TaxTMI 
TaxTMI 
2024 (3) TMI 310
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....of Mauritius with the Management & Economic substance in Mauritius and thus, the benefit of DTAA being available to the Assessee Company, as such, the transaction of alleged long term capital gain, is not liable to tax in India and thus, the amount of tax deducted by the buyer needs to be refunded to the Assessee Company. 3. That the Ld. AO/DRP has further erred in law and on facts by holding that the assessee company is a shell/conduit entity, overlooking the fact that the assessee company is being incorporated in Mauritius right from year 2007 and has been duly complying with the legal requirements in the country of residence and as such, the authorities are not justified in holding the assessee company to be a conduit or shell company on a mere subjective opinion, which is wholly arbitrary, unjustified and untenable in law. 4. That the Ld. AO/DRP has also failed to appreciate the following: (i) CBDT issued Circular No.789 dated April 13, 2000 which provided that a TRC issued by the Mauritius Revenue Authority would be regarded a sufficient evidence for accepting the residential status as well as beneficial ownership for the purpose of applying the India- Mauritius Tax Trea....
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....ecording perverse findings, as can be seen from the fact that Ld. AO in draft assessment order records that the assessee - appellant has not furnished its audited financial statements, whereas, both AO and DRP have made the same financial statements as the basis to justify the impugned addition, which shows the preconceived notions with which the impugned addition has been made. 8. That the Ld. AO/DRP has grossly erred in making the impugned addition with preconceived notions, recording perverse findings and also by arbitrarily brushing aside the detailed submissions/evidences/material placed on record, which were furnished in order to support the fact that the transaction in question is genuine. 9. That on the facts and circumstances of the case and in law, the Ld. AO failed to appreciate the fact that the scope of the impugned assessment proceedings was only for the purpose of "issue of refund claim" of the amount of tax deducted at source, as such, the addition so made on account of addition of alleged long term capital gain is without jurisdiction by Ld. AO and thus, is liable to be deleted. 10. That the Ld. AO/DRP has erred in law and on facts in making the addition in t....
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....tius. Therefore, the assessee contended that assessee sought refund of tax deducted at source by LEI Singapore from the sale consideration of the shares. It was further stated that as per provisions of section 195 r.w.s. 112(1)(c)(iii) M/s LEI Singapore Holdings Pte Ltd. has withheld tax @10% + SC + EC. It was, however, submitted that as per provisions of Article 13(4) of India - Mauritius treaty the capital gain is not chargeable to tax in India since the shares transferred were purchased in the years 2010 & 2011 i.e. before 01.04.2017. The Assessing Officer not convinced with the submissions of the assessee passed draft order u/s 144C of the Act dated 28.09.2021 proposing to tax the long term capital gain which was claimed as exempt by the assessee at 10% u/s 112 of the I.T. Act. In the draft assessment order the AO with the following observations brought to tax the long term capital gains at 10% + SC + EC: - "11.7 In a nut shell, following facts emerge: 1. The scheme of arrangement employed by the assessee is one of tax avoidance through treaty shopping mechanism. 2. The TRC is not sufficient to establish the tax residency if the substance establishes otherwise. 3. The a....
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....n arising on transfer of shares of PRS by the assessee to LEI Singapore Holding Pte. Ltd. is liable to tax in India." 4. The DRP vide order dated 25.04.2022 passed u/s 144C(5) of the Act rejected the objections filed by the assessee observing as under: "2.8 The submissions have been examined along with materials available on record. There is no dispute that the assessee has a Tax Residence Certificate of Mauritius. To that extent, the contention that it is resident in Mauritius is in order. However, even in case where the company holds a TRC, the contention that it becomes automatically eligible for treaty benefits cannot be accepted, ft has been held by Hon'ble Supreme Court in Vodafone International Holdings Vs Union of India In Civil Appeal No.733 of 2012 as under- "TRC whether conclusive 98. LOB and look through provisions cannot be read into a tax treaty put the Question may arise as to whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at the substance of the transaction. DTAA and Circular No. 789 dated 13.4.2000, in our view, would not preclude the Income Tax Department from denying the tax treaty benefits, if it is established,....
