TaxTMI 
TaxTMI 
2024 (5) TMI 387
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....n to the aforesaid submission of the assessee. In view of the aforesaid, we proceed to deal with the issue raised in ground no.5 at the very outset. 3. The issue arising for consideration in ground no.5 relates to rejection of assessee's claim of benefit under Article 13(4) of the India-Mauritius Double Tax Avoidance Agreement (in short 'DTAA) in respect of Long Term Capital Gain arising from sale of shares. 4. Briefly the facts, relating to this issue are, the assessee is a non-resident corporate entity incorporated under laws of Mauritius and is a tax resident of Mauritius in view of Tax Residency Certificate (TRC) issued by Mauritius Revenue Authority. The assessee is a investment holding company and Category -1 Global Business License holder. As an investment holding company, the assessee had invested in shares. The assessee is also registered as a foreign venture capital investor with Securities and Exchange Board of India (in short 'SEBI'). In connection with its business activity, the assessee had invested in equity shares of various Indian companies. In the previous year relevant to the assessment year under dispute, the assessee had sold shares of certain Indian comp....
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....of board meetings at a place would by itself not be conclusive for being located at Mauritius. The key decisions by the directors are in fact being taken in a place other than the place where the formal meetings are held which is the case in point currently, Key decisions are taken by ultimate holding company in USA and beneficially owned. Therefore, the assessee's principal decisions are unconnected with Mauritius. * Real management and control of applicants was not with their respective Board of Directors in Mauritius but with ultimate holding company in USA being the owner and controller of entire group structure and applicant companies were only a'see-through entity. * The main bank account signatories are not full time directors of the company and some signatories are based in Mauritius and others are based in the USA. 6. From the aforesaid analysis of facts, the Assessing Officer concluded that the assessee was controlled and managed from outside and does not have any commercial substance or real economic activity in Mauritius. He observed, the ultimate parent company of the assessee is beneficially owned by the entity in USA. He observed that under I....
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.... 2007 and is still continuing such activity in India even after capital gain on sale of shares became taxable under India-Mauritius DTAA. In fact, he submitted, in the assessment year under dispute the assessee has offered to tax on short term capital gain derived from sale of shares acquired post 01.04.2017. 11. He submitted, since capital gain derived from sale of shares acquired prior to 01.04.2017 is not taxable under Article 13(4) of the India-Mauritius DTTA, the assessee claimed exemption and did not offer it to tax. He submitted, once Tax Residency Certificate is issued by Mauritius Revenue Authority, that is the most authentic evidence to prove the residency of the assessee. In this context, he drew our attention to Circular No.789 dated 13.04.2000 issued by Central Board of Direct Taxes. He submitted, the sanctity of CBDT Circular No.789 dated 13.04.2000 has been upheld by the Hon'ble Supreme Court in case of UOI vs Azadi Bachao Andolan reported in [2003] 263 ITR 706 (SC). In this context, he drew our attention to various observations of the Hon'ble Supreme Court in the cited decision. He submitted, though, subsequently there was a proposal in the Finance bill to amend ....
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....odafone International Holdings B.V. vs UOI (2012) 17 taxmann.com 202 (SC), however, he conveniently overlooked the observations of the Hon'ble Supreme Court in paragraph 97 of the said judgment. In this context, he drew our attention to the decision of the Hon'ble Bombay High Court in case of Bid Services Division (Mauritius) Ltd. vs Authority for Advance Ruling (Income-tax) judgment dated 8th March 2023 in Writ Petition No.713 of 2021. In the said decision, the Hon'ble High Court has observed that though mere holding of TRC cannot prevent any enquiry if it can establish interposed entity was a device to avoid tax, however, the Hon'ble Supreme Court has also held that conclusivity of the TRC cannot be doubted in absence of fraud or illegal activities. He submitted, the Assessing Officer has failed to establish any fraud or illegal activity by the assessee. 14. He submitted, in identical facts and circumstances, the Hon'ble Punjab & Haryana High Court in case of Serco BPO (P.) Ltd. vs Authority for Advance Ruling (2015) 60 taxmann.com 433 (P & H) and the Delhi Tribunal in case of MIH India (Mauritius) Ltd. vs ACIT in ITA No.1023/Del/2022 dated 16.11.2022 and in case of Veg & Tabl....
