TaxTMI 
TaxTMI 
2024 (3) TMI 310
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....t had discharged its onus to prove that it is a resident 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 ....
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.... and on facts. 7. That further the Ld. AO/DRP has made the impugned addition with preconceived notions and by recording 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 jurisdi....
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.....e. prior to 01.04.2017 the resultant capital gain thereon is not liable to tax in India in view of Article 13(4) of DTAA between India and Mauritius. 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 ta....
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....ia; and the place of payment of the consideration for the transfer is within India or outside India, as long as such capital asset derives its value substantially from assets located in India. Therefore, capital gain 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 Depa....
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.... 175. The term "benefit" includes ail limitations (e.g. a tax reduction, exemption, deferral or refund) on taxation imposed on the state of source under Articles 6 through 22 of the Convention, the relief from double taxation provided by Article 23, and the protection afforded 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 Contracti....
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....s indicates that the company has not undertaken any significant active and continuous business activity after the share investment in 2010. The fact that the company has no employees also evidences negligible or nil business operations and no real and continuous business activities. Such characteristic defines 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......
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....of full board meetings in which key decisions can be seen to have been discussed and taken in regard to the purchase of shares of M/s Pearl Retail Solutions Private Limited and sale of the same as well as other investment opportunities and consultancy activities. Given the above, the assessee's contention that all decisions of the company with respect to 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 ....
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....tled law that where there is evidence brought out regarding use of the treaty for tax evasion, as laid out in the Preamble which details the object and purpose of the tax convention, treaty benefit will no longer be available. This is affirmed by UN Model Commentary on Article 1 as under- "22....A guiding principle is that the benefits of a double taxation convention should not be available 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 A....
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....the assessee sought the benefit of India - Mauritius DTAA. Heavy reliance, is placed on the Protocol issued by Ministry of Finance dated 10.05.2016 and 29.08.2016, wherein, the "investments made prior to 01.04.2017 have been grandfathered" and even the amendments in India - Mauritius DTAA provides said protection has been made available to the assessee - appellant. It is submitted in brief as under: - "i) The press 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 P....
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....d entitled to the benefit given under India-Mauritius Tax treaty and more so, the investments so made by assessee - appellant are clearly grandfathered/ protected by Government of India Press Release dated 29.08.2016 and also by the amendments in India - Mauritius DTAA. As such, the sale of the said investment in the impugned assessment year is not taxable in India. Heavy reliance is placed on the judgment of Hon'ble High Court of Bombay in the case of Bid Services Division (Mauritius) Ltd. vs 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 co....
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....arch 2011 held by the Petitioner in MIAL would not be liable to tax in India. Learned Senior Counsel would submit that since Petitioner is incorporated in Mauritius, it is liable to tax in Mauritius. He submits that, besides, Petitioner held Category 1 Global Business License and also a valid TRC issued by the Mauritian Authorities establishing the fact that it was a tax resident of Mauritius and would be entitled to the beneficial provisions of the Mauritius DTAA. 24. Ld. Sr. Counsel has also drawn the attention of this Court to Circular No.682 dated 30th March 1994 issued by the Central 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 certif....
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....enior Counsel also refers to Press Release dated 29th August, 2016 by the CBDT and submits that investments made before 1st April, 2017 have been grandfathered and will not be subject to capital gains taxation in India. 26. Learned Senior Counsel would submit that surprisingly, Respondent no. 1-Authority did not accept the contentions raised on behalf of the Petitioner regarding the non-taxability of the gain arising from the transaction of sale of shares to be effected pursuant to the SPA dated 1st March, 2011 held by the Petitioner in MIAL, by virtue of Article 13(4) of the Mauritius DTAA and passed 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....
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....n existence. That, right from the issue of ITREOI, filing of expression of interest, short listing of pre-qualified bidders by AAI, issue of RFP to pre-qualified bidder, Airport visits, site inspection and discussions with government agencies etc., Bidvest i.e. the ultimate holding company, was involved as member of the Consortium and not the Petitioner. That, it is only at Stage 2 of the bidding process that the Petitioner was substituted in place of Bidvest. That, no prior approval of AAI was obtained by the Consortium at any stage before filing of technical and financial bid which was the requirement as per paragraph 6.4 of the RFP and paragraph 6.1 of ITREOI. 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....
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....n of orders passed by Advance Ruling Authorities is minimal, however the same can be interfered with if the Ruling is without considering the entire material on record or the submissions made on behalf of the parties or the Ruling suffers from a fundamental error or is absurd or perverse. 34. Mr. Pardiwala, learned Senior Counsel had relied upon Article 13 of the Mauritius DTAA to submit that in view of Circular 789 income from capital gains arising in India on sale of shares would not be taxable in India in view of Article 13(4) of the Mauritius DTAA. For ease of reference the said Article 13 is quoted as under: ARTICLE 13 CAPITAL GAINS 1. Gains from the alienation 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 i....
