Facts of the Case:
The assessee, Hareon Solar Singapore Pte. Ltd., a company incorporated in Singapore, claimed to be a tax resident of Singapore and held a valid Tax Residency Certificate (TRC) for AY 2020–21. The assessee was a wholly owned subsidiary of Hareon Solar Co. Ltd., Hong Kong, which in turn was a wholly owned subsidiary of a Chinese listed entity. In July 2015, the assessee invested in equity shares and Compulsorily Convertible Debentures (CCDs) of an Indian company, Renew Solar Energy (Karnataka) Pvt. Ltd. In June 2019, the assessee transferred the said equity shares and CCDs to Renew Solar Power Pvt. Ltd., resulting in long-term capital gains of approximately Rs.17.67 crore. The assessee claimed exemption from capital gains tax in India under Article 13(4A)/13(5) of the India-Singapore DTAA on the ground that Shares were acquired prior to 01.04.2017 (grandfathering provision), and Gains were taxable only in Singapore. The Assessing Officer denied treaty benefit on the ground that the Singapore entity lacked commercial substance and was merely a conduit entity. The DRP upheld the draft order. The matter was carried before the ITAT.
Contention of Assessee:
The Assessee contended that it was tax resident of Singapore and furnished a valid TRC in compliance with Section 90(4) of the Act.
The Assessee further contended that the shares were acquired prior to 01.04.2017 and hence a grandfathering protection under the amended India-Singapore DTAA applied.
The Assessee also contended that treaty benefit was already granted on interest income from CCDs; therefore, denial for capital gains was inconsistent.
The Assessee also contended that the Limitation of Benefits (LOB) clause under Article 24A was not triggered, as operational expenditure in Singapore exceeded the prescribed threshold and board meetings were also held in Singapore and control and management were exercised from Singapore.
Contention of Revenue:
The Revenue contended that Singapore entity was a shell/conduit company interposed between Hong Kong and Chinese parent entities to avoid capital gains in India.
The Revenue further contended that the assessee had no employees, no office infrastructure, and no independent commercial activity in Singapore. Further, control and management were exercised outside Singapore; key directors and bank signatories were not based in Singapore.
The Revenue also contended that TRC is not conclusive and accordingly the revenue is entitled to examine substance and beneficial ownership and consider the transaction as treaty shopping to deny treaty benefit.
Ruling:
The Tribunal has ruled in favour of the Revenue by giving following observations stated hereunder:-
- Mere possession of a TRC does not preclude the Revenue from examining commercial substance and beneficial ownership.
- The assessee failed to demonstrate real commercial substance in Singapore.
- The entity lacked employees, independent business operations, and meaningful economic activity and control and management were effectively exercised outside Singapore.
- The LOB clause under Article 24A applied substantively and not merely on satisfaction of expenditure threshold.
In view of the above the arrangement was held to be treaty shopping, and therefore, DTAA exemption was denied and capital gains were held taxable in India under Section 45 read with Section 9(1)(i) of the Act.
Editor’s Note:-
The ruling highlights the growing judicial emphasis on substance over form in international tax structuring and serves as a caution for passive investment holding vehicles claiming treaty protection.
Citation:- Hareon Solar Singapore Pvt. Ltd v DCIT, International Taxation Circle-2(1)(1) (ITA No.2226/Del/2024) of Hon’ble Delhi Tribunal