Delhi ITAT Denies DTAA Benefit: TRC Insufficient Without Economic Substance

BACKGROUND OF THE CASE¹

• Hareon Solar Singapore Pvt. Ltd. ('Assessee'), incorporated in Singapore in April 2015, is a wholly owned subsidiary of Hareon Solar Co. Ltd., Hong Kong ('H Co'), which is in turn wholly owned by Hareon Solar Technology Co. Ltd., China ('C Co'), the ultimate holding company and a global leader in manufacturing solar PV modules.
• In July 2015, the Assessee subscribed to 40,92,941 equity shares and 14,89,180 Compulsorily Convertible Debentures ('CCDs') in Renew Solar Energy (Karnataka) Private Limited ('RSEPL'), an Indian company, with funding provided entirely by H Co.
• Separately, C Co supplied Solar PV Modules to RSEPL under a separate supply contract.
• In June 2019, the Assessee transferred its entire investment in equity shares and CCDs of RSEPL to Renew Solar Power Private Limited ('RSPPL'), resulting in an LTCG of Rs. 17,67,24,300/-, which was claimed as exempt in India under Articles 13(4A) and 13(5) of the India-Singapore DTAA. The Assessee filed its return declaring Rs. 90,95,180/- as income, being interest on CCDs.
• The case was selected for complete scrutiny and a notice under Section 143(2) of the Act was issued.

ASSESSING OFFICER’S CONTENTIONS

• Entire funding of the Assessee was provided by H Co, the immediate parent company based in Hong Kong.
• The Assessee did not have any full-time employees, independent office premises, or operating expenses for regular business operations. The only expenses incurred were legal and professional fees paid to its consultant for accounting, reporting and tax filing services, and loss on foreign exchange.
• Out of five directors, three were based outside Singapore i.e. in USA and Taiwan, and no authenticated records such as passport copies, visa, immigration entry/exit stamps, air tickets or hotel bills were furnished to substantiate their physical presence in Singapore at the time of Board meetings.
• The authorized signatories for operation of the bank account were a US resident, and a Taiwan resident, establishing that the actual control of the bank account and utilization of funds lay outside Singapore.
• The AO invoked Article 24A of the Treaty - Limitation of Benefit ('LOB') clause to allege that the Assessee was a conduit entity incorporated solely for gaining tax benefit under the India-Singapore DTAA, as there was no commercial rationale or economic substance for routing investment through Singapore.
• Mere holding of a Tax Residency Certificate ('TRC') issued by Singapore tax authorities is not conclusive to decide tax residency under the Treaty if the substance establishes otherwise, relying upon the judgment of the Hon'ble Bombay High Court in Vodafone BV.
• The control and management of the Assessee effectively lies outside Singapore, as all key decisions including heading of meetings and operation of bank accounts were managed by persons based in USA and Taiwan, and accordingly the AO denied the Treaty benefit.
• Aggrieved by the order of the AO, the Assessee filed objections before the Hon'ble Dispute Resolution Panel ('DRP'). The DRP found no infirmity in the draft assessment order and upheld the same, rejecting the objections of the Assessee. Aggrieved, the Assessee preferred an appeal before the Income Tax Appellate Tribunal.

ASSESSEE’S ARGUEMENTS

• The Assessee is a Private Limited Company incorporated under the laws of Singapore in 2015 and is a tax resident of Singapore, holding a valid TRC issued by the Inland Revenue Authority of Singapore ('IRAS’) .
• The Assessee is engaged in making investments in the renewable energy sector and is not merely a shell company as it held investments other than in RSEPL, namely Nereus Capital Investments (Singapore) Pte. Ltd. and Hareon Dalmia Solar Private Limited, India.
• The Board of Directors meetings were held in Singapore, and the Directors were physically present in Singapore at the time of the meeting and key decision making.
• The Assessee contended that it satisfied and complied with the LOB clause under Article 24A of the Treaty as it incurred expenditure of SGD 4,00,000 per year in Singapore, which is higher than the minimum stipulated threshold of SGD 2,00,000, evidenced by audited financial statements.
• The Assessee did not have full time employees or conventional office premises, as it is an investment holding company whose affairs are managed by its Board of Directors.
• The AO allowed treaty benefit at the rate of 15% while bringing interest on CCDs to tax, both in the current year as well as in earlier years, and on the same basis, treaty benefit ought to be extended to capital gains arising on transfer of equity shares and CCDs.
• Reliance was placed on the decision of the Mumbai ITAT in the case of Fullerton Financial Holdings Pte. Ltd. v. ACIT², wherein on similar facts the Tribunal held that the taxpayer was entitled to treaty benefits under the India-Singapore DTAA.

TRIBUNAL OBSERVATIONS

• The Tribunal observed that the Assessee had no independent business activities apart from holding a few investments and was completely dependent on H Co for funding. Liabilities payable to outsiders and assets held were minimal.
• C Co was directly supplying PV modules to RSEPL under a separate supply contract, and nothing prevented C Co from making direct investment in RSEPL. It was held that the reason for routing investment through the Assessee was to take tax advantage under the India-Singapore DTAA, as there is no capital gains tax in Singapore. Had the investments been made directly by C Co or H Co, the capital gains would have been chargeable to tax in India.
• Out of five directors, three were based outside Singapore, and no authenticated records such as passport copies, visa or immigration stamps were produced to substantiate their physical presence in Singapore. Further, the bank account was operated by a US resident and a Taiwan resident, establishing that actual control of the Assessee lay outside Singapore.
• The TRC issued by Singapore tax authorities is not conclusive to establish tax residency, where the underlying substance suggests otherwise.
• The Tribunal held that the Assessee was effectively a conduit entity lacking commercial rationale and economic substance, and that the investment structure was designed to obtain tax advantage under the India-Singapore DTAA. Accordingly, the benefit of the Treaty was denied by invoking the LOB provisions under Article 24A.
• The Tribunal distinguished the ruling in Fullerton Financial Holdings Pte. Ltd. V. ACIT as in that case the taxpayer was a subsidiary of Temasek Holdings owned by the Government of Singapore, had investments across multiple jurisdictions, and maintained real substance and control in Singapore, unlike the present case.
• Accordingly, treaty benefits were denied and LTCG on sale of equity shares and CCDs was held to be chargeable to tax in India under the source rule under the provisions of the Income-tax Act, 1961.

AURTUS COMMENTS

• The ruling marks a decisive shift towards substance over form, reinforcing that treaty benefits cannot be claimed merely on the basis of incorporation and TRC, without real economic substance in the country of residence.
• Taxpayers must ensure that investment holding companies have genuine commercial rationale, independent funding, real office presence, resident directors with decision- making authority, and authenticated records of board meetings, failing which treaty benefits are at risk of being denied.
• In light of this ruling and the Apex Court's judgment in Tiger Global, taxpayers with existing structures routed through intermediate holding companies in treaty-favorable jurisdictions should undertake a substance review to assess their exposure.

Footnotes

1. Hareon Solar Singapore Pvt. Ltd. Vs DCIT (ITA No.2226/Del/2024)

2. (2025) 180 taxmann.com 241(Mum-Trib.)

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