GOLDMAN SACHS (SINGAPORE) PTE,SINGAPORE vs. ASSISTANT COMMISSIONER OF INCOME TAX (INTERNATION TAX)-2(3)(2), MUMBAI

The ld. AR at the outset submitted that the issue is covered by the decision of the Co-ordinate Bench in the case of ACIT v/s. J.P. Morgan India Investment Company, Mauritius Ltd. [2022] 143 taxmann.com 82 (Mum. Trib.) where it has been held that “12. We have heard the rival submissions and also perused the relevant findings and material placed on record. The controversy involved in this appeal is, whether in the year in which assessee has claimed benefit of DTAA while claiming exemption from taxation of capital gain as per Article 13(4) of Indian Mauritius DTAA, without setting off of short term capital loss and long term capital loss from earlier year and be allowed to be carry forward to the subsequent years on the ground that in the earlier years when assessee suffered loss it chose not to claim benefit under DTAA and computed the loss as per domestic law, i.e., under the Income Tax Act.

First of all, it is well settled principle that the tax treaties allocate taxing rights to the treaty partner in the following three manners:- (a) Rights are allocated (only) to the source country in respect of certain income (e.g. income from immovable property is taxed in the country where the property is located. In this case the computation of income in the country of residence is of no consequence as the taxing rights are given solely to the country of source. The country of residence gives up the right to tax the income or alternatively gives full credit of the tax paid in the country of source. (b) Income is taxed in the country of source and also the country of residence but as the income is taxed in the country of residence, the country of source limits its right to tax the income. In this case, the computation income is also provided in the treaty (e.g. Royalties/FTS are taxed on gross basis in the country of source but at a lower rate). (c) Income is taxed only in the country of the taxpayer's residence. In this case, the country of source gives up its taxing rights of such income entirely and therefore the computation of income in the country of source is immaterial, [e.g. Business income in the absence of the Permanent Establishment (PE) when a foreign enterprise does not have a PE in India, there is no computation done when the income is reported in India].

In the case of a situation of tax relief, the country where a particular income arises (source country), consciously gives up its taxing rights in respect of a particular income arising from source(s) in that country in favour of the other treaty partner country (residence country). The residence country may or may not levy tax on the said income, for e.g. some countries like Singapore, Hong Kong etc. do not levy tax on the income unless it arises in their own territory, as they follow a 'territorial' model of taxation.

In case of income, where a country consciously gives up its rights to tax 'income' (i.e. positive income) of resident of the treaty partner arising on its own shores, it automatically does not mean that losses which had arisen in earlier year in the subject country are not allowed to be carried forward.

The said principle of allocation of taxing rights has also been considered and propagated in various judicial precedents and commentary. ITAT Mumbai in this regard in case of APL Co. Pte. Ltd. v. ADIT (International Taxation) [2017] 78 taxmann.com 240 (Mum. - Trib.) has observed as under: "12. There is another angle to interpret Article 24, which is that, the said Article purports to exclude tax exemption in India if the income is not remitted or received in Singapore for taxation purpose on the premise that this is a foreign income to Singapore. First of all, it has to be seen whether shipping income is exempt from tax in India and; secondly, whether the shipping income is foreign income to Singapore which would then be taxable upon receipt or remittance to Singapore. The shipping income is dealt with under Article 8, which states that "profits derived by an enterprise of a contracting state from the operation of ships………………….. in international traffic shall be taxable only in that state, i.e., resident state." The word "only" debars the other contracting state to tax the shipping income, that is, India is precluded from taxing the shipping income even if it is sourced from India. An enterprise which is tax-resident of Singapore is liable for taxation on its shipping income only in Singapore and not in India. Whence India does not have any taxation right on a shipping income of non- resident entity, which is exclusive domain of the resident state, there is no Question of any kind of exemption or reduced rate of taxation in the source state. It only envisages territorial and jurisdictional rights for taxing the income and India has no jurisdiction for any taxing right which are governed by Article 8. There is no stipulation about exemption under Article 8 of the shipping income which as pointed out by Id. Senior Counsel has been specifically provided in some of the Articles like Article 20, 21 & 22. Hence, it cannot be reckoned that shipping income earned from India is to be treated as exempt from tax or taxed at reduced rate, which is a condition precedent for applicability of Article 24, albeit India at the threshold does not have the jurisdiction to tax the shipping income of the non- resident entity……." 16.1 Eminent author Klaus Vogel in his commentary on "Double Taxation Conventions" has opined as under:- "19. [Allocation of taxing rights; exclusive or shared] For the purpose of eliminating double taxation, the Convention establishes two categories of rules. First Articles 6 to 21 determine, with regard to different classes of income, the respective rights to tax of the State of source or situs and of the State of residence, and Article 22 does the same with regard to capital. In the case of a number of items of income and capital, an exclusive right to tax is conferred on one of the Contracting States. The other Contracting State is thereby prevented from taxing & 2063/Mum/2025 Goldman Sachs (Singapore) Pte. those items and double taxation is avoided. As a rule, this exclusive right to tax is conferred on the State of residence. In case of other items of income and capital, the right to tax is not an exclusive one. As regards two classes of income (dividends and interest), although both States are given the right to tax, the amount of tax that may be imposed in the State of source is limited. Second, insofar as these provisions confer on the State of source of situs a full or limited right to tax, the State of residence must allow the relief so as to avoid double taxation; this is the purpose of Articles 23A and 236. The Convention leaves it to the Contracting States to choose between two methods of relief i.e. the exemption method and the credit method. Further in Third class: Exclusive residence State taxation] Other items of income or capital may not be taxed in the State of source or situs; as a rule they are taxable only in the State of residence of the taxpayer. This applies, for example, to royalties (Article 12), gains from alienation of shares or securities (Paragraph 5 of Article 13, subject to the exception of paragraph 4 of Article 13)……."

