2023 (8) TMI 823 - AT - Income Tax

Tribunal grants tax exemption to Mauritian company on Indian capital gains

Saif II-Se Investments Mauritius Limited Versus Assistant Commissioner Of Income Tax, Circle – International Taxation (3) (1) (2), Delhi

The Tribunal ruled in favor of the assessee, a non-resident corporate entity incorporated in Mauritius, in a tax dispute involving the non-taxability of ... Taxability of global income - residential status of assessee - taxability of long term capital gain derived from sale of shares in an Indian company to be exempt u/Article 13(4) of India – Mauritius DTAA - assessee is a non-resident corporate entity incorporated in Mauritius holding a valid Tax Residency Certificate (TRC) issued by Mauritius Tax Authorities - as per AO assessee operates as an investment holding company for undertaking various investments - assessee claimed the dividend income as exempt u/s 10(34) - whether the assessee can be treated as a tax resident of Mauritius? - HELD THAT:- It is a fact on record that the assessee is holding the shares in NSE for more than a decade, since the year 2009, and even as on date, is still holding 3.5% shares in NSE. Thus, holding period of shares by the assessee demonstrates the status of the assessee as a genuine entity carrying on the business in holding investment. TRC issued by an authority in the other tax jurisdiction is the most credible evidence to prove the residential status of an entity and the TRC cannot be doubted. In fact, the CBDT, specifically in the context of India – Mauritius treaty, has issued Circular No. 682, dated 30th March, 1994 and 789, dated 14th April, 2000 clarifying that TRC issued by Mauritius Tax Authorities proves the residential status of a resident of Mauritius and no other evidence is required. In case of UOI Vs. Azadi Bachao Andolan [2003 (10) TMI 5 - SUPREME COURT]held that “liable to taxation” as used in Article 4 of India-Mauritius DTAA does not mean that merely because tax exemption under certain specified head of income including capital gain from sale of shares has been granted under the domestic tax laws of Mauritius, it can lead to the conclusion that the entities availing such exemption are not liable to taxation. The Hon’ble Supreme Court categorically rejected Revenue’s contention that avoidance of double taxation can arise only when tax is actually paid in one of the contracting States. Hon’ble Court held that ‘liable to taxation’ and ‘actual payment of tax’ are two different aspects - As for economic development, initially, many developing countries allowed some amount of treaty shopping to attract FDI. Thus materials available on record clearly establish that not only the assessee is a resident of Mauritius, but being a beneficial owner of the income derived from sale of shares, is entitled to the treaty benefits. Undisputedly, the shares sold by the assessee in the year under consideration were acquired in the year 2009, much prior to 01.04.2017. Therefore, the provisions of Article 13(3A) of the tax treaty would not be applicable. Capital gain derived by the assessee from sale of shares would fall within the ambit of article 13(4) of the tax treaty. Capital gain, being exempt under the treaty provisions, cannot be brought to tax in India. Therefore, we direct the AO to delete the addition - Decided in favour of assessee. Issues Involved:1. Non-taxability of long-term capital gain derived from the sale of shares under Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement (DTAA).2. Levy of interest under sections 234A and 234B.3. Initiation of penalty under section 270A of the Income-tax Act, 1961.Summary:Issue 1: Non-taxability of Long-Term Capital GainThe primary issue raised by the assessee pertains to the non-taxability of long-term capital gain derived from the sale of shares in an Indian company, claimed to be exempt under Article 13(4) of the India-Mauritius DTAA. The assessee, a non-resident corporate entity incorporated in Mauritius, holds a valid Tax Residency Certificate (TRC) and a Global Business Licence (Category 1) issued by the Financial Service Commission in Mauritius. The Assessing Officer (AO) questioned the assessee's claim of exemption, alleging that the assessee had no commercial substance and was set up as a conduit company to gain tax advantages under the treaty. The AO's conclusions were based on the lack of operational activities, absence of employees, and the use of dividend income for repayment to related parties.The Dispute Resolution Panel (DRP) upheld the AO's decision, rejecting the assessee's objections. However, the Tribunal found that the assessee's holding of shares in NSE for over a decade and the regulatory approvals obtained from various Indian authorities, including FIPB, SEBI, and RBI, validated the assessee's status and its claim for treaty benefits. The Tribunal emphasized that a valid TRC is credible evidence of the residential status, and the CBDT Circulars No. 682 and 789 support the assessee's claim. Citing the Supreme Court's decision in UOI Vs. Azadi Bachao Andolan, the Tribunal held that the assessee, being a resident of Mauritius, is entitled to treaty benefits, and the capital gain from the sale of shares is exempt under Article 13(4) of the DTAA. Consequently, the Tribunal directed the AO to delete the addition.Issue 2: Levy of Interest under Sections 234A and 234BThe Tribunal noted that the issue of levy of interest under sections 234A and 234B is consequential in nature. As such, this ground was dismissed.Issue 3: Initiation of Penalty under Section 270AThe Tribunal found that the initiation of penalty under section 270A of the Act is premature at this stage and dismissed this ground as well.Conclusion:The appeal was partly allowed, with the Tribunal ruling in favor of the assessee on the primary issue of non-taxability of long-term capital gain under the India-Mauritius DTAA, while dismissing the grounds related to the levy of interest and initiation of penalty. The order was pronounced in the open court on 14th August 2023.