TaxTMI 
TaxTMI 
2024 (5) TMI 387
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..... 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 companies and derived capital gain. In the return of ....
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....sions 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 India-USA DTAA, the long term capital gain would have been chargeable to tax. Therefore, to avoid the taxability of long ter....
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.... 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 section 90 of the Act to the effect that TRC alone may not be a sufficient condition for claiming treaty benefit, however, issue was ....
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....n'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 & Table vs DCIT in ITA No.2251/Del/2022 dated 31.10.2023 have upheld the applicability of Article 13(4) of India Mauritius Tax Treaty. He submitt....
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....tral 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 Revenue Authorities have also issued TRC in favour of the assessee for the year under consideration. As per section 90 read with rule 21AB, the as....
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....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 beneficial ownership for applying treaty provisions. In paragraph-3 of the said circular, it has been specifically mentioned that the status of resident ....
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....al 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 the relevant period. The Respondent had acquired shares of Tata Industries Limited (TIL) in June 1996 is a matter of record. The Respondent sold shares of TIL on 10th J....
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....e 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 or prejudice to the national interests, as perceived by the respondents." 10. In the present matter, it would be relevant to note that the shares were purchased by the Respondent in the year 1996 and ....
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....titled 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. 2,700,000 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 ....
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....st 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 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. ....
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....t 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 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 1st April 2017, unless there is a fraud or any illegal activity involved. Infact, as noted above, the investments prior to 1st April 2017 have been grandfathered and are not subje....
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....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 India -Mauritius Tax Treaty. * India has deposited ratified MLI with the OECD and it has come into force in India on 1st October, 2019 and the MLI preamble will be added to the India - Mauritius Tax Treaty, if Mauritius signs the MLI and notifies the India - Mauritius Tax Treaty as a Covered Tax Agreement (TCA). * Once MLI preamble is added to the Tax Treaty, there will be significant change in the legal position established in Azadi Bachao An....
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....e 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 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 provis....
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....ving 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 Assessing Officer. Undisputedly, the assessee was incorporated in Mauritius in the year 2006. It is not disputed that the assessee had been carrying on investment activity in India as well as other places. The TRC issued by the Mauritian Tax Authorities bears testimony to this fact. Further, audited financial statements of the assessee indicate that not only it had made substantial investments in India, but, proposes to make additional investment to the tune of Rs. 665 crores in the year under consideration and subsequent years. Interestingly, PayU India to whom the assessee had ....
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....vil, 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 treaty shopping merely because one section of thought considers it improper. A holistic view has to be taken to adjudge what is perhaps regarded in contemporary thinking as a necessary evil in a developing economy. Rule in McDowell" 14. Further, elsewhere in the decision, the Hon'ble Supreme Court accepted the contention put forward by the appellants that the motives with which the residents have been incorporated in Mauritius are wholly irrelevant and cannot in any way affect the legality of the transaction, as, there is nothing like equity in a fiscal statute. Either, the statute applies proprio vigor....
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....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 company whose shares were sold was carried out. In case of JCIT Vs. Merrill Lynch Capital Market Espana SA SV (supra) the Coordinate Bench, while dealing with an identical provision under India - Spain DTAA has held that the onus is entirely on the Assessing Officer to prove that the value of shares is derived principally from immovable property situated in the source country. In other words, it has to be proved that the Indian company in which the assessee had invested the money towards equity was principally holding immovable property. Neither any such allegation has been made by the Assessing Officer in the assessment order befor....
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....TAAs 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 country (eg Mauritius). The LoB refers to procedural requirements that the concerned beneficiary is a resident of the treaty country. The Limitation of Benefit (LoB) Clause is attached by the treaty parties in their bilateral DTAAs. The benefit of tax concession will be limited to such entities that produces the document (for example, the company proving that its residence is in Mauritius). The LoB is tailored to check a well-known misutilization by foreign investors called, treaty shopping. Under treaty shopping, foreign companies (of UK, USA etc) establishes an office in Mauritius and channelizes their investment into India to claim the tax concess....