Direct Tax Alert - Singapore-based FII allowed to claim exemption of Capital gains: Rejects invocation of LoB when global income is taxed in Singapore

Background

Globally, countries have revised and incorporated an anti-abuse measure called the Limitation of Benefits (LoB) clause which prevents the abuse of the beneficial tax treatment under the Double Taxation Avoidance Agreements (DTAA).
The Bombay High Court, in its recent ruling¹,has held that the ‘LoB’ clause cannot be invoked in the Source country when the entire global income of the taxpayer is taxed in the Resident country and the tax authorities of such Resident country have certified the same.

We at BDO in India have summarised the above ruling and have provided our comments on the impact of this decision hereunder.

Facts of the Case

• The Taxpayer is a SEBI-registered Foreign Institutional Investor (FII) investing in the debt segment. The Taxpayer had been investing in debt securities in India and had earned substantial capital gain during the year. While filings its return of income, the Taxpayer claimed exemption under Article 13(4) of the India-Singapore DTAA.​
• The tax officer held that the taxpayer had not repatriated the amount of capital gains to Singapore and therefore taking recourse to Article 24² of DTAA between India and Singapore held that the taxpayer is not entitled to the exemption claimed with respect to capital gains in the Source Country (i.e., India in the Instant Case). As a result, the tax officer disallowed the benefit of such an exemption.
• Aggrieved by the said treatment of capital gains, the taxpayer approached the Dispute Resolution Panel (DRP) wherein the DRP upheld the order passed by the tax officer. Pursuant to which the taxpayer preferred an appeal before the Mumbai Tax Tribunal.
• Mumbai Tax Tribunal allowed the taxpayer’s appeal. The Mumbai Tax Tribunal overturned the contention of the tax officer and held that the taxpayer is eligible to claim the exemption under Article 13(4) of the DTAA.

The Tax Authorities, aggrieved by the order of the Mumbai Tax Tribunal, preferred an appeal before the Bombay High Court.

Bombay High Court Ruling

• The Hon’ble Bombay High Court held that the entire Capital Gains will be taxed in Singapore as per the provisions of Article 13(4) of the DTAA.
• The Hon’ble Bombay High Court further held that the provisions of Article 24(1) of the DTAA would not trigger wherein the entire income is subject to tax under the laws in force in Singapore regardless of remission or receipt in Singapore.
• Further, the Hon’ble Bombay High Court observed that the certificates issued by the Singapore Tax Authorities would constitute sufficient documentary evidence for accepting the position of the law in Singapore. In this regard, a reference was made to the Central Board of Direct Taxes (CBDT) Circular No.789, dated 13 April 2000 issued with reference to India-Mauritius DTAA, which stated that certificate issued by Mauritius authorities shall constitute sufficient evidence.
• The Hon’ble Bombay High Court dismissed Tax Authorities' appeal as devoid of a substantial question of law.

BDO India Comments

The ruling affirms the contention of the taxpayer that the Indian tax authorities cannot question the certification provided by the Tax Authorities of the Resident Country. The foreign entity cannot be denied exemption based on the fact that it has failed to provide the information regarding the repatriation wherein the entire global income was taxed in its country of residence. The decision also outlays the principle that the LoB clause cannot be invoked when the entire income is brought to tax in the country of residence. Consequently, this ruling provides relief to the taxpayer from the operational hassles of repatriating the funds to their country of residence to merely avail of the beneficial tax treatment under a DTAA.

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