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....nd control in Mauritius. He submitted, as per section 73A of the Mauritius Income Tax Act, the company shall be treated as non-resident, if central management and control is outside Mauritius. Thus, he submitted, since the control and management of the assessee was outside Mauritius, it cannot be treated as resident of Mauritius. He submitted, the facts and material brought on record by the Assessing Officer clearly reveal that the assessee has been interposed as an entity in Mauritius only for the purpose of availing tax benefit under India-Mauritius tax treaty. Thus, he submitted, the Departmental Authorities were justified in denying assessee's claim of exemption under Article 13(4) of the India-Mauritius tax treaty. 17. We have considered rival submissions in the light of the decisions relied upon and perused the materials available on record. In so far as the factual aspect of the issue is concerned, there is no dispute that the assessee was incorporated as a company in Mauritius on 04th September, 2006 as per the certificate of incorporation issued by the Registrar of Companies, Government of Mauritius, a copy of which is placed at page-1 of the paper book. The Mauritius R....
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....AA. Subsequently, the treaty was amended through protocol with effect from 01.04.2017 and as per the amended provisions contained under Article 13(3A) of India-Mauritius tax treaty; capital gain became taxable w.e.f. 01.04.2017. However, the treaty provided grandfathering by excluding from taxation capital gain derived from sale of equity shares acquired prior 01.04.2017 in terms with Article 13(4) of the treaty. Factually, the assessee has offered to tax capital gain derived from shares acquired post 01.04.2017. Whereas, he has claimed exemption under Article 13(4) of the treaty in respect of shares acquired prior to 01.04.2017. 21. Even, the Assessing Officer has not disputed these facts. However, expressing doubt over the TRC issued by Mauritius Tax Authority, the Assessing Officer has held that the assessee, being a shell/conduit company, is not entitled to claim benefit under Article 13(4) of the India-Mauritius tax treaty. To uphold the sanctity of TRC under the India-Mauritius tax treaty, the CBDT issued circular No.789 dated 13.04.2000, stating that TRC issued by Mauritius Tax Authority will constitute sufficient evidence for explaining the residential status as well as ....
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....the assessee derived capital gain were acquired prior to 01.04.2017. That being the case, the assessee being holder of TRC is the beneficial owner of the capital gain, hence, is entitled to benefits under Article 13(4) of the treaty. The denial of the treaty benefits to the assessee clearly runs in the teeth of CBDT Circular No.789 dated 13.04.2000. In fact, the issue is no more res integra in view of ratio laid down by the Hon'ble Supreme Court in case of Union of India vs Azadi Bachao Andolan (supra). The ratio laid down by the Hon'ble Supreme Court in case of Union of India vs Azadi Bachao Andolan (supra) has been reiterated time and again by various High Courts and different benches of the Tribunal. In case of CIT vs JSH Mauritius (supra), the Hon'ble Bombay High Court has held as under:- "7. The factual matrix that the Respondent is incorporated in Mauritius, holds a Category 1 Global Business License issued by Financial Services Authority of Mauritius and is incorporated on 04/04/1996, is not disputed. It is also not disputed that the Certificate is issued by the Mauritius Revenue Authority to the Respondent evidencing that it is a tax resident in Mauritius during th....
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....viate from the provisions of the Act. The Apex Court in the said Judgment observed that the whole purpose of DTAC is to ensure that the provisions thereunder are available even if they are inconsistent with the provisions of Indian Income Tax Act. The further observation is made by the Apex Court that the principle of piercing the veil of incorporation can hardly apply to a situation as the one before it. The Apex Court further made the following observations : "If the court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it would not be permissible for the court to treat the intervening legal steps as non est based upon some hypothetical assessment of the "real motive" of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a will-o'- the-wisp." "We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment o....
