14 Articles 8, 24 of India-Singapore DTAA – Distinction between ‘liable to tax’ and ‘subject to tax’; expression ‘exempt from tax’ implies, treaty benefit of non-taxation in source state depends on taxability in residence state; remanded to CIT(A) for proper deliberation on whether treaty benefits can be granted in source state, where such benefit results in double non-taxation.

TS-556-ITAT-2017(Rjt)

BP Singapore Pte Ltd. vs. ITO

A.Y.: 2015-16,

Date of Order: 28^th November,
2017

Facts

A Singapore Company (“the Taxpayer”) was
engaged in the business of operation of ships in international waters. The
Taxpayer had claimed exemption under Article 8 of the DTAA in respect of the
freight income.

The Assessing Officer (“AO”) contended that
Article 24 of the India-Singapore treaty grants benefits of an exemption or
lower rate of taxation under the treaty only where income was taxed in
Singapore and since there was no evidence indicating that the freight income
was taxed in Singapore, AO applied Article 24 and denied the treaty benefits to
the Taxpayer.

The Taxpayer contended that as per Article
8, India has no right to tax shipping income. Hence, the income cannot be said
to be “exempt from tax in India”. Therefore, Article 24 was not applicable to
the facts of the case. Further, since the income was taxable in Singapore on
accrual basis¹ , even for this reason, Article 24 could not be
applied.

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1   Though
the Taxpayer had claimed that the income was taxed in Singapore on accrual
basis, during the proceedings before Tribunal, it mentioned that because of
applicability of an incentive provision, such freight income was not taxed in
Singapore.

Held

?    The income was liable to tax in Singapore as
the fiscal domicile of the Taxpayer was in Singapore. However, it was not
actually taxed because of the incentive provision. In other words, though it
was “liable to tax”, the income was not “subjected to tax”

?    On the issue of whether income was “exempt
from tax in India”, Tribunal held as follows:

•    Article 3(2) requires
contextual interpretation of the undefined terms. Even where there is a
domestic law meaning to the undefined term, the contextual meaning will have
precedence.

•    The expression ‘exempt
from tax’ in Article 24, essentially implies that the treaty benefit of
non-taxation of an income, or its being taxed at a lower rate in a contracting
state (in this case, India), depends on the status of taxability in other
contracting state (in this case, Singapore).

•    Irrespective of whether
the treaty grants taxing rights exclusively to resident state (like the
language used in Article 8) or exempts the income in the source state the
impact on source state taxation remains the same, especially if seen in the context
of the provisions of the treaty where a benefit being granted is dependent
on the taxation in resident state.

?    Thus, technically, Article 24 was applicable
to the facts of the case.

?    However, noting that granting of treaty
benefits in the facts of the case, would lead to double non-taxation of income,
the matter was remanded back to CIT(A) for adjudication de novo on the issue of
whether, having regard to the underlying objective of the treaty to avoid
double non-taxation, treaty benefits in the source state (i.e India) can be
granted in respect of an income which is exempt from tax in resident state.

?    The Tribunal noted that this issue would
impact a large number of Singapore companies and may be difficult to adjudicate
without proper deliberation, backed by the submissions of the parties. Hence,
the Tribunal remanded the matter to the CIT(A) to consider the issue and
directed both the parties to provide detailed arguments before CIT(A).