17 August 2017

Limitation of Benefits clause in the India Singapore DTAA - An analysis of recent decisions

by Gayatri Sridharan


The Mumbai Bench of the Income Tax Appellate Tribunal had occasion to examine the India Singapore Double Taxation treaty in a recent judgment in the case of Citicorp Investment Bank (Singapore) Ltd v. Deputy Commissioner of Income Tax (International Taxation) Mumbai.


Brief facts of the case

Citicorp Investment Bank (Singapore) Ltd [CIBL] a tax resident of Singapore was registered as Foreign Institutional Investor (FII) in Debt segment, with Security and Exchange Board of India (SEBI). In its return of income for the Assessment Year 2010-11, CIBL declared a Capital Gain of Rs. 86,62,63,158/- on sale of debt instruments and claimed exemption under Article 13(4) of India-Singapore Double Taxation Avoidance Agreement (DTAA or Treaty). This claim was resisted by tax authorities citing the Article 24 [see End Note 1] on limitation of benefits (‘LoB’) in the said treaty.  As per that Article if the exemption under the treaty is qua an income which is taxable in other state only on receipt of income in that state then the exemption shall be allowed only when remittance of such income has been made.  The dispute in this case really centered around whether the income in question was taxable in Singapore on receipt basis or on accrual basis. CIBL relied on the confirmation letter/Certificate issued by IRAS which confirmed the taxability of global income in Singapore on accrual basis. The contention of CIBL was not accepted by Assessing Officer for the following reasons:

(i)      In order to avail any benefit under the tax treaty, one is bound by the provisions of the Articles in the said treaty.
(ii)    Though the provisions of Article 13(4) allow exemption of capital gains in the source country i.e. India, the provisions of Article 24 restrict exemption of such capital gains to the extent of repatriation of such income to the other country i.e Singapore.
(iii) Section 10(1) relating to charge of income tax under the Singapore Income Tax Act,  also provides that income is taxed on receipt basis in Singapore when arising from outside Singapore. In fact, there was no such repatriation of said income reflected in the bank statement furnished.

The Assessing authority therefore disallowed the exemption claimed by assessee under Article 13(4) of the India-Singapore DTAA and treated the capital gains as taxable in India as per the draft assessment order and the Dispute Resolution Panel upheld the same.

On further appeal before the Income Tax Appellate Tribunal, the Tribunal following its earlier decisions [see End Note 2] held

1.      that the limitation prescribed under Article 24 of the Treaty is not applicable in the present case as the income earned by assessee on sale of debt instrument is not taxable in India as per Article 13(4) of Treaty [see End Note 3].
2.      the capital gain earned in India, not being remitted to Singapore has no relevance


The Reasoning of the Tribunal

The Income Tax Appellate Tribunal had in an earlier case [see End Note 4] observed as under

……. as in the case of Singapore, the treaty protection must remain confined to the amount which is actually subjected to tax. Any other approach could result in a situation in which an income, which is not subject matter of taxation in the residence jurisdiction, will anyway be available for treaty protection in the source country. It is in this background that the scope of LOB provision in Article 24 needs to be appreciated.

The Tribunal, then followed a decision of the Gujarat High Court [see End Note 5] wherein the Hon'ble High Court relied on the confirmation letter/Certificate issued by IRAS which confirmed the taxability of global shipping income in Singapore on accrual basis.

With reference to Article 24, the Tribunal held that the expression "only in that state” in Article 13.4 debars the other contracting state from taxing the income, that is, India is precluded from taxing the gains on alienation of debt instruments even if it is sourced from India. India does not have any taxation right on gains on alienation of debt instruments of non- resident entity, which is the exclusive domain of the resident state. Thus there is no question of any kind of exemption or reduced rate of taxation in the source state. There is no stipulation about exemption under Article 13.4 of the gains on alienation of debt instruments. Articles 20, 21 & 22 of the DTAA contains specific exemptions.


Some unanswered questions

Section 10(1) of the Income Tax Act of Singapore reads as follows;

Charge of income tax
10.— (1) Income tax shall, subject to the provisions of this Act, be payable at the rate or rates specified hereinafter for each year of assessment upon the income of any person accruing in or derived from Singapore or received in Singapore from outside Singapore in respect of—
(f)rents, royalties, premiums and any other profits arising from property; and

The Tribunal has not discussed on what basis it treats such gains as Singapore Income [ostensibly the company being an investment company the gains are taxable as revenue by virtue of Section 10A of the Income Tax Act of Singapore]. It is not clear if the circular was issued under Section 10 or 10A.

Interestingly, as per the definition adopted by the BEPS committee in its final report in 2015 on Action Plan 6, the term “benefit” also includes limitations on the taxing rights of a contracting state over a capital gain derived from the alienation of movable property located in that state by a resident of the other state under Article 13.  The fact that India does not have any right of taxation on gains on alienation of debt instruments of a non- resident entity, which is the exclusive domain of the resident state can be construed as a benefit. 


[The author is a Principal Associate, Direct Tax Practice, Lakshmikumaran & Sridharan, Bangalore]


End Notes:

1. Article 24 , reads as follows
1. Where this Agreement provides (with or without other conditions) that income from sources in a Contracting State shall be exempt from tax, or taxed at a reduced rate in that Contracting State and under the laws in force in the other Contracting State the said income is subject to tax by reference to the amount thereof which is remitted to or received in that other Contracting State and not by reference to the full amount thereof, then the exemption or reduction of tax to be allowed under this Agreement in the first-mentioned Contracting State shall apply to so much of the income as is remitted to or received in that other Contracting State.
2. SET Satellite Singapore Pte Ltd. v. ADIT [M.A. No. 520 (Mum.) of 2010 dated 11-2-2010] (para 4) and in APL Company Pte Ltd. v. ADIT [2017] 78 taxmann.com 240 (Mum. -Trib)
3. Article 13(4) which reads as follows;
13.4. Gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of this Article shall be taxable only in that State.
4. Alabra Shipping Pte Ltd. v. Income-tax Officer - International Taxation, Gandhidham62 Taxmann.com 185
5. CIT vs Venkatesh Karrier Ltd. reported in 349 ITR 124(Guj)



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