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....fforded to residents and nationals of a contracting state under Article 24 or any other similar limitations.... It also includes limitations of the taxing rights of a Contracting State over a capital mm derived from the alienation of movable property located in that State by a resident of the other State under Article 13...." 177. The terms "arrangement or transaction" should be interpreted broadly and include any agreement understanding scheme, transaction or series of transactions, whether or not they are legally enforceable, in particular they include the creation, assignment, acquisition or transfer of the income itself,. or of the property or right in respect of which is the income accrues. These Terms also encompass arrangements concerning the establishment, acquisition or maintenance of a person who derives the income, including the qualification of that person as a resident of one of the Contracting States, and include steps that persons may take themselves in order to establish residence.... One transaction alone may result in a benefit or it may operate in conjunction with a more elaborate series of transactions that together result in the benefit. In both cases the pro....
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....nes it to be a shell entity which has been interposed in Mauritius for the purpose of availing of no tax benefit under the India- Mauritius DTAA. It is instructive to refer to the UN Model Commentary on 'use of base companies' in this regard- "iii) the use of base companies 90. Base company situated in low tax jurisdictions may be used for the purposes of diverting income to a country that that income will be subjected to taxes that are substantially lower than those that would have been payable if the income had been derived directly by the shareholders of that company. 91. Various approaches have been used to deal with such arrangements. For example, a company that is a mere shell with no employees and no substantial economic activity could, in some countries, be disregarded for tax purposes pursuant to general anti-abuse rules or judicial doctrines...." (Emphasis supplied)" 2.13 Similarly, it has been held by Hon'ble ITAT, Mumbai in DC IT vs. Leena Power Tech Engineers Private ltd. (ITA 1330/Mum/20) as follows- "A shell entity, by itself, is not an illegal entity, but it is their act of abatement of, and being part of, financial manoeuvring to legitimise illicit mo....
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....its business, investments etc., are undertaken by the Board of the company through duly constituted board meetings is devoid of merit. 2.16 The Panel also takes note of the finding of the AO that the assessee company is wholly owned by UAE entity JSM Trading FZE, which in turn is wholly controlled by Mr. Deepak Seth who is also the director of the unlisted Indian company M/s Pearl Retail Solutions Private Limited. Under paragraph 4 of Article 13 of India-UAE DTAA, "Gains from the 'alienation of shares (other than those mentioned in paragraph 3 thereof) in a company which is a resident of a Contracting State may be taxed in that State." In the present case, capital gain on account of alienation of shares in M/s Pearl Retail Solutions Private Limited would have been taxable in the hands of JSM Trading FZE in India under the India-UAE DTAA. It is evident that the assessee company has been interposed as a conduit entity in this arrangement in Mauritius to take advantage of the provisions of Article 13 of the India- Mauritius DTAA which provides for exemption from tax in India on such capital gain. The arrangement therefore falls within the scope and meaning of treaty shopping as ....
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....ble where main purpose for entering into certain transactions or arrangements was to secure a more favourable tax position and obtaining that more favourable treatment in these circumstances would be contrary to the object and purpose of the relevant provisions. That principle applies independently from the provisions of article 29, paragraph 9, which merely confirm it." 2.18 In view of the above discussion, the conclusions drawn by the AO as detailed in Para 2.5 above are upheld. The objections in Grounds 1 and 4 are dismissed. 3. The objections of the assessee are decided as above. The Assessing Officer is directed to incorporate the findings of the DRP in respect of various objections suitably in the final order. The AO shall also place a copy of the DRP Directions as Annexure to the final order." 5. The Ld. Counsel for the assessee submitted that the assessee company is a resident of Mauritius and is holding a valid TRC (page 71 of PB-I) and was incorporated in Mauritius on 26.11.2007 and is being assessed to tax in Mauritius since its inception. It is submitted that the assessee company made investments in Indian Company namely M/s Pearl Retail Solutions Pvt. Ltd. in 2,04....
