TaxTMI 
TaxTMI 
2023 (11) TMI 692
X X X X Extracts X X X X
X X X X Extracts X X X X
....ficial provisions of India-Mauritius Double Taxation Avoidance Agreement (DTAA) to the income earned under the head 'capital gain'. In addition to the aforesaid grounds, the assessee has raised an additional ground vide letter dated 09.05.2023 on the issue of taxability of long-term capital gain from sale of shares under Article 13(4) of India-Mauritius DTAA. Since, the adjudication of additional ground does not require fresh investigation of facts and can be decided based on the facts already available on record, we are inclined to admit the additional ground. 5. As could be seen, grounds Nos. 4 & 5 of the main grounds as well as the additional ground are on the common issue of taxability or otherwise of capital gain from sale of equity shares under Article 13(4) of India-Mauritius DTAA. 6. Briefly, the facts relating to the issue are, the assessee is a non-resident corporate entity incorporated under the laws of Mauritius and a tax resident of Mauritius. As stated by the Assessing Officer, the assessee was incorporated primarily for the purpose of making investments in India in education space, agriculture, healthcare, microfinance institutions and other financial services.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....idency Certificate (TRC) issued by Mauritius revenue authorities. He submitted, assessee's registered office is situated in Mauritius and it maintains regular books of account and other statutory records in the registered office. He submitted, the key policy decisions, such as, fund flow, investment activities, divestment of investments are taken collectively outside India by assessee's board of directors, who are all non-residents including the resident directors in Mauritius. In this context, he drew our attention to share holding patterns of the assessee company as well as the details of the directors. He submitted, the assessee is continued with its business activities as on date and is holding multiple investments in Indian companies. He submitted, the assessee was primarily incorporated for making investments in microfinance institutions in India and from this very institution, the assessee is making investments in India in more than 15 companies aggregating to US Dollar 58 million approximately. He submitted, all investment decisions have been taken in the board meetings in Mauritius. In this regard, he drew our attention to the details of board meetings held in the year und....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d the amended provisions of Article 13 as well as the limitation of benefit (LOB) clause as provided under Article 27A of the Treaty would not be applicable as it is applicable only with reference to Article 13(3B) of the Treaty. 10. Without prejudice, learned counsel submitted, the conditions of Article 27A are not applicable to the assessee, as the assessee cannot be considered to be a shell / conduit company, as neither the assessee has negligible or nil business operations nor its expenses are below the threshold limit prescribed in Article 27A. Thus, he submitted, the long-term capital gain derived from sale of equity shares is not taxable under any circumstance in case Article 13 of India-Mauritius DTAA is applied. Thus, he submitted, the long-term capital gain wrongly offered to tax in the revised return of income is not taxable under Article 13(4) of the India-Mauritius DTAA. 11. Strongly relying upon the observations of the Assessing Officer and learned DRP, learned Departmental Representative submitted that the share holders of the assessee company are not based in Mauritius, but are residents of other countries. He submitted, all decisions relating these activities....
X X X X Extracts X X X X
X X X X Extracts X X X X
....th the assessee; (v). that there is no commercial rationale of establishment of assessee in Mauritius as it has nil or negligible business; that the assessee cannot be a tax resident of Mauritius , as it is not liable to tax in Mauritius in terms of Article 4(1) of the Treaty. Of course, learned DRP has agreed with the views expressed by the Assessing Officer. 15. Keeping in view the aforesaid observations of the departmental authorities, let us examine the issue at hand. 16. First and foremost, the residential status of the assessee needs to be decided. As discussed earlier, from its very inception, the assessee has been granted TRC by Mauritius tax authorities. Though, the Assessing Officer is conscious of this fact, however, he has brought the theory of substance over form to deny Treaty benefits to the assessee despite valid TRC. In our view, the aforesaid decision of the Assessing Officer cannot be accepted under any circumstance. Now, it is well settled that once the tax resident of Mauritius is holding a valid TRC, the Assessing Officer in India cannot go behind the TRC to question the residency of the entity. In fact, since, there were considerable number of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 cannot 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. Thus, keeping in view the ratio laid down by Hon'ble Supreme Court, as aforesaid, the reasoning of the Assessing Officer that since, the assessee is not liable to tax under Article 4 of the India-Mauritius Treaty, it cannot claim benefit of Treaty provisions, is liable to be rejected. 17. In so far as the allegation of the Assessing Officer that the assessee has been set up as a scheme of arrangement for tax avoidance through Treaty shopping, in our view, such allegation of the Assessing Officer is thoroughly misconceived and not borne out from any material/evidence brought on record. Further, the allegation of the Assessing Officer to the effect that ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ticle 13(4) of the Tax Treaty in respect of capital gain arising from sale of equity shares of Veritas Finance Pvt. Ltd. It is the case of the assessee that it had acquired the cumulative convertible preference shares (CCPS) of Veritas Finance Pvt. Ltd. on 18.03.2016, whereas, the CCPS were converted to equity shares on 04.08.2017. Thus, it is the case of the assessee that the shares of Veritas Finance Pvt. Ltd. were acquired prior to 01.04.2017, hence, it will not be covered under Article 13(3A) and 13(3B), rather, under Article 13(4) of the Treaty. In our considered opinion, assessee's claim is acceptable. 20. Undoubtedly, the assessee has acquired CCPS prior to 01.04.2017, which stood converted into equity shares as per terms of its issue without there being any substantial change in the rights of the assessee. As rightly contended by learned counsel for the assessee, conversion of CCPS into equity shares results only in qualitative change in the nature of rights of the shares. The conversion of CCPS into equity shares did not, in fact, alter any of the voting or other rights with the assessee at the end of Veritas Finance Pvt. Ltd. The difference between the CCPS and equity ....