INSIGHT: India Reinforces Limitation of Relief Benefit under the India–Singapore Tax Treaty

The Tribunal held that since capital gains are taxable under the Singapore tax laws due to the residence of the taxpayer, the Limitation of Relief provision under the India–Singapore tax treaty becomes inoperative.

In the case of D.B. International (Asia) Ltd (“taxpayer” or “DB International”) DCIT v. D.B. International (Asia) Ltd (ITA No. 992/Mum/2015) dated June 20, 2018, the Mumbai Income-tax Appellate Tribunal (“Tribunal”) confirmed the applicability of Limitation of Relief (“LOR”) provision, only when the income derived from source country is either tax-exempt or taxed at a reduced rate. Accordingly, the Tribunal held that, since capital gains are taxable under the Singapore tax laws due to the residence of the taxpayer, the LOR provision under the India–Singapore tax treaty (“tax treaty”) becomes inoperative.

The Tribunal ruled that LOR provisions under Article 24 of the tax treaty applies to income derived from a source country being exempt or taxed at a reduced rate and not to income derived from alienation of shares, debt instruments and derivatives of an Indian company where the taxing rights are granted to the taxpayer in its residence country. Since, the capital gains tax provision under Article 13(4) of the tax treaty refers to the gains derived by a resident of a contracting state (i.e. Singapore) taxable only in Singapore, Article 13(4) of the tax treaty cannot be regarded as an exempt provision since taxable in taxpayer’s hand in Singapore. Accordingly, the LOR provisions under Article 24 of the tax treaty would not apply to the taxable transactions in the resident country undertaken by the taxpayer.

Facts

DB International is a tax resident of Singapore engaged in the activities of trading in securities from Singapore. Pursuant to its operations it has earned capital gain from sale of shares, debt instruments, and derivatives of Indian companies. The taxpayer claimed capital gains exemption under Article 13(4) of the tax treaty which grants exclusive rights of tax in Singapore on such gains. Revenue authorities disputed the tax treaty claim of the taxpayer on the premise that, although provisions of Article 13(4) of the tax treaty permits capital gains tax exemption in the source country, i.e. India, Article 24 of the tax treaty restricts such exemption to the extent of income repatriated to the resident country, i.e. Singapore.

Relying on the Singapore tax laws the Revenue authorities observed that, foreign sourced income is taxable in Singapore on receipt basis. Since the capital gain was not repatriated to Singapore, it was taxable in India under the Indian domestic tax laws and the benefit of exemption under Article 13(4) read with Article 24 of the tax treaty cannot be claimed. Accordingly, short-term capital gain arising from alienation of securities was liable to tax in India. The matter reached the Dispute Resolution Panel (“DRP”) concluding that, income received by the taxpayer from all sources were taxable in Singapore regardless of the fact that it is received in Singapore or not. The DRP relied on the letter issued by the Revenue Authority of Singapore confirming that the taxpayer was liable to tax in Singapore on its worldwide income.

The taxpayer does not have a Permanent Establishment (“PE”) in India which entitles Singapore exclusive right to tax such income under Article 13(4) of the tax treaty for which the restriction imposed under Article 24 of the tax treaty would not apply. The capital gains derived from alienation of equities, debt securities and derivatives constitutes trade income accruing in or derived from Singapore was subject to tax in Singapore under Singapore tax laws. The DRP observed that once capital gain was taxable in the country of residence of the taxpayer, applicability of Article 24 becomes redundant as the income was taxable in Singapore with reference to full amount and not with reference to the amount remitted to or received in Singapore. Accordingly, the DRP concluded that the capital gain derived by the taxpayer was not taxable in India under Article 13(4) of the tax treaty.

Tribunal Ruling

In the immediate case, the taxpayer is a resident of Singapore. On perusal of Article 13 of the tax treaty, it was observed that the capital gains derived by the taxpayer from alienation of Indian securities would fall within the purview of Article 13(4) of the tax treaty. Hence gains arising to the taxpayer from alienation of Indian securities would be taxed only in Singapore. The applicability of Article 24 of the tax treaty would not arise in the present case.

Article 24 of the tax treaty becomes applicable on fulfillment of two conditions:

· income is derived from source country (i.e. India) being tax exempt or is taxed at a reduced rate; and

· the amount remitted/received out of such income in the resident state (i.e. Singapore), was taxable to the extent of such remittance/receipts. If both the conditions are satisfied, then the exemption is allowed or the reduced rate of tax is levied on the amount so remitted.

The provisions of Article 24 of the tax treaty become irrelevant insofar as it relates to the applicability of Article 13(4) of the tax treaty to income derived from capital gain. The term “exempt” pertaining to capital gains derived by the taxpayer was used loosely. In contrast, the superseding nature of Article 13(4) of the tax treaty makes capital gain taxable only in the country of residence of the taxpayer.

Capital gains derived by the taxpayer from sale of Indian securities are taxable only in the resident state, i.e. Singapore pursuant to Article 13(4) of the tax treaty. LOR provision applies if income derived from a source country is either exempt from tax or taxed at a reduced rate in that source country. The provision is clear and unambiguous and expresses itself as not an exemption provision but, refers to the taxability of a particular income in a particular country by virtue of residence of the taxpayer.

Accordingly, as the condition is not fulfilled in the present case it was held that, the capital gain derived by the taxpayer cannot be termed as exempt but referred as not taxable in India under Article 13(4) of the tax treaty. The Tribunal in order to arrive at the conclusion relied on the Mumbai Tribunal decision in the case of Citicorp Investment Bank (Singapore) Ltdto uphold capital gains tax exemption under Article 13(4) of the tax treaty on the sale of debt instruments and disregard applicability of the Article 24 of the tax treaty.

Planning Points

The applicability of the LOR clause under the tax treaty vis-à-vis taxation of capital gain has been a matter of debate. The Tribunal applying the favorable decision of Citicorp Investment Bank (Singapore) Ltd provides key guidance on the interpretation of LOR provision to reiterate that, it applies to restrict any treaty benefit resulting in double non-taxation if the income is not remitted to Singapore.

It is pertinent to note that the tax treaty is amended effective April 1, 2017 and the DB International ruling deals with the tax treaty prior to such an amendment.

The amended tax treaty grants India the right to tax capital gains rising on sale of shares of Indian companies acquired on or after April 1, 2017. However, under the amended tax treaty, capital gains on the sale of instruments other than shares; and shares acquired before April 1, 2017 are grandfathered and continue to be taxed in the residence country.

Further, under the amended tax treaty, capital gains on the alienation of shares acquired and disposed between April 1, 2017 and March 31, 2019 (interim period) are taxable in India at a concessional tax rate of 50 percent under the Indian domestic laws.

The ruling will be relevant even under the amended India–Singapore tax treaty, which retains the LOR provision. Hence, based on the DB International decision, Article 24 applies only to capital gains that are taxable in India at a “reduced rate” during the interim period provided, such capital gain is taxable in Singapore on a remittance basis.

The ruling provides a useful guidance in relevant facts where the taxpayer intends to plow back its gains in India for future investments without remitting to Singapore. However, it would be pertinent to review the tax treaty claim pursuant to the Limitation of Benefit clause under OECD Action Plan 6 preventing the grant of treaty benefits in abusive situations on formal implementation of multilateral instrument by the countries.

Shailendra Sharma is a chartered accountant with a multinational consulting firm in India.