ITAT Delhi Denies DTAA Capital Gains Benefit To Hareon Solar Singapore, Says Entity Set Up For Treaty Benefit

The Income Tax Appellate Tribunal at New Delhi has denied capital gains tax exemption to Hareon Solar Singapore Pvt. Ltd. under the India–Singapore Double Taxation Avoidance Agreement, holding that the company was set up solely for claiming the tax benefit.

The tribunal comprising Judicial Member Raj Kumar Chauhan and Accountant Member Ramit Kochar held, “Thus, we hold that the assessee company was created for the principal purposes of taking a tax advantage under the India-Singapore DTAA, while otherwise there is no economic substance or commercial justification for routing investment through assessee company based at Singapore. Thus, in the instant case, LOB clause 1 of Article 24A of India-Singapore DTAA is attracted.”

The dispute concerned long-term capital gains earned by the Singapore-based taxpayer from the sale of equity shares and compulsorily convertible debentures of Renew Solar Energy (Karnataka) Pvt. Ltd., an Indian company.

The taxpayer claimed the gains were taxable only in Singapore under Articles 13(4A) and 13(5) of the DTAA.

The taxpayer was incorporated in Singapore in 2015. It was a wholly owned subsidiary of a Hong Kong company. That company was in turn wholly owned by a Chinese parent engaged in manufacturing and supplying solar photovoltaic modules.

In 2015, the taxpayer invested in the Indian solar company. The investment was sold in June 2019, resulting in substantial capital gains.

The Assessing Officer denied treaty benefits. The officer held that the taxpayer was a shell or conduit entity. It had no employees. It had no independent office. It had negligible assets. Funding and effective control were found to lie outside Singapore. These findings were affirmed by the Dispute Resolution Panel.

The tribunal examined the corporate structure, funding pattern, financial statements, and joint venture arrangements. It noted that the taxpayer had no independent business operations. It was entirely funded by its Hong Kong parent. The bench also found no commercial justification for routing the investment through a Singapore entity.

In view of these findings, the tribunal ruled that the taxpayer was not entitled to capital gains exemption under Article 13 of the DTAA, as the benefit stood denied by the Limitation of Benefits clause in Article 24A.

For Assessee: Advocate Ritesh Bajaj, Advocate & Ms. Mamta Verma, CA

For Revenue: Advocate M.S. Nethrapal, CIT, DR