The Mumbai Bench of the Income-tax Appellate Tribunal (Tribunal) in its ruling in Citicorp Investment Bank (Singapore) Ltd ([2017] 81 taxmann.com 368) has upheld the capital gains tax exemption under Article 13(4) of the India – Singapore tax treaty (Treaty) on the sale of debt instruments held by Citicorp Investment Bank (Singapore) Ltd (Taxpayer). The Tribunal disregarded the applicability of the “Limitation of Benefits” (LOB) clause under Article 24 of the Treaty, which mandates actual remittance of income to Singapore when (i) income in the source state (i.e. India) is tax exempt or taxed at a reduced rate; and (ii) such income is taxed in the residence state (i.e. Singapore) on remittance basis.

Background

The Taxpayer was a tax resident of Singapore and was registered as a foreign institutional investor in the debt segment with the Securities and Exchange Board of India. In its tax return, the Taxpayer declared a capital gain of over INR 860 million on the sale of debt instruments and claimed an exemption under Article 13(4) of the Treaty, in terms of which, gains derived by a Singaporean resident from the alienation of assets other than assets covered in other paragraphs of Article 13, was taxable only (emphasis supplied) in the state of residence of the alienator (i.e. Singapore). The tax authorities disallowed the exemption claimed by the Taxpayer and treated the capital gains from the sale of debt instruments as taxable in India on the basis that it had not remitted such income to Singapore in terms of Article 24. The decision of the tax authorities was sustained by the Dispute Resolution Panel (DRP). Aggrieved by the order of the DRP, the Taxpayer filed an appeal with the Tribunal.

Arguments of the Taxpayer

  • Since the Taxpayer was liable to tax in Singapore on its global income, actual remittance of such income to Singapore was not relevant to claim the benefit of Article 13(4) of the Treaty.
  • The Taxpayer furnished a certificate provided by the Singapore tax authorities stating that the income derived by the Taxpayer from the buying and selling of Indian debt securities and from foreign exchange transactions in India would be considered under Singapore tax law as accruing in or derived from Singapore (i.e. Singapore-sourced income). Such income would be brought to tax in Singapore without reference to the amounts remitted or received in Singapore. The taxability of such income would be based on accounting treatment of the relevant instruments on revenue account without further adjustments.
  • The LOB clause is not attracted to income which is covered by Article 13(4) of the Treaty in terms of which, India does not have a right to tax such income. It only applies to income which is either “exempt” from tax in India or is taxed at a “reduced rate” in India.

Arguments of the Tax Authorities

  • Though the provisions of Article 13(4) provide an exemption from capital gains tax in the source country (i.e. India), the LOB clause seeks to restrict the quantum of the exemption to the extent such income is repatriated / remitted to the country of residence (i.e. Singapore).
  • Even in terms of the domestic tax law of Singapore, income sourced from outside Singapore is only taxed on receipt basis in Singapore.
  • The Taxpayer has not adduced any evidence to demonstrate that it has repatriated the income earned from the sale of the Indian debt instruments to Singapore in terms of Article 24 of the Treaty, in order to be entitled to claim the capital gains exemption under Article 13(4) of the said Treaty.
  • The certificate issued by the Singapore tax authorities cannot override the Treaty between India and Singapore.

Tribunal’s Ruling

Relying on the previous decisions of the Coordinate Benches of the Tribunal in the cases of SET Satellite (Singapore) Pte Ltd (M A No 520 (Mum) of 2010) and APL Co Pte Ltd ([2017] 78 taxmann.com 240), the Tribunal ruled in favour of the Taxpayer. It held that the LOB clause under Article 24 of the Treaty was inapplicable in the instant case as the income earned by the Taxpayer from the sale of debt instruments was not taxable (emphasis supplied) in India in terms of Article 13(4) of the Treaty. While the Tribunal did not lay down its own reasoning on the inapplicability of Article 24 in the instant case, it primarily drew from the following principles as enunciated in the aforementioned judicial precedents:

  • Applicability of Article 24 of the Treaty mandates the fulfillment of two conditions– (i) income earned from the source state (i.e. India) must be exempt from tax or must be taxed at a reduced rate in the source state; and (ii) under the laws in force of the resident state (i.e. Singapore), such income must be taxed on remittance / receipt basis. If both the conditions are satisfied, then the exemption is allowed or the reduced rate of tax is levied on the amount so remitted.
  • In relation to the first condition, the limitation under Article 24 operates in conjunction with only those provisions of the Treaty which (i) exempt certain income; or (ii) reduce the rate of tax on income in the country of source. There is a difference between income which is ‘exempt from tax’ and income which is ‘not taxable’, with Article 24 operating in the sphere of the former. Since under Article 13(4) of the Treaty, the income earned by the Taxpayer is not taxable itself in India, Article 24 has no applicability.
  • The word “only” in Article 13(4) of the Treaty debars the source state to tax certain gains, viz. India is precluded from taxing the capital gains arising from the sale of certain property, even if such income is sourced from India. When India does not have any taxation right on such capital gains income of a resident of Singapore, which is the exclusive domain of the resident state (i.e. Singapore), there is no question of any kind of ‘exemption’ or ‘reduced rate of taxation’ in the source state. In other words, Article 13(4) does not ‘exempt’ or ‘reduce the rate’ of tax in India – it only envisages the territorial and jurisdictional rights of Singapore to tax certain gains arising in India. Unlike certain other provisions of the Treaty, such as Article 20 (Students and Trainees), Article 21 (Teachers and Researchers) and Article 22 (Income of Government), which expressly ‘exempt’ certain income in a contracting state, Article 13(4) contains no such stipulation.
  • Further, for Article 24 to apply in the instant case, the income ought to have been taxable in Singapore as per its domestic law on receipt / remittance basis. However, since the certificate provided by the Singapore tax authorities confirmed that the income derived by the Taxpayer from the buying and selling of Indian debt securities and from foreign exchange transactions in India would be considered under Singapore tax law as accruing in or derived from Singapore (i.e. Singapore-sourced income) and would be taxed in Singapore on accrual basis, the latter condition for applicability of Article 24 of the Treaty failed.

Comment

The Tribunal’s ruling confirms that Article 24 of the Treaty has no operation where income is not subject to tax in Singapore on “remittance” basis. Additionally, for this provision to apply, income must be “exempt” (or taxable at a reduced rate) in India. This ruling (placing reliance on judicial precedents) draws a distinction between income which is exempt in India and income which is not taxable in India. Thus, the restriction or condition of actual remittance under Article 24 should not apply to capital gains which are ‘not taxable’ in India as per Article 13.

Capital gains are generally not taxable under Singapore’s domestic law. Thus, typically for capital gains which are not taxable in Singapore (either on remittance or accrual basis), the issue of actual remittance should generally not arise. In the case of the Taxpayer, it can be inferred from the facts that the Taxpayer offered the gains from the transfer of debt instruments as revenue income (under Singapore law) and hence the issue of actual remittance seems to have arisen.

Note that the Treaty has been amended and this ruling deals with the Treaty as it stood prior to the amendment. Under the revised Treaty, India has a right to tax capital gains arising on sale of shares of Indian companies acquired on or after 1 April 2017. However, the principles emerging from this ruling are still relevant as under the amended Treaty, capital gains on sale of (a) instruments other than shares; and (b) shares acquired before 1 April 2017 continue to remain outside the purview of Indian taxation. Further, under the amended Treaty, capital gains on sale of shares acquired and disposed between 1 April 2017 and 31 March 2019 (Transition Period) are taxable in India at 50% of the tax rate applicable under Indian law. Thus, based on this ruling, Article 24 would only apply to capital gains which are taxable in India at a ‘reduced rate’ during the Transition Period provided such gains are taxable in Singapore on remittance basis and not to capital gains which are not taxable at all in India.