The Mumbai Bench of the Income-tax Appellate Tribunal (Tribunal) in its ruling in Citicorp Investment Bank (Singapore) Ltd ( 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.
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
Arguments of the Tax Authorities
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 ( 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:
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.