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....ess release issued by Ministry of Finance dated 10th May 2016 and 29.08.2016 copy enclosed at pg 285 of PB - I, captioned as "Protocol for amendment of the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains between India and Mauritius" wherein it was clarified that capital gains on sale of investment made before 1 April 2017 have been grandfathered and will not be subject to capital gains taxation in India even if, allegation is of treaty abuse or round tripping. ii) Relevant Articles of India - Mauritius DTAA, pre - amendment, wherein, it is evident on perusal of Article 13(4) that the capital gain has to be taxed only in the resident state i.e. Mauritius (pages 1 to 3 of PB - II). iii) Relevant Articles of India - Mauritius DTAA, post amendment, wherein, on reading Article 13(3A), it becomes clear that the said amendment is only applicable for investments made after 01.04.2017, whereas, in the case of assessee - appellant investments were made much prior to 01.04.2017. Thus, still provision of Article 13(4) will apply and the capital gain has to be taxed only in resident state i.e. Mauritius (....
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.... AAR reported in 453 ITR 461. In view of the above, it is submitted that the benefit of DTAA being available to the Assessee Company, the transaction is not liable to taxed in India and the amount of tax deducted by the buyer, be refunded to the Assessee Company and the appeal of the assessee company be allowed. 6. On the other hand, the Ld. DR strongly supported the orders of the authorities below. 7. Heard rival submissions, perused the orders of the authorities below and the decision relied on. 8. We observed that in the case of Bid Services Division (Mauritius) Ltd. Vs. Authority for Advance Ruling (Income Tax) [453 ITR 461] & [148 taxmann.com 215] the Hon'ble Bombay High Court considered an identical situation i.e. whether the investments made by the assessee a non-resident which is holding the valid TRC and assessed to tax in Mauritius, whether the investments made prior to 01.04.2017 are liable for capital gain tax in India. The Hon'ble High Court considering the circulars of CBDT and also the decision of the Hon'ble Supreme Court in the case of Vodafone International Holding B.V. Vs. Union of India and the decision in the case of Union of India & another Vs. Azadi Bachao....
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....al Board of Direct Taxes ("CBDT") which mentions that capital gains arising to a resident of Mauritius on transfer of shares in an Indian company would be liable to tax only in Mauritius. 25. Learned Senior Counsel has further placed reliance upon Circular No.789 dated 13th April 2000 issued by the CBDT which clarifies that companies which are resident in Mauritius would not be taxable in India on income from capital gains arising in India on the sale of shares as per Article 13(4) of the Mauritius DTAA. He further submits that the said circular also clarifies that wherever a certificate of residence is issued by the Mauritian authorities such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the double taxation avoidance convention. Learned Senior Counsel has also relied upon Press Release dated 1st March, 2013 with respect to the TRC. Learned Senior Counsel relies upon the decision of Union of India & Anr. v. Azadi Bachao Andolan and Anr.2 in support of his contentions. Learned Senior Counsel also refer to the decision in the case of Vodafone International Holding B.V. v. Union oflndias relied upon....
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....d ruling dated 10th February, 2020 rejecting the contentions raised by the Petitioner holding that the Petitioner is not entitled to the benefits under Article 13(4) of the Mauritius DTAA. 27. Aggrieved by the aforesaid Ruling, Petitioner has filed this Petition for the following principal reliefs: (a) That this Hon'ble Court may please to issue a Writ of Certiorari or a writ in the nature of Certiorari or any other appropriate writ, order or direction, calling for the records of the Petitioner's case and after going into the legality and propriety thereof, to quash and set aside the impugned ruling dated 10th February 2020; (b) That this Hon'ble Court may please to issue a Writ of Mandamus or a writ in the nature of Mandamus or any other appropriate writ, order or direction, directing the Respondent no. 1 to rule that the gain arising on the sale of shares of MIAL to GAHPL would not be chargeable to tax in India having regard to the provisions of Article 13(4) of the Mauritius DTAA. 28. Mr. Suresh Kumar, learned standing Counsel for the Respondents supports the impugned Ruling and submits that the transaction by the Petitioner is sham and bogus. He would submit that entire....
