2017 (8) TMI 289 - HC - Income Tax

Taxability in India - Entitlement to the benefits of the Agreement between the Government of Mauritius and the Government of the Republic of India - avoidance of double taxation and prevention of fiscal evasion (the India Mauritius tax treaty ) - taxes on income and capital gains - Held that - In the present case, the Respondent has placed reliance on the Double Taxation Avoidance Agreement between India and Mauritius. It is clear from the said Agreement that the capital gains from alienation of the shares situated in India could only be taxed in Mauritius and not in India. The Apex Court in a case of Azadi Bachao Andolan & Anr.(2003 (10) TMI 5 - SUPREME Courta) has clearly observed that the terms and provisions of the Agreement i.e. DTAA shall operate even if they are inconsistent with the provisions of the Income Tax Act. The Petitioner could have relied on Section 9(1)(i) and Explanation 5 if the present case would have not been covered by the DTAA. Though the question of limitation/delay/laches would not be inconsequential we refrain from going into said aspect as we have decided this Petition on merits itself. On perusal of the Judgment of the AAR, it transpires that the AAR has considered all the relevant aspects of the matter and has arrived at the just conclusion. The Treaty has also been rightly considered.

Issues Involved:
1. Entitlement to benefits under the India-Mauritius Tax Treaty.
2. Tax liability on capital gains from transfer of shares under the India-Mauritius Tax Treaty.
3. Applicability of Section 115JB of the Income Tax Act in the absence of a Permanent Establishment in India.
4. Allegations of the Respondent being a Shell Company and Treaty Shopping.
5. Application of Section 9(1)(i) and Explanation 5 of the Income Tax Act.
6. Jurisdiction and procedural aspects under Section 245(R)(2)(iii) of the Income Tax Act.
7. Delay in filing the Writ Petition.

Issue-wise Detailed Analysis:

1. Entitlement to benefits under the India-Mauritius Tax Treaty:
The Respondent applied to the AAR to ascertain if capital gains from the transfer of shares of Tata Industries Limited (TIL) to Tata Sons Limited (TSL) were taxable in India under the India-Mauritius Tax Treaty. The AAR ruled in favor of the Respondent, confirming their entitlement to the benefits of the Treaty. The Respondent was incorporated in Mauritius, held a Category 1 Global Business License, and was recognized as a tax resident in Mauritius by the Mauritius Revenue Authority. The Court upheld this finding, noting that the Respondent's status as a tax resident in Mauritius was not disputed.

2. Tax liability on capital gains from transfer of shares under the India-Mauritius Tax Treaty:
The AAR concluded that the capital gains arising from the transfer of shares in TIL to TSL were not liable to tax in India under Article 13 of the India-Mauritius Tax Treaty. The Court agreed, emphasizing that the Treaty provisions override the Income Tax Act, as established in the case of Azadi Bachao Andolan & Anr. The Court noted that the Respondent held the shares for 13 years and reinvested the sale proceeds in another Tata Group company, indicating bona fide investment intentions.

3. Applicability of Section 115JB of the Income Tax Act in the absence of a Permanent Establishment in India:
The AAR found that in the absence of a Permanent Establishment (PE) in India, the Respondent would not be subject to tax under Section 115JB of the Income Tax Act. The Court upheld this ruling, noting that the Respondent did not have any business presence or PE in India and was engaged in investment and financing activities from Mauritius.

4. Allegations of the Respondent being a Shell Company and Treaty Shopping:
The Petitioner argued that the Respondent was a Shell Company created to take advantage of the Tax Treaty, lacking commercial substance. The AAR rejected this claim, and the Court upheld the AAR's finding, noting that the Respondent's long-term holding of shares and reinvestment in India indicated genuine business activities. The Court referenced the Azadi Bachao Andolan case, which held that treaty shopping is not illegal and can be a tolerated practice in fiscal policy.

5. Application of Section 9(1)(i) and Explanation 5 of the Income Tax Act:
The Petitioner contended that the transaction should be taxed under Section 9(1)(i) and Explanation 5 of the Income Tax Act, which was amended post the Vodafone case. The Court dismissed this argument, emphasizing that the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius takes precedence over the Income Tax Act provisions. The capital gains from the alienation of shares situated in India could only be taxed in Mauritius, as per the DTAA.

6. Jurisdiction and procedural aspects under Section 245(R)(2)(iii) of the Income Tax Act:
The Petitioner argued that the AAR lacked jurisdiction to decide the case under Section 245(R)(2)(iii) of the Act, which prohibits ruling on cases designed for tax avoidance. The Court noted that the AAR