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....been made to article 27A of the Mauritius DTAA on LOB which was inserted by Notification dated 10th August, 2016 by amending the said DTAA pursuant to which shell/conduit companies claiming residence of a contracting State shall not be entitled to the benefits of the convention. The said Article is usefully quoted as under:- "ARTICLE 27A LIMITATION OF BENEFITS 1. A resident of a Contracting State shall not be entitled to the benefits of Article 13(3B) of this Convention if its affairs were arranged with the primary purpose to take advantage of the benefits in Article 13(3B) of this Convention. 2. A shell/conduit company that claims it is a resident of a Contracting State shall not be entitled to the benefits of Article 13(3B) of this Convention. A shell/conduit company is any legal entity falling within 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....
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....m alienation of shares acquired on or after 1st April, 2017 in a company resident in India with effect from financial year 2017-18. Simultaneously, investments made before 1st April, 2017 have been grandfathered and will not be subject to capital gains taxation in India. Where such capital gains arise during the transition period from 1st April, 2017 to 31st March, 2019, the tax rate will be limited to 50% of the domestic tax rate of India. Taxation in India at full domestic tax rate will take place from financial year 2019-20 onwards. The benefit of 50% reduction in tax rate during the transition period shall be subject to the Limitation of Benefits Article, whereby a resident of Mauritius (including a shell/conduit company) will not be entitled to benefit of 50% reduction in tax rate, if it fails the main purpose test and bonafide 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 ....
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....f Petitioner was not interposed, the Bidvest group in accordance with the Indo- SA DTAA would have to pay capital gains on the share sale as the same is taxable in India is misplaced as not relevant as the investment is by the Petitioner. As noted above, the Petitioner has been incorporated in Mauritius, holds a TRC which is sufficient proof of its residence in Mauritius, which as noted above, cannot be enquired into unless there is a fraud or illegal activity, which in this case, has neither been alleged nor demonstrated. Even if as observed by the Authority that the entire value creation activities are happening in India leading to rise in share valuations, in our view absent any element of fraud or illegality that cannot be a reason to hold the Petitioner's investment as a device to evade tax. The suggestions/findings 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 1st 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 St....
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.... the Assessing Officer to deny treaty benefit, has held as under:- "8. We have considered rival submissions in the light of the decisions relied upon and perused the materials on record. As far as the factual aspect of the issue in dispute is concerned, it is a fact that the assessee is a resident of Mauritius and the Mauritian Tax Authorities have issued TRC in favour of the assessee. Thus, on the strength of the TRC, the assessee has claimed benefit under Article 13(4) of India - Mauritius Tax Treaty as it existed prior to its amendment. Whereas, the Assessing Officer has held that the assessee is not entitled to claim benefit under the India - Mauritius Tax Treaty. The reason for coming to such conclusion can, more or less, be summed up as under: * The assessee lacks commercial and economic substance. * It had no financial strength to invest in the shares of the Indian company and the entire fund was routed through the assessee by the holding company PayU Global B.V. Netherlands * The effective control and management of the assessee lies with the holding company at Netherlands. The assessee is merely used as a conduit to get benefit of the Ind....
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....aragraphs (1), (2) and (3) of this article shall be taxable only in that State. 5. For the purposes of this article, the term "alienation" means the sale, exchange, transfer, or relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in force in the respective Contracting States, 10. On a reading of Article 13 of India - Mauritius Tax Treaty as a whole, it is very much clear that the capital gain derived by the assessee on sale of shares would be covered under Article 13(4) of the Tax Treaty. A reading of Article 13(4) would make it clear that the capital gain derived by the assessee would be taxable in Mauritius. Article 13 of India - Mauritius Tax Treaty was subsequently amended by a protocol and the amended Article 13 which was made effective from 01.04.2017 applicable to assessment year 2018-19 reads 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 th....
