Tax Residency Certificate and India-Mauritius DTAA govern capital gains relief for pre-cutoff share acquisitions, with limited verification for one component.

A valid Tax Residency Certificate generally establishes Mauritius treaty residence for India-Mauritius DTAA purposes, and Indian tax authorities cannot ordinarily go behind it to question residence. For capital gains on sale of unlisted shares acquired before 01.04.2017, the analysis treats Article 13(4) as governing, with Article 13(3A), Article 13(3B) and the Limitation of Benefit clause in Article 27A being inapplicable on those facts. Unsupported allegations that the investor is a shell or conduit entity do not displace treaty entitlement. Where a limited portion of short-term capital gains may relate to shares acquired after 01.04.2017, factual verification is required to determine whether the post-cut-off treaty regime applies.

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Issues: (i) Whether the assessee, a Mauritius tax resident holding a valid Tax Residency Certificate, was entitled to exemption under the India-Mauritius DTAA on capital gains arising from sale of unlisted equity shares acquired before 01.04.2017. (ii) Whether the Revenue could deny treaty benefit on the basis that the assessee was a shell or conduit entity and on the basis of the Limitation of Benefit clause in Article 27A. (iii) Whether the matter required limited factual verification in respect of a portion of the short-term capital gain for Assessment Year 2019-20.

Issue (i): Whether the assessee, a Mauritius tax resident holding a valid Tax Residency Certificate, was entitled to exemption under the India-Mauritius DTAA on capital gains arising from sale of unlisted equity shares acquired before 01.04.2017.

Analysis: The valid Tax Residency Certificate established the assessee's residence in Mauritius for DTAA purposes. The judicial position relied upon by the Court recognises that Indian tax authorities cannot go behind the TRC to question treaty residency. The shares giving rise to capital gains were acquired prior to 01.04.2017, so the gains did not fall within the post-01.04.2017 regime of Article 13(3A) or the grandfathering window in Article 13(3B). On the facts, the case was governed by Article 13(4), under which the capital gains were exempt.

Conclusion: The assessee was entitled to treaty exemption under Article 13(4) of the India-Mauritius DTAA in respect of capital gains arising from shares acquired before 01.04.2017.

Issue (ii): Whether the Revenue could deny treaty benefit on the basis that the assessee was a shell or conduit entity and on the basis of the Limitation of Benefit clause in Article 27A.

Analysis: The reasons recorded by the Assessing Officer to deny treaty benefit were found unsupported by cogent evidence. The Court held that mere allegations of lack of commercial substance could not displace the TRC-based treaty entitlement. The DRP's reliance on Article 27A was held to be misconceived because that clause was relevant to Article 13(3B), whereas the assessee's case for pre-01.04.2017 acquisitions fell under Article 13(4). The GAAR provisions were not invoked in the assessment proceedings, and that line of reasoning was treated as academic.

Conclusion: Denial of treaty benefit on the grounds of shell or conduit character and Article 27A was rejected.

Issue (iii): Whether the matter required limited factual verification in respect of a portion of the short-term capital gain for Assessment Year 2019-20.

Analysis: For one stated component of the short-term capital gain, the assessee indicated that the shares may have been acquired after 01.04.2017 and sold before 31.03.2019, which could potentially attract Article 13(3B). The Court therefore directed factual verification of that limited aspect.

Conclusion: Limited verification was directed for that specific component, and treaty relief was to be granted to that extent if the factual condition was satisfied.

Final Conclusion: The appeals succeeded substantially because the assessee was held entitled to treaty exemption for capital gains on pre-01.04.2017 share acquisitions, with only a limited factual check left for one specified portion of the short-term capital gain. The stay application became infructuous.

Ratio Decidendi: A valid Tax Residency Certificate ordinarily establishes treaty residence and, where shares were acquired before the relevant treaty cut-off date, capital gains fall within the exempting provision of the applicable DTAA notwithstanding unsupported allegations of conduit status or the inapplicable limitation-of-benefit clause.

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