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....lienation of any property other than those mentioned in the proceedings paragraphs and gives the right of taxation of capitals gains only to that State of which the person deriving the capital gains as a resident. In terms of paragraph 4, capital gains derived by residents of Mauritius by alienation of shares of companies shall be taxable only in Mauritius according to Mauritius Tax Law. Therefore, any resident of Mauritius deriving income from alienation of shares of Indian Companies will be liable to capital gains tax only in Mauritius as per Mauritius tax law and will not have any capital gains tax liability in India. 4. Paragraph 5 defines 'alienation' to mean the sale, exchange, transfer or relinquishment of the property or the extinguishment of any rights in 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 Cir....
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....of residence issued by Mauritian Authorities will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for the purposes of the Mauritius DTAA and that capital gains arising from sale of shares would not be taxable in India. It is not in dispute that Circular No.789 dated 13th April 2000 continued to be in force between India and Mauritius at the relevant time. 40. A press release dated 1st March 2013 from the Finance Ministry which is quoted as under also unequivocally declares that the TRC produced by resident of a contracting State will be accepted as evidence that he is a resident of that contracting State and the Income Tax Authorities will not go behind the TRC and question his residence status. "FINANCE MINISTRY'S CLARIFICATION ON TAX RESIDENCY CERTIFICATE (TRC) 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 Cert....
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....ital gains tax only in Mauritius as per Mauritius tax law and would not have any capital gains tax liability in India. This circular was a clear enunciation of the provisions contained in the DTAC, which would have overriding effect over the provisions of sections 4 and 5 of the Income-tax Act, 1961 by virtue of section 90(1) of the Act. If, in the teeth of this clarification, the assessing officers chose to ignore the guidelines and spent their time, talent and energy on inconsequential matters, we think that the CBDT was justified in issuing 'appropriate' directions vide circular no.789, under its powers under section 119, to set things on course by eliminating avoidable wastage of time, talent and energy of the assessing officers discharging the onerous public duty of collection of revenue. The circular no.789 does not in any way crib, cabin or confine the powers of the assessing 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 offi....
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....at the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance. Tax Department, in such a situation, notwithstanding the fact that the Mauritian company is required to be treated as the beneficial owner of the shares under Circular No. 789 and the Treaty is entitled to look at the entire transaction of sale as a whole and if it is established that the Mauritian company has been interposed as a device, it is open to the Tax Department to discard the device and take into consideration the real transaction between the parties, and the transaction may be subjected to tax. In other words, TRC does not prevent enquiry into a tax fraud, for example, where an OCB is used by an Indian resident for round- tripping or any other illegal activities, nothing prevents the Revenue from looking 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 impugn....
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....ithin the definition of resident with negligible or nil business operations or with no real and continuous business activities carried out in that Contracting State. 3. A resident of a Contracting State is deemed to be a shell/ conduit company if its expenditure on operations in that Contracting State is less than Mauritian Rs. 1,500,000 or Indian Rs. 2,700,000 in the respective Contracting State as the case may be, in the immediately preceding period of 12 months from the date the gains arise. 4. A resident of a Contracting State is deemed not to be a shell/conduit company if: (a) it is listed on a recognized stock exchange of the Contracting State; or (b) its expenditure on operations in that Contracting State is equal to or more than Mauritian Rs. 1,500,000 or Indian Rs. 2,700,000 in the respective Contracting State as the case may be, in the immediately preceding period of 12 months from the date the gains arise. Explanation : The cases 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....
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....pose test and bona fide business test. A resident is deemed to be a shell / conduit company, if its total expenditure on operations in Mauritius is less than Rs. 2,700,000 (Mauritian Rupees 1,500,000) in the immediately preceding 12 months. The Protocol further provides for source-based taxation of interest income of banks, whereby interest arising in India to Mauritian resident banks will be subject to withholding tax in India at the rate of 7.5% in respect of debt claims or loans made after 31st March, 2017. However, interest income of Mauritian resident banks in respect of debt-claims existing on or before 31st March, 2017 shall be exempt from tax in India as per existing provisions in the Convention. The Protocol also provides for updating of the Exchange of Information Article as per the international standard, provision for assistance in collection of taxes, source-based taxation of other income, amongst other changes. The Protocol will tackle treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of inform....
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....indings with respect to shell company / conduit, in our view, would apply only in accordance with Article 27A of the Mauritius DTAA which is applicable for investment with effect from 1^st April 2017 and not prior to that, and therefore, same would have to be reconsidered in that light. 54. True that there may have been abuse of tax treaty laws and contracting States have taken corrective measures to prevent abusive transactions by amending the bilateral conventions, however, as noted above, the amendments to the Mauritius DTAA for plugging such transactions have been made effective from 1^st April 2017, unless there is a fraud or any illegal activity involved. In fact, as noted above, the investments prior to 1st April 2017 have been grandfathered and are not subject to capital gains taxation in India. The Press Release dated 29th August 2016 quoted above also takes care of the transition period from 1st April 2017 to 31st March 2019 where the tax rate has been limited to 50% of domestic tax rate in India. That taxation in India at full domestic rate is stated to take place from financial year 2019-20 onwards, subject to other conditions. 55. Although the observa....