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....subject to, applicability of Limitation of Benefits under Article 27A of the Treaty. However, in the facts of the present appeal, since, the shares resulting in capital gain were acquired prior 01.04.2017, it will not be covered under Article 13(3A) and 13(3B) of the amended Article 13. In sum and substance, the present transaction of the assessee would be governed under pre-amended Article 13 of India - Mauritius Tax Treaty. That being the position, the assessee otherwise is entitled to avail the beneficial provision of Article 13(4) on the strength of TRC. 12. Having held so, it is necessary now to deal with the reasoning of the Assessing Officer in denying the Treaty benefits to the assessee. The primary objection of the Assessing Officer is to the effect that the assessee is a conduit company having no economic and commercial substance. Therefore, it being a mere case of treaty shopping, benefits under India - Mauritius Treaty cannot be given. Rather, the beneficial owner of capital gain being the holding company at Netherlands, the provisions of India - Netherlands Tax Treaty would apply. It is necessary to examine the validity of the aforesaid reasoning of the Assess....
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....the Writ Application, the Hon'ble Delhi High Court quashed the circular by holding that the said circular is ultra vires the provisions of section 90 and section 119 of the Act. Interestingly, the aforesaid decision of the Hon'ble Delhi High Court was challenged by the Union of India before Hon'ble Supreme Court. While upholding the validity of the CBDT Circular No. 789, dated 13.04.2000, the Hon'ble Supreme Court specifically dealt with the concept of treaty shopping and observed as under: "134. There are many principles in fiscal economy which, though at the first blush might appear to be evil, are tolerated in a developing economy, in the interest of long-term development. Deficit financing, for example, is one; treaty shopping in our view, is another. Despite the sound and fury of the respondents over the so-called "abuse" of "treaty shopping", perhaps, it may have been intended at the time when the Indo-Mauritius DTAC was entered? into. Whether it should continue, and, if so, for how long, is a matter which is best left to the discretion of the executive as it is dependent upon several economic and political considerations. This Court cannot judge the legality of trea....
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....India - Netherlands Tax Treaty would apply, what would be the position. On a careful reading of Article 13 of India - Netherlands Tax Treaty, which deals with taxation of capital gain, it becomes clear that the subject transaction would have fallen under Article 13(4) of the Tax Treaty, which reads as under: "13(4) Gains derived by a resident of one of the States from the alienation of shares (other than shares quoted on an approved stock exchange) forming part of a substantial interest in the capital stock of a company which is a resident of the other State, the value of which shares is derived principally from immovable property situated in that other State other than property in which the business of the company was carried on, may be taxed in that other State. A substantial interest exists when the resident owns 25 per cent or more of the shares of the capital stock of a company." 16. A careful reading of Article 13(4) makes it clear that the source State has the authority to tax the capital gain, only if, the value of shares sold is derived principally from immovable property situated in the source State, other than, property in which the business of the comp....
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.... learned Dispute Resolution Panel leaves a lot to be desired. For better appreciation, we reproduce the following observations of learned DRP as under:- "4.1.3.1.1 The Panel agrees with the AO's observation on issue of the concept in Limitation of Benefit. Virtually, taxation of cross-national income is complex and in often controversial. In the effort to attract more foreign investment, developing countries including India extends tax concessions to foreign investors through Double Taxation Avoidance Agreements (DAAs). But a major defect of DTAAS is that companies often exploit the opportuneness/loopholes provided in tax laws of DTAAs to avoid taxes. Several Double Taxation Avoidance Agreements (DTAA) are misused by cross national investors to reduce tax burden. One classic example is the often-quoted India-Mauritius DTAA. The Govt of India like any other governments in the world, is also not sitting idle and is devising new techniques to counter the misutilization of DTAAs. One such weapon is Limitation of Benefit Clause (LoB). Under the LoB, foreign investors who seek tax exemptions in India should produce documents that he is a resident of the said foreign....