Thus, the application of a treaty can result in the entire (gross) income being not subject to tax in India in a year where a taxpayer claims treaty benefits. Therefore, in a year in which a taxpayer claims benefit of Article 13(4) of the India- Mauritius tax treaty, the entire gains he earns will not be taxable at all as India has given up its taxing rights in respect thereof. Thus, the entire amount of gains for the year (before set off of brought forward losses) will go out of the taxing provisions if Assessee has chosen to be assessed as per Treaty.

Further, the provisions of sections 4 and 5 are expressly made subject to the provisions of the Act which means that they are subject to the provisions of section 90 of the Act. By necessary implication they are subject to the terms of the Double Taxation Avoidance Agreement, if any, entered into by the Government of India. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections "subject to the provisions" of the Act.

Thus, as a corollary, where treaty provisions are beneficial as compared to the provisions of the Act; the taxpayer has right to rely on the treaty provisions.

Section 90(2) of the Act reads as under: "90(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case maybe, under sub-section (1) for granting relief of tax, or as the case maybe, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee."

From the above, it is clear that the provisions of the Act can be resorted to only when these are more beneficial (compared to Treaty).

The said proposition has been accepted by the Supreme Court in the case of Azadi Bachao Andolan (supra), wherein it was held as under:- "A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the Income-tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of changeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections "subject to the provisions" of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income-tax Act in the matter of ascertainment of chargeability to income tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC."

There could however be years where a taxpayer chooses not to claim treaty benefit as we have already noted above that he can do so under the provisions of section 90(2) of the Act. When he does so, his income will have to be computed under the provisions of the Act for that year. This will include the provisions for carry forward of loss.

In the present case, Assessee being the resident of Mauritius holding valid TRC is eligible to claim treaty benefits. In this regards, Article 13 of India- Mauritius DTAA on Capital gains is noteworthy. The relevant extracts of Article 13 of India- Mauritius treaty are reproduced as under: "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."

Thus, under DTAA between India Mauritius, the taxing rights on capital gains falling under Article 13(4) is kept with country of residence, i.e., Mauritius and hence the same is not taxable in country of source, i.e., in India.

In the previous year for the Assessment year under appeal (A.Y. 2016-17) the Assessee chose to be governed by the provisions of the tax treaty and consequently the gains earned in that year were not offered to tax. The question of touching the brought forward capital losses in this Assessment year does not arise as the eligibility to carry these losses forward was determined in the year they were suffered. The entire capital & 2063/Mum/2025 Goldman Sachs (Singapore) Pte. gains earned during the previous year were claimed to not be taxable under the treaty. As a result, the capital losses were carried forward as it is to the subsequent years.

In the instant case, in the earlier years (A.Y. 2009-10, A.Y. 2011-12 to A.Y. 2014-15) the Assessee had incurred capital losses.

Thus, it is for an assessee to examine whether or not, in the light of the applicable legal provisions and in the light of the precise factual position, the provisions of the Income-tax Act are beneficial to him or that of the applicable double taxation avoidance agreement. Thus, these losses were therefore computed under the provisions of the Act, as in those earlier years, the Assessee chose not to be governed by provisions of the treaty for those years but by the provisions of the Act. These provisions included the provisions of section 74 of the Act which deal with carry forward and set off of these losses.

In so far as reliance placed by Ld. DR in the case of R.M. Muthaiah (supra), the Hon'ble Court has clearly held as under:- When a power is specifically recognized as vesting in one, exercise of such a power by others, is to be read, as not available; such a recognition of power with the Malays/an Government, would take away the said power, from the Indian Government; the Agreement thus operates as a bar on the power of the Indian Government in the instant case. This bar would operate on ss. 4 and 5 of the IT Act, 1961.

