Mauritian residence and treaty protection upheld for share-sale gains where control remained outside India and restructuring was commercial.

A foreign company is treated as resident in India under the pre-amended section 6(3) only if its control and management is wholly situated in India during the relevant year; board meetings, records and corporate administration in Mauritius supported non-residence, while delegated execution in India did not shift control. Valid Mauritian tax residency, incorporation and administration, together with the absence of a limitation of benefits clause in the relevant treaty period, supported Article 13(4) protection for capital gains on VEL shares. The restructuring, including liquidation of ETIL and the holding pattern, was assessed as a commercially driven group arrangement, with no cogent material showing sham, fraud or circular fund movement to evade tax.

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Issues: (i) Whether the assessee was resident in India under section 6(3) of the Income-tax Act, 1961 on the ground that its control and management of affairs was wholly situated in India; (ii) whether the assessee was entitled to the benefit of Article 13(4) of the India-Mauritius DTAA for capital gains arising on sale of VEL shares; (iii) whether the transaction structure, including the liquidation of ETIL and the holding pattern, was a colourable device or a genuine commercial arrangement.

Issue (i): Whether the assessee was resident in India under section 6(3) of the Income-tax Act, 1961 on the ground that its control and management of affairs was wholly situated in India.

Analysis: The relevant test under section 6(3) required the control and management to be wholly situated in India during the relevant previous year. The board meetings, decision-making, maintenance of records, and ordinary corporate administration were found to have taken place in Mauritius. The presence of authorised personnel in India for execution of decisions did not convert delegated implementation into the situs of control. The authorities below relied on earlier years and surrounding transactions, but the residential status had to be tested year-wise on the facts of the relevant year.

Conclusion: The assessee was not resident in India under section 6(3); the finding was against the Revenue.

Issue (ii): Whether the assessee was entitled to the benefit of Article 13(4) of the India-Mauritius DTAA for capital gains arising on sale of VEL shares.

Analysis: The assessee held valid tax residency certificates issued by the Mauritian authority, and the record showed incorporation, tax residence, and corporate administration in Mauritius. In the absence of a limitation of benefits clause in the relevant treaty period, and in view of the binding effect of the CBDT circulars and the treaty position then prevailing, the Revenue could not deny treaty benefit merely by questioning the commercial motivation for routing investment through Mauritius. The grandfathering framework introduced later also reinforced that the impugned transfer, relating to shares acquired before 1 April 2017, fell within the earlier treaty regime.

Conclusion: The assessee was entitled to Article 13(4) treaty protection; the finding was in favour of the assessee.

Issue (iii): Whether the transaction structure, including the liquidation of ETIL and the holding pattern, was a colourable device or a genuine commercial arrangement.

Analysis: The liquidation of ETIL was linked to lender requirements and the attempt to create a direct pledge structure for security enforcement after regulatory clearance for direct pledge was not obtained. The investment holding structure, intra-group funding, and use of sale proceeds were explained as commercial arrangements within a multinational group. The Revenue did not produce cogent material showing sham, fraud, or any circular movement of funds designed to evade tax. The Court applied a holistic commercial-purpose approach and declined to adopt a dissecting approach to isolated steps in the restructuring.

Conclusion: The arrangement was held to be commercially driven and not a colourable device; the finding was in favour of the assessee.

Final Conclusion: The assessee was held to be a Mauritian resident entitled to treaty protection, and the capital gains arising from the sale of VEL shares were not taxable in India. The connected appeals were allowed.

Ratio Decidendi: For a foreign company to be treated as resident in India under the pre-amended section 6(3), the Revenue must establish that the whole of its control and management was situated in India during the relevant previous year; where valid Mauritian tax residence is shown and the transaction is a bona fide commercial investment structure, treaty benefits under Article 13(4) cannot be denied in the absence of a limiting clause or proof of sham.

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