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....TREOI. The evaluated entities at prequalified bidding stage were GVK, ACSA and Bidvest. That, it is GVK as well as Bidvest holding company and not Petitioner who have the financial muscle and management capabilities to undertake the project and ACSA had the necessary technical expertise and experience in the field of operation and maintenance of the airport. That, the two business groups and ACSA had the complete competency required to bid for the project. On the basis of their financial and management capabilities and experience in airport management and on the basis that they were the evaluated entities, the Consortium was declared as successful bidder by the AAI on 4th February 2006. However, just ten days prior to filing of technical and financial bid, the Petitioner was brought into the Consortium. That the Mumbai International Airport Private Limited (MIAL) and the JV company was incorporated on 2nd June 2006. That the GVK group was committed to provide 37% equity through GAHPL and Bidvest provided 27% equity funding required to be invested by BSDM and ACSA was committed to funding 10% through AGL. That, despite this, the Bidvest group changed its routing of funds through the....
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....n of immovable property, as defined in paragraph (2) of Article 6, may be taxed in the Contracting State in which such property is situated. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State. 3. Notwithstanding the provisions of paragraph (2) of this article, gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 3A. Gains from the alienation of shares acquired on or after 1 st April 2017 in a company which is resident of a Contracting State may be taxe....
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....n it or its compulsory acquisition under any law in force in India or in Mauritius. Circular : No.682, dated "30-3-1994" 37. It is clear from the aforesaid that capital gains derived by a resident of Mauritius by alienation of shares of companies shall be taxable in Mauritius only and will not have any capital gains tax liability in India. 38. Further, reliance was placed upon another Circular No.789 dated 13th April 2000 issued by the CBDT which clarified that companies which are resident in Mauritius would not be taxable in India on income from capital gains arising in India on sale of shares as per paragraph 4 of Article 13 of Mauritius DTAA. An extract of Circular No.789 is reproduced below: "734. Clarification regarding taxation of income from dividends and capital gains under the Indo- Mauritius Double Tax Avoidance Convention (DTAC) 1. The provisions of the Indo-Mauritius DTAC of 1983 apply to 'residents' of both India and Mauritius. Article 4 of the DTAC defines a resident of one State to mean "any person who, under the laws of that State is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a simila....
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.... PRESS RELEASE, DATED 1-3-2013 Concern has been expressed regarding the clause in the Finance Bill that amends Section 90 of the Income-tax Act that deals with Double Taxation Avoidance Agreements. Sub-section (4) of section 90 was introduced last year by Finance Act, 2012. That subsection requires an assessee to produce a Tax Residency Certificate (TRC) in order to claim the benefit under DTAA. DTAAs recognize different kinds of income. The DTAAs stipulate that a resident of a contracting state will be entitled to the benefits of the DTAA. In the explanatory memorandum to the Finance Act, 2012, it was stated that the Tax Residency Certificate containing prescribed particulars is a necessary but not sufficient condition for availing benefits of the DTAA. The same words are proposed to be introduced in the Income-tax Act as sub-section (5) of section 90. Hence, it will be clear that nothing new has been done this year which was not there already last year. However, it has been pointed out that the language of the proposed sub-section (5) of section 90 could mean that the Tax Residency Certificate produced by a resident of a contracting state could be questioned by the In....
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....g officer with regard to any particular assessment. It merely formulates broad guidelines to be applied in the matter of assessment of assessees covered by the provisions of the DTAC. 50. We do not think the circular in any way takes away or curtails the jurisdiction of the assessing officer to assess the income of the assessee before him. In our view, therefore, it is erroneous to say that the impugned circular No.789 dated 13.4.2000 is ultra virus the provisions of section 119 of the Act. In our judgment, the powers conferred upon the CBDT by sub-sections (1) and (2) of section 119 are wide enough to accommodate such a circular." 43. Paragraphs 97 and 98 of the decision in the case of Vodafone International Holding B.V. v. Union of India (supra) which also clearly uphold Circular No.789 and the conclusivity of the TRC are also usefully quoted as under: "97 We are, therefore, of the view that in the absence of LOB Clause and the presence of Circular No.789 of 2000 and TRC certificate, on the residence and beneficial interest/ownership, tax department cannot at the time of sale/disinvestment/exit from such FDI, deny benefits to such Mauritius companies of the Treaty by sta....