As stated above, the capital gain as per the Indian Mauritius DTAA is taxable in the resident country and the source country has given up its rights to tax the income. The question of computation in the source country does not therefore arise. Accordingly, the income from capital gains is not taxable in India as per Article 13(4) DTAA and accordingly, the mode of computation income in India as the source country will not arise. If the particular income is not to be taxed at all, the question of including the same under the total income and determining the taxability on the same will not arise and the contention of Ld. DR that the total income as per Act is to be calculated to determine the tax liability and thereafter, the benefit is to be given cannot upheld. Accordingly, we hold that the losses which have been brought forward from earlier years will be carried forward to the subsequent years without setting off the same against the gains of the previous year relevant to the assessment year in question for the reason that once the assessee has chosen the benefit of DTAA, then the capital gain is not at all taxable in India and therefore, there is no question of setting off of loss from the earlier years. Accordingly, the Cross Objection raised by the assessee is allowed. In view of the aforesaid findings, the other ground in Cross Objection is purely academic in nature.” (emphasis supplied)

The ld. AR further submitted that in assessee's own case for AY 2014-15 (ITA No. 2425/Mum/2025 dated 07.08.2025) the Co-ordinate Bench has allowed the carry forward of the STCL incurred by the assessee by holding that “During the hearing proceedings before ITAT, the Ld. AR has argued that the issue raised by the Revenue was covered in their favour in the order of its sister-concern and hence Ld. CIT(A) followed that decision and gave relief to appellant in this year. The Ld. AR of the appellant has filed a copy of ITAT order in the case of Goldman Sachs India Investments (Singapore) PTE Ltd. (ITA No. 6619/Mum/2016 dated 9.4.2021, wherein Hon'ble ITAT has held as under :-

The ld. AR also submitted that similar view has been held by the Co- ordinate Bench in the case of assessee's sister concern Goldman Sachs Investment & 2063/Mum/2025 Goldman Sachs (Singapore) Pte. (Mauritius) Ltd. v/s DCIT(IT) [2020] 120 taxmann.com 23 (Mum. Trib.). The ld. AR submitted that Article-13 of India-Mauritius DTAA and Article-13 of India- Singapore DTAA are similarly worded and therefore the ratio laid down by the Co-ordinate Bench in above cases are applicable to the assessee also.

The ld. DR on the other hand relied on the orders of the lower authorities.

We heard the parties and perused the material on record. The assessee during the year under consideration has offered net STCG Rs. 888,94,64,645/- as exempt under Article-13 of India-Singapore DTAA. Accordingly in the return the assessee has carried forward STCL brought forward from AY 2014-15 amounting to Rs. 37,55,67,388/- . The AO did not allowed the carry forward of the loss stating that when the gain is exempt the loss also should be treated as exempt. Accordingly, the AO set off the brought forward loss against current STCG thereby denying the carry forward of the loss. From the perusal of the AO's order, we notice that the AO has given a finding that that if the brought forward losses are accepted by the Department in earlier years then the same cannot be denied to be carried forward. Having held so, the AO still proceeded to set off the brought forward loss against current year gain. From the perusal of the judicial pronouncements relied on by the ld AR we notice that the coordinate bench has laid down the ratio that where the treaty provisions are beneficial as compared to the provisions of the Act the taxpayer has right to rely on the treaty provisions and that the question of touching the brought forward capital losses does not arise in subsequent AYs once the eligibility to carry these losses forward was determined in the year they were suffered. For AY 2016-17, the assessee has chosen to be governed by Treaty provisions thereby claiming the capital gain as exempt since it is more beneficial. The assessee in AY 2014-15 has chosen to be governed by the & 2063/Mum/2025 Goldman Sachs (Singapore) Pte. Act since it was more beneficial and accordingly has claimed the carried forward of the capital loss incurred in the said AY. The coordinate bench has allowed the carried forward from AY 2014-15 and the relevant observations of the coordinate bench is extracted in the earlier part of this order. Further if AO's view is to be accepted then it would mean that to the extent of the loss set off against the current year gain, the gain is brought to tax under the Act which is not correct. From the perusal of Article-13, the India-Singapore DTAA we notice that both are similarly worded and accordingly, we see merit in the submission of the ld. AR that the ratio laid down by the Co-ordinate Bench in the above case are applicable to the assessee also. In view of this discussion we hold that the lower authorities are not correct in setting off the brought forward STCL of AY 2014-15 against the STCG of the AY 2016-17 thereby denying the benefit of carry forward. The grounds raised by the assessee in this regard are allowed.

For AY 2021-22 the AO denied the carried forward of unabsorbed capital loss from AY 2014-15 by placing reliance on his own order for AY 2016-17. We have while considering the impugned issue for AY 2016-17 have held that the AO's action of denying the benefit of carry forward of STCL is not correct. Accordingly we are of the considered view that our decision in AY 2016-17 is mutatis mutandis applicable to AY 2021-22 also and therefore we hold that denying the carry forward of the said same in AY 2021-22 also cannot be sustained. The grounds of the assessee in this regard for AY 2021-22 succeed,

In result, appeals filed by the assessee for AY 2016-17 & 2021-22 are allowed.