,735
£ 161,215
£ 4,705
31/12/2012
£ 39,188,011
£ 290,254
£ 4,817
31/12/2013
£ 8,622,609
£ 195,320
£ 4,635
49. It is evident from the above table that BG Asia was not only engaged in a continuous business activity but it was also incurring administrative expenses every year. We also find recharge of employee cost in each of the year. BG Asia was following a business model wherein one of the group companies in a particular country was making available the necessary services to all the group companies on cost sharing basis. Accordingly, the administrative expenses including the employee cost were recharged to BG Asia. It is not the case that this model was practised 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.
50. The Income-Tax Return filed by BG Asia for the year 2012, 2013 and 2014 has also been brought on record. It is found from these returns that place of control and management of the seller company was in Singapore in all the years. It is also seen that the “Sales, General and Administrative Expenses” and “Director's Fees and Remuneration” as disclosed in the returns for these 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
51. 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
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
52. It was also certified in the P & L account that administrative recharges was paid to a Singapore tax resident.
53. 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 in the Contracting state; but still may not carry any business operations. Therefore, what is relevant to consider is the expenditure incurred on operations in the Contracting state. As already discussed earlier, the operation of BG Asia in Singapore was holding of investments and the nature of expenditure in relation to such business activity will be mostly in the nature of administrative expense. As already mentioned earlier the employee recharge was part of this administrative expense. Therefore, the administrative recharge has to be considered as operational expense on account of business activity carried on by BG Asia, in Singapore. It is also not relevant whether such operational expense was incurred directly or through a subsidiary. The fact that the administrative expense was incurred has not been controverted by the Revenue by bringing on record any adverse evidence. Rather the Certificate issued by Singapore Tax Authority and the P&L account for Singapore operations are conclusive 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
54. 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 months from the date the gain arises is also found fulfilled in this case.
55. The Seller had also filed a certificate from Singapore tax authority dated 31/11/2005 which is reproduced below:
We refer to the email from Deloitte & Touche LLP dated 4 September 2015 regarding BG Asia Pacific Holdings Pte Ltd. (BGAPH).
Based on BGAPH's audited financial statements for the years ended 31 December 2011 to 31 December 2013 (Relevant Years) and income 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.”
56. 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 contention of the Revenue that the applicant was not having enough operational expense and that the LOB bar in Article 3.3 of the Protocol was attracted in this case is found to be without any basis. As the total annual expenditure on operations of BG Asia in Singapore was more than Singapore $200,000 in immediately preceding 24 months from the date of capital gains the bar in Article 3.3 of the Protocol to Singapore DTAA is not found attracted.
57. The Revenue has also contended that the control and management of BG Asia was not in Singapore. The Revenue has further contended that the TRC issued by Singapore tax authorities regarding control and management was conditional and was based on certain assurances given by BG Asia. The said residency 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.
58. 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 29/01/2015 issued by Singapore Tax authority wherein it was categorically confirmed that BG Asia was a resident in Singapore for Income Tax purposes for the Year of assessment 2014. As already discussed earlier, the TRC certificate in respect of “residency” of an entity cannot be questioned. Further, in the returns filed before Singapore authority the place of control and management was mentioned as Singapore in all the years. The Applicants have brought on 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.
59. 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 that it had sought information under the Exchange of Information Article in the DTAA/TIEA in the case of BG Asia from Singapore authorities. However, no adverse evidence in respect of any of the allegations/contentions as raised by the Revenue has been brought on record even after lapse of almost five years. The contentions of the Revenue are found to be based on mere presumptions and not on any material evidence.
60. In view of the foregoing discussions we hold that the LOB conditions as prescribed in Article 3 of the Protocol of the India-Singapore DTAA are satisfied and BG Asia is eligible to avail the exemption under Article 13(4) of the India-Singapore DTAA. As BG Asia is resident of Singapore, the capital gains arising to it on sale 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-a-vis the provisions of the tax treaty. As in the present case the provisions of DTAA between India and Singapore arc 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.
61. In view of the foregoing, the questions posed to us for a Ruling are answered as under:
Que. 1 : BG Asia Pacific Holdings Pte Limited is not liable to capital gains tax in India under the provisions of the Income-tax Act, 1961 (“Act”) and Article 13.4 of India-Singapore DTAA read with Article 3 of the Protocol to the said DTAA, in respect of the 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 GSPC, the Buyer, a company incorporated in India.
Que. 2&3 : In view of the answer to Question No. 1, the query raised in Question No. 2 & 3 becomes infructuous and need not be answered.
62. Accordingly, the Ruling is given and pronounced on this the 25 day of February, 2021.