2024 (2) TMI 393 - AT - Income Tax

Mauritius tax resident with valid TRC exempt from capital gains tax on pre-2017 equity share sales under Article 13(4)

M/s Sarva Capital LLC Versus The ACIT, Circle International Tax 3 (1) (2), New Delhi

ITAT Delhi ruled in favor of non-resident Mauritius tax resident holding valid TRC regarding capital gains taxation on equity share sales. Department ... Treaty benefits - ‘gains from alienation of shares' - taxability or otherwise of capital gain from sale of equity shares under Article 13(4) of India-Mauritius DTAA - beneficial tax rate under grandfathering clause - treating the assessee as a conduit company set up - assessee is non-resident corporate entity and tax resident of Mauritius holding a valid TRC - HELD THAT:- As decided in SARVA CAPITAL LLC, C/O DINESH MEHTA & CO., CAS [2023 (11) TMI 692 - ITAT DELHI] Departmental authorities have miserably failed to establish the fact of the assessee, being a conduit company with reference to Article 27A of India-Mauritius DTAA (Limitation on Benefit clause). Therefore, having regard to the relevant facts and ratio laid down in the judicial precedents, discussed above, we have no hesitation in holding that the assessee, having been granted a valid TRC, has to be treated as tax resident of Mauritius, hence, eligible to avail benefit under India-Mauritius DTAA. There cannot be any dispute with regard to assessee’s claim of exemption under Article 13(4) of India-Mauritius DTAA, as, undisputedly, the shares were acquired prior to 01.04.2017. Therefore, the gain derived from sale of such equity shares is taxable only in the country of residence of the assessee, i.e., Mauritius and not in India. However, in so far as the capital gain arising from sale of shares of Veritas Finance Pvt. Ltd. is concerned, the facts are slightly different. Though, in the original return of income, the assessee claimed the resultant capital gain to be exempt under Article 13(4), however, subsequently, the assessee filed revised return of income offering the capital gain to tax under the provisions of Article 13(3A) read with Article 13(3B) of the Treaty by claiming beneficial tax rate under grandfathering clause. The word ‘shares’ bas been used in a broader sense and will take within its ambit all shares, including preference shares. Thus, since, the assessee had acquired the CCPS prior to 01.04.2017, in our view, the capital gain derived from sale of such shares would not be covered under Article 13(3A) or 13(3B) of the Treaty. On the contrary, it will fall under Article 13(4) of India-Mauritius DTAA, hence, would be exempt from taxation, as the capital earned is taxable only in the country of residence of the assessee. No doubt, the assessee has offered the capital gain under Article 13(3B) of the Treaty in its revised return. However, that will not preclude the assessee from claiming benefit under Article 13(4) of the Treaty when the capital gain clearly falls within the ambit of Article 13(4) of the Treaty. In view of the aforesaid, we allow assessee’s additional ground and hold that the capital gain derived by the assessee from the sale of equity shares is not taxable in terms of Article 13(4) of the India-Mauritius DTAA. Appeal of assessee allowed. Issues Involved:1. Incorrect assessment of income and taxation of capital gains.2. Jurisdictional error due to improper issuance of notice under section 143(2).3. Violation of principles of natural justice.4. Incorrect taxation under domestic law instead of the India-Mauritius DTAA.5. Denial of beneficial tax treatment under the India-Mauritius DTAA.6. Proposal to initiate penalty proceedings under section 270A.Summary:1. Incorrect Assessment of Income and Taxation of Capital Gains:The assessee contended that the A.O. erred in assessing the income at Rs. 163,26,34,468/- and taxing the capital gains under section 112 at 10%, contrary to the returned income of Rs. 16,94,79,930/-. The Tribunal found that the grounds and arguments for both years were similar to those adjudicated in ITA No. 2289/Del/2022 for AY 2019-20, where it was held that the capital gains derived from the sale of equity shares are not taxable under Article 13(4) of the India-Mauritius DTAA.2. Jurisdictional Error Due to Improper Issuance of Notice:The assessee argued that the notice under section 143(2) was issued by NeAC/NfAC, whereas the appellant is assessed with International Tax charge, rendering the notice and consequential assessment proceedings null and void. The Tribunal did not provide specific findings on this issue in the reproduced order but allowed the appeal in line with the previous year's decision.3. Violation of Principles of Natural Justice:The assessee claimed that the A.O. violated principles of natural justice by not providing a reasonable opportunity to be heard and by disregarding submitted evidence. The Tribunal's decision to allow the appeal implies acceptance of this contention, aligning with the previous year's adjudication.4. Incorrect Taxation Under Domestic Law Instead of the India-Mauritius DTAA:The A.O. taxed capital gains on the sale of shares under domestic law instead of Article 13(4) of the India-Mauritius DTAA. The Tribunal upheld that the capital gains are exempt under Article 13(4) as the shares were acquired before 01.04.2017, thus taxable only in Mauritius.5. Denial of Beneficial Tax Treatment Under the India-Mauritius DTAA:The A.O., following DRP directions, denied treaty benefits, alleging tax avoidance through treaty shopping, and questioned the validity of the Tax Residency Certificate (TRC). The Tribunal reiterated that the TRC is sufficient to establish tax residency and eligibility for treaty benefits, referencing the Supreme Court decision in Azadi Bachao Andolan and CBDT Circular No. 789.6. Proposal to Initiate Penalty Proceedings Under Section 270A:The assessee contested the proposal to initiate penalty proceedings mechanically based on additions made in the assessment order. The Tribunal's decision to allow the appeal suggests that the penalty proceedings may not be justified.Conclusion:The Tribunal allowed the appeal, holding that the assessee is entitled to the benefits of the India-Mauritius DTAA, and the capital gains derived from the sale of equity shares are not taxable in India. The decision aligns with the previous year's adjudication in ITA No. 2289/Del/2022.