Capital Gain – Anti-Avoidance Scrutiny: Evolving Landscape!

It is a trite law that a non-resident is entitled to claim any relief under the applicable Double Tax Avoidance Agreement (“DTAA”), if a Tax Residency Certificate (“TRC”) is obtained by such non-resident from the Government of their home country. Further, such TRC also constitutes sufficient evidence for accepting the status of residence as well as beneficial ownership for granting the benefits available under the DTAA. [see: section 90(4) of the Income Tax Act, 1961 (“Act”); Union of India v. Azadi Bachao Andolan, (2003) 263 ITR 706 (SC); and Blackstone Capital Partners (Singapore) VI FDI Three Pte Ltd. v. ACIT, Order dated 30.01.2023 in W.P.(C) 2562/2022 (Del. HC)]

Recently, the Hon’ble Income Tax Appellate Tribunal, Delhi bench (“ITAT”) in the case of Reverse Age Heath Services Pte. Ltd. v. DCIT, Order dated 17.02.2023 in ITA 1867/Del/2022 (Del. Trib.), whilst following the decision of Blackstone (supra) also adjudicated upon the interplay of applicability of General Anti Avoidance Rule (“GAAR”) where valid TRC was furnished to the Income Tax Authorities. The controversy before the ITAT was that the non-resident sold shares of an Indian company on 02.01.2018 resulting in short term capital gain of Rs. 1,92,63,473. However, the Assessee claimed that such short-term capital gain was not taxable in India as per article 13 of India-Singapore DTAA. Therefore, it claimed refund of entire tax deducted at source on the consideration received by the non-resident.

However, the Assessing Officer (“AO”)/ Dispute Resolution Panel (“DRP”) denied the treaty benefit to the Assessee whilst holding that it had no economic/commercial substance and it was a “shell” and “conduit company”. In light of these facts and circumstances, ITAT held:

• That the AO cannot go behind the TRC issued by the other tax jurisdiction and question the residency of the non-resident for denying the benefits available to such non-resident under DTAA.
• That in terms of section 101 of the Act, the provisions of GAAR cannot be invoked for denying the benefit of treaty, if such case falls within one of the conditions prescribed under Rule 10U of the Income Tax Rules, 1962 (“Rules”).
• That the provisions of GAAR cannot circumvent the statutory exemptions i.e., threshold of tax benefit to the tune of Rs. 3 crore and cut-off date i.e., 01.04.2017, provided by the Legislature under Chapter X-A of the Act.
• That the doctrine of “substance over form” cannot be invoked to deny the benefit of article 13 of India-Singapore DTAA as the anti-avoidance rule is now codified by the Legislature under chapter X of the Act.
• That the genuineness of the Assessee cannot be doubted by the AO/DRP since the Assessee was subject to the tax scrutiny in Singapore and the same has been accepted to be genuine by the Singapore tax authorities as per the applicable tax law.

In view of the above, the Hon’ble ITAT held that the Assessee had furnished a valid TRC and hence, the treaty benefits available under article 13 of the India-Singapore was allowed to the Assessee.

This ruling rendered by the Hon’ble ITAT is first of its kind dealing around the interplay between domestic codified GAAR, which exempted the transaction in question from anti-abuse radar vis-à-vis judicially evolved substance over form principles.  This ruling also opens up the debate around the interplay between the GAAR provisions under the provisions of the Act read with Rule 10U of the Rules vis-à-vis anti-abuse provisions under the applicable DTAA and whether the latter could be applied if the provisions of the Act read with the Rules, like the case at hand, exempted the subject transaction from the purview of domestic codified GAAR.

Practice Area News

Xiaomi Technology India Pvt. Ltd. v. DCIT, [2023] 451 ITR 58 (Karnataka HC). The Hon’ble Karnataka High Court in a path breaking decision allowed Xiaomi India’s Writ Petition and quashed the provisional attachment of fixed deposits to the tune of INR 3700 crore. In a rare observation, the Hon’ble Court noted that the order passed by the Assessing Officer was – “bald, vague, cryptic, laconic, unreasoned and non-speaking”. It was also held that mere apprehension of huge tax demand to be raised on complete assessment cannot be a sufficient ground for exercising such draconian power of provisional attachment.

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ANI Technologies (P.) Ltd. v. DCIT, [2022] 142 taxmann.com 442 (Chandigarh – Trib). In a first of its type ruling, after two rounds of litigation before the Chandigarh bench of Income Tax Appellate Tribunal (“ITAT”), the ITAT set aside the order of the lower authorities and held OLA to be not liable for any withholding tax default. The ITAT, inter alia, held that the payments in question were consideration for provision of transportation services by Drivers, and that OLA only acted as an intermediary for collecting such payments from Riders before disbursing them to Drivers. It was also observed that OLA itself was not engaged in transportation services in terms of the Motor Vehicles Act, 1988 and therefore, it was in no capacity to subcontract any transportation services to Drivers. In this background, the ITAT held that OLA was not obligated to deduct tax at source under section 194C of the Act (which only applies where payments are made to contractors), while disbursing payments collected from Riders to Drivers.

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Google LLC v. JCIT, Order dated 20.02.2023 in ITA No. 167/Bang/2021 (Bangalore – Trib)..The Hon’ble Income Tax Appellate Tribunal, Bangalore bench held that reimbursement by Google India Pvt. Ltd. (“GIPL”) of salary cost of seconded employees to Google LLC is not taxable as Fees for Included Service (“FIS”) under Article 12 of India-USA Double Tax Avoidance Agreement. The Assessing Officer held that the reimbursement received by the Google LLC was in the nature of FIS. On appeal, the Hon’ble ITAT observed that the seconded employees were working solely under control and supervision of GIPL and not on behalf of Assessee during the period of secondment. The Assessee’s role was merely to facilitate payment of salary on behalf of GIPL, which was reimbursed by GIPL on actual basis. Therefore, the payment made by GIPL to Assessee cannot be characterised as FIS under Income Tax Act, 1961 and India-US DTAA.

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ACIT v. AON Services India Pvt. Ltd., Order dated 28.02.2023 in ITA No. 5986 /Del/2022 (Delhi Tribunal). On the aspect of ‘levy of penalty’ under section 271(1)(c) of the Income Tax Act, 1961, the Hon’ble Income Tax Appellate Tribunal, Delhi bench noted that the dispute regarding transfer pricing adjustment was settled through Mutual Agreement Procedure as envisaged under the India-US DTAA. However, on the contrary, whilst relying on the draft assessment order, proceedings under section 271(1)(c) were initiated against the Assessee alleging furnishing of
inaccurate particulars of income and concealment of income. In light of these peculiar facts and circumstances, the ITAT held that transfer pricing adjustment was on account of change/modification of certain filters adopted by the Assessee which ultimately resulted in rejection of comparables selected by the Assessee and selection of fresh comparables. It was observed that there cannot be any doubt that application of filters and selection of comparables are highly debatable issues. Therefore, in respect of such additions, the Assessee cannot be accused of furnishing inaccurate particulars of income or concealing income.

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