Delhi High Court case law in relation to sale of shares by a non-resident and treatment of such capital gains in the hands of the non-resident.

Brief facts

• Assessee was subjected to reassessment proceedings for AY 2016-17 with regard to sale of shares of Indian company. Assessee had claimed treaty benefit on capital gains under India-Singapore DTAA on the basis of TRC;
• On 31st March, 2021 a notice was issued to the petitioner under Section 148 of the Act for the Assessment Year 2016-17. Revenue placed reliance on the data extracted from a third-party online source and the information forwarded by the TDS Officer of the buyer company for initiating the reassessment proceedings;

Key takeaways from the judgement

• On Limitation of Benefit (LOB) Clause: Assessee is held to to be a bonafide entity and not a shell / conduit entity as it complies with the LOB clause i.e. total annual expenditure on operations in Singapore was not less than SGD 200,000 or Indian Rs.50,00,000/- in the immediately preceding period of twenty-four months from the date the gains arose, therefore, the allegation of treaty shopping is irrelevant in the present case;
• On beneficial ownership w.r.t. capital gains: HC observed that under India-Singapore DTAA, “at the relevant time, capital gain was to be taxed on the basis of legal ownership and not on the basis of beneficial ownership”.
• On Assessee’s incorporation with nominal capital: HC noted that it is quite common for companies to be incorporated as a special purpose vehicle for a particular investment / project and that too initially with a minimum paid-up share capital and observes that the Assessee was subsequently capitalized and a genuine investment was made in India which had grown exponentially from which the Assessee had exited;
• On validity of reassessment proceedings: HC finds the impugned notice to be based on borrowed satisfaction as the Revenue placed reliance on data from third-party online source and relies on recent SC ruling in Hewlett Packard cautioning the governmental authorities to refrain from using online sources to arrive at any conclusion. HC also finds that the Revenue did a ‘cut and paste’ job by issuing notice without any independent application of mind or verification or investigation. HC also held that there was no live link or close nexus between the material before the Revenue and the belief that there has been escapement of the income chargeable to tax;
• On Revenue going behind TRC: HC relies on Punjab & Haryana HC ruling in Serco BPO holding that TRC is sufficient to claim relief under the DTAA and observes that the said ruling has been accepted by the Revenue as the same was not challenged before SC. HC reiterates the settled legal position on binding nature of CBDT Circulars and relies on SC ruling in Azadi Bachao Andolan for upholding the validity of the same;
• On residential status of the Assessee: HC observes that the Assessee is managed from Singapore where it is incorporated and there is nothing on record to establish that the decision making power for the Assessee was in the US. Thus, holds that the Assessee is neither a US based company nor its affairs are managed from the US.

Relevance of the judgement from Indian Tax standpoint

• It was held that a TRC certificate is sufficient evidence to show residence and beneficial interest/ownership and the Revenue cannot at the time of sale/disinvestment/ exit from such FDI, deny benefits of the DTAA. It also held that the Revenue cannot attempt to question and go behind the TRC issued by the foreign authority as the same is wholly contrary to the Government’s consistent policy and repeated assurances to Foreign Investors;
• It is to be noted that the concept of beneficial ownership, at the relevant time under the India Singapore DTAA, was attracted for taxation purposes only for three transactions i.e. dividend, interest and royalty and not for capital gains”;
• It is to be noted that the ruling is issued in the context of the assessment year 2016-17 i.e. prior to introduction of MLI and GAAR provisions and therefore, the courts might take a different view for the recent assessment years;