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....ng into special agreements, contracts or arrangements made or effected by Indian resident or the role of the OCB in the entire transaction." 44. Although paragraph 98 of the Vodafone International Holding B.V. v. Union of India (supra) has been quoted in the impugned ruling, however, paragraph 97 which is also relevant, appears to have been missed out by the authority. 45. No doubt mere holding of a TRC cannot prevent an enquiry if it can be established that the interposed entity was a device to avoid tax. However, the decisions of the Apex Court cited above have clearly upheld the conclusivity of the TRC absent fraud or illegal activities. Nowhere in the impugned ruling the existence of TRC has been denied. In fact in paragraph 2 of the impugned Ruling, the Authority has itself set out the existence of a valid TRC in the name of the Petitioner. Further, except bald allegations, no material has been placed on record to demonstrate or establish that Petitioner was a device to avoid tax or that there was fraud or any illegal activity. There is hardly any discussion in the impugned Ruling on the applicability of the said Circulars No. 682, 789 or the Press Releases by the CBDT /....
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....ses of legal entities not having bona fide business activities shall be covered by Article 27A(1) of the Convention. 48. It is observed that this Article disentitles benefits of Article 13(3B) if the affairs were arranged for the primary purpose to take advantage of the benefits of Article 13(3B). The Article has been inserted with effect from 1st April 2017. According to this Article, with effect from 1st April 2017, a shell or a conduit company that claims to be a resident of a contracting State shall not be entitled to benefits of Article 13(3B). 49. The Petitioner has also made reference to Press Release dated 29th August 2016 issued by the CBDT post amendment to Mauritius DTAA which was effective from 1st April 2017. The said Press Release is quoted as under:- "Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes PRESS RELEASE New Delhi, 29th August, 2016. Subject: Notification of Protocol for amendment of the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains, and for the encouragement of mutual trade and investment between India and Mauri....
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....tius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between the two Contracting Parties. It will improve transparency in tax matters and will help curb tax evasion and tax avoidance. (Meenakshi J Goswami) Commissioner of Income Tax (Media and Technical Policy) Official Spokesperson, CBDT." 50. The said press release expressly provides for grandfathering of capital gains exemption provided under the erstwhile Mauritius DTAA. The protocol provides for source based taxation of capital gains arising from alienation of shares acquired with effect from 1st April 2017 in a company resident in India viz. from Financial year 2017-18. Investments made before 1st April 2017 have been grandfathered and will not be subject to capital gains taxation in India. 51. The Authority appears to have clearly missed the clear import of this Circular as the entire sale by Petitioner was prior to 1st April, 2017. The arguments of the Revenue with respect to shell company/ conduit can only be considered for investments with effect from 1st April 2017 and not case at hand. 52. Therefore, to say that ....
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....ace from financial year 2019-20 onwards, subject to other conditions. 55. Although the observations of the Authority in paragraph 62 with respect to the claim of treaty shopping of as well as the doctrine of substance over formed in paragraph 63 cannot be faulted with, however, it needs to be emphasized that the LOB clause has been made effective for investments only from 1st April 2017. As noted above, even the press release dated 29th August 2016 confirms that investments made before 1st April 2017 will not be subject to capital gains taxation in India. That being the position these observations of the authority appear to be misplaced." 9. Ratio of the above decision squarely applies to the facts of the assessee's case. As could be seen from the above decision of Bombay High Court the assessee which was holding valid TRC of Mauritius sold its investments which were made prior to 01.04.2017. The Hon'ble High Court considering the press release issued by Finance Ministry's clarification on tax residency certificates, Circular of CBDT No.789/2000, Article 13(4) of India - Mauritius DTAA, press release of CBDT on Protocol of amendment of convention for avoidance of double taxati....