I. Case Summary

Company A, a business based in Singapore (referred to as “Company A”), acquired shares in an Indian company, Company B (referred to as “Company B”), during the fiscal year 2013-14 (assessment year 2014-15 according to Indian law). Later, in the fiscal year 2015-16 (assessment year 2016-17), Company A sold these shares and earned short-term capital gains.

Company A filed an income tax return for the fiscal year 2015-16 with the Indian tax authorities, fully disclosing its acquisition and sale of Company B’s shares. The company argued that, since it had a tax residency certificate from the Singapore tax authorities and most of its board members were Singapore residents, the capital gains from the sale of Company B’s shares should only be taxable in Singapore as per Article 13(4) of the India-Singapore Tax Treaty and Section 143(1) of the Indian Income Tax Act, 1961 (ITA). Therefore, these gains should not be taxed in India.

In 2021, the Indian tax authorities issued a notice to Company A to start a reassessment process. In response, Company A resubmitted its original return and asked the tax authorities to clarify the reasons for the reassessment.

The Indian tax authorities provided the following reasons for the reassessment:

• The actual controller and source of funds for the group that includes Company A come from an investment management company headquartered in the United States, Company C (referred to as “Company C”). Therefore, the beneficial owner of the capital gains realized by Company A is Company C, and thus Company A cannot benefit from the India-Singapore Tax Treaty.
• The authenticity of Company A’s sale of Company B and the associated tax obligations were not verified.
• Under Section 147(2)(b) of the Indian Income Tax Act, 1961 (ITA), if a taxpayer declares income but it is not assessed, and it later appears that there was under-reported income, overstatement of losses, excessive deductions, excessive depreciation, or undue exemptions, then such income is considered to have escaped taxation.

Company A disputed these points, asserting that the share transfer agreement it had was legitimate and that, as a Singapore tax resident, it was entitled to the benefits of the India-Singapore Tax Treaty, meaning it only had to pay taxes in Singapore on the short-term capital gains. Dissatisfied with how the Indian tax authorities handled its objections, Company A took the case to the Indian High Court, which ultimately ruled in favor of Company A.

II. Key Points of Dispute

The dispute between the Indian tax authorities and Company A mainly revolved around the following issues:

（A）Determining the Nature of the Company

Company A’s stance: It is a Singapore-resident company. Indian tax authorities’ stance: According to the Limitation of Benefits (LOB) clause in the India-Singapore Tax Treaty, Company A qualifies as a shell or conduit company, which is not eligible for treaty benefits. A shell or conduit company is defined as any legal entity that has no substantial business operations or conducts negligible business activities in the contracting state.

（B）Legal Basis for Claiming Treaty Benefits

Company A’s argument: Under the capital gains provisions of the India-Singapore Tax Treaty, the gains from transferring shares acquired by a resident company of one contracting state are taxable only in the other contracting state where the transferor company is resident. Thus, the capital gains from selling Company B’s shares should not be taxed in India. Although the 2017 third protocol to the India-Singapore Tax Treaty introduced anti-abuse provisions, capital gains arising before April 1, 2017, are not subject to these restrictions.

Indian tax authorities’ argument: According to Article 13(4)(a) and (c) of the India-Singapore Tax Treaty, arrangements undertaken primarily to obtain treaty benefits are not eligible for treaty benefits, so Company A does not qualify for these benefits.

（C）Determining the Authenticity of the Transaction

 Indian tax authorities’ stance: Under the provisions of Section 147 of the Indian Income Tax Act (before the 2021 amendment), if an assessing officer has reason to believe that income chargeable to tax for a certain assessment year has not been fully assessed, then under Sections 148 to 153 of the Act, the taxpayer’s income, other income that has escaped assessment, newly discovered income, and re-computed losses, depreciation, or allowances must be assessed or reassessed. Thus, a reassessment of Company A’s unassessed income is necessary to verify the authenticity of its transaction of selling Company B shares and related tax obligations.

According to Section 147(2)(b) of the Indian Income Tax Act, if a taxpayer has declared income but not had it assessed, and the assessing officer finds situations listed under Section 147, it is also considered income that has escaped assessment.

III. Final Judgment

The Indian High Court ruled that there was no case of income escaping assessment and that the Indian tax authorities did not have valid grounds to initiate the reassessment process. Consequently, the reassessment notice issued under Section 148 of the Indian Income Tax Act, along with the reasons given and related documents from the assessing officer, were revoked.Specific Findings:

（A）Determining Company A’s Tax Residency

The Indian High Court found that the tax authorities did not provide any evidence proving that Company A was a U.S. tax resident. Company A was neither established in the U.S. nor managed from there; instead, it was incorporated in Singapore and managed by its board of directors located in Singapore. Thus, Company A is a Singapore-resident company governed by Singapore laws and regulations.

