QUALCOMM ASIA PACIFIC PTE LTD,SINGAPORE vs. DEPUTY COMMISSIONER OF INCOME-TAX, INTERNATIONAL TAX -CIRCLE 3(3)(1), MUMBAI

The ld. AR submitted that the CIT(A) has enhanced the denial of carry forward of LTCL for the reason that the LTCG are exempt under the DTAA and that the loss from same source of income cannot be allowed to be carried forward.

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 earned LTCG which have been claimed as exempt under Article-13 of the DTAA between India and Singapore since these shares were acquired prior to 01.04.2017 and that the grandfathering provisions are applicable. The assessee also made LTCL on sale of two different scrip which was claimed to be carried forward under the provisions of the Act. While processing the return under section 143(1) the AO did not allow the carry forward of loss from one of the scrip amounting to Rs. 2,29,03,528/-. The assessee filed a petition under section 154 of the Act which was rejected. The CIT(A) while considering the appeal filed by the assessee against the order under section 154 denied the carry forward of the LTCL arising from the sale of both the scrips and held that the same needs to be set off against the LTCG. The CIT(A) further held that the LTCG after setting off of the losses is only eligible for claiming exemption under Article- 13 of the DTAA between India and Singapore. Accordingly the issue for our consideration is whether only the net LTCG is eligible for treaty benefits or 5 ITA 686/Mum/2025 -Qualcomm Asia Pacific Pte. Ltd. whether the assessee can claim the treaty benefits towards LTCG and the LTCL can be carried forward under the Act. In this regard we notice that the Co-ordinate Bench in the case of J.P. Morgan India Investment Company Mauritius Ltd. has considered a similar issue where it has been held that “DECISION 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 clamed 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 los from earlier year and he allowed to be carry forward to the subsequent years on the ground that in the earlier yours when assessee suffered loss it chose not to claim benefit under DTAA and computed the love as per domestic low, 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 am 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 ADET (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, le 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 7 ITA 686/Mum/2025 -Qualcomm Asia Pacific Pte. Ltd.

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." 21. 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). 22. 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

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 26. 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 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

In so far as reliance placed by Ld. DR in the case of RM. 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.”

The following principles emanate from the perusal of the above –

Now when we will apply the above principles to assessee's case - As per Article 13 of India Singapore DTAA, the gain on transfer of shares acquired prior to 01.04.2017 cannot be taxed in the source country i.e. India. Therefore the LTCG earned on sale of shares in assessee's case cannot be taxed in India. Accordingly the LTCG does not enter in the computation of total income of the assessee. The assessee has computed the LTCL to be carried forward under the provisions of the Act and the assessee cannot be restricted from choosing not to avail the DTAA benefits. When the LTCG does not enter into the computation of total income then the question of setting off of the LTCL against the said gain does not arise.

The next contention of the revenue that the entire transaction of sale of shares carried out by the assessee resulting in LTCG & LTCL should be considered as one source and therefore the assessee cannot avail benefit under both

The ratio laid down by the coordinate bench in the above case is that each transaction is a separate source of income for the assessee and therefore the assessee can choose to apply either the provisions of DTAA or the Act for each of the transactions. We notice that a similar view has been held by the Tribunal in the case of Bay Capital India Fund Ltd., Mauritius (supra). In view of these discussions and respectfully following the decisions of the Co-ordinate Bench we hold that the assessee is entitled to claim the treaty benefits for the LTCG and is eligible to carry forward the LTCL under the provisions of the Act. The grounds raised by the assessee in this regard are allowed.

Ground No.1 & 2 pertain to the contention that the denial of carry forward of LTCL should not have been done and in the intimation under section 143(1) of the Act. The ld. AR in this regard submitted that the assessee has not received any intimation as per the 1st proviso to section 143(1)(a) of the Act and submitted the screenshots from the e-proceeding to substantiate the said claim. The ld. AR accordingly submitted that the order of the lower authorities are in breach of the mandatory prescription of law as contained in the 1st proviso to section 143(1)(a)

We heard the parties and perused the material on record. From the perusal of the evidences submitted by the assessee there is merit in the submission of the assessee that the assessee has not received the intimation under section 143(1)(a) of the Act with regard to disallowance of carry forward of LTCL. Further it is a settled legal position that the adjustment under section 143(1) cannot be made when the issue is debatable. In the given case from the perusal of the intimation we notice that the CPC has disallowed the carry forward of LTCL as claimed by the assessee under the provisions of the Act. The impugned issue of whether the LTCL is to be allowed to be carried forward as per the Act or to be set off against the LTCG for giving exemption under the DTAA is a debatable issue. Therefore in our considered view, the AO is not correct in making the disallowance of carry forward of LTCL as enhanced by the CIT(A). These grounds of the assessee are thus allowed.

In result the appeal of the assessee is allowed.