（B）Application of the Beneficial Ownership Clause to Types of Income

The Indian High Court determined that the concept of beneficial ownership in the India-Singapore Tax Treaty applies only to dividends, interest, and royalties, not to capital gains. According to the treaty, capital gains should be taxed based on statutory ownership rather than beneficial ownership. Therefore, Singapore has the right to tax Company A’s capital gains from the sale of Company B shares.

（C）Authenticity of Company A’s Share Sale Transaction

The Indian High Court concluded that the tax authorities had no legal basis to reassess the taxpayer’s income. In this case, Company A had timely submitted its income tax return and provided a complete explanation (including that, as a Singapore-resident company, it was not liable to tax in India under Article 13(4)(a) of the India-Singapore Tax Treaty), and the deadline for the tax authorities to request further information from Company A had passed.

（D）Necessity of Tax Reassessment

The Indian High Court ruled that the tax authority’s decision to restart the assessment and issue the reassessment notice based on a simple duplication of information from a third party (the tax deducted at source (TDS) officer) without independent verification or investigation amounted to “borrowed satisfaction” under the provisions of Section 148 of the Indian Income Tax Act and was therefore invalid.

The Indian High Court noted that the tax authorities must show an actual connection or close nexus between the materials they possessed and their belief that the taxpayer had unassessed income. In this case, the tax authorities failed to provide such supporting evidence.

Regarding the application of Section 147(2)(b) of the Indian Income Tax Act, the Indian High Court ruled that this provision only applies to situations where the taxpayer’s return shows under-reported or undeclared income, overstated losses, excessive deductions, excessive depreciation, or undue exemptions. However, in this case, the taxpayer only claimed benefits under Article 13(4) of the India-Singapore Tax Treaty, which does not fall into these categories, so the tax authorities misapplied this provision. Moreover, this provision only relates to the allocation of taxing rights, stating that capital gains should be taxed in Singapore, making its application irrelevant in this case.

（E）Determination of Corporate Status

The Indian High Court stated:

Under the Limitation of Benefits (LOB) clause in the protocol of the India-Singapore Tax Treaty, the treaty’s application is limited to non-shell or conduit companies operating in Singapore, excluding entities with minimal or no business operations and shell or conduit companies lacking substantial continuous activities. The protocol also specifies that a local resident conducting business in Singapore with annual business expenses of not less than SGD 200,000 within 24 months from the date of earning income is not considered a shell or conduit company. In this case, the taxpayer’s business expenses in Singapore, audited by financial reports and certified by an independent certified public accountant, met the requirements of the LOB clause and were declared in the annual report following relevant Singapore regulations and recognized by regulatory authorities (such as the Monetary Authority of Singapore). Thus, Company A is a genuine entity rather than a shell or conduit company.

It is common practice to set up special-purpose companies with a minimal initial paid-up capital of USD 1 for specific investments or projects. In this case, after paying the initial capital, the taxpayer replenished it and made genuine investments in India.

（F）Use of the Tax Residency Certificate

According to Circular No. 789 issued by the Central Board of Direct Taxes (CBDT) on April 13, 2000, a Tax Residency Certificate is sufficient proof of a taxpayer’s status as a tax resident and beneficial owner for applying for tax treaty benefits.

When selling, divesting, or exiting foreign direct investments in India, the Indian tax authorities provide tax treaty benefits to eligible taxpayers.

IV. Lessons for “Going Global” Companies

(A) Adhering to Compliance Requirements of Host Countries

Before engaging in “going global” business activities, companies should conduct thorough tax and legal due diligence to understand the host country’s requirements regarding tax residency, declarations, and tax benefits. During operations, they should promptly declare income per the host country’s tax laws and provide complete details to clarify significant matters, thereby avoiding suspicions of non-compliance and reducing the risk of investigations by local tax authorities.

(B) Attention to the Effective Dates of Tax Treaties

According to the protocol of the India-Singapore Tax Treaty, the Limitation of Benefits clause became effective on April 1, 2017, while Company A’s sale of Company B shares occurred before this date, meaning the Limitation of Benefits clause does not apply to this transaction.

(C) Using Legal Deadlines for Tax Authority Actions to Protect Rights

 In the case above, the Indian High Court determined that Company A had timely filed its income return and provided a full explanation to the tax authorities, and the period for the tax authorities to request additional information from Company A had expired. The tax authorities’ request for reassessment lacked a legal basis. Therefore, companies should be fully aware of the legal procedures for resolving tax disputes in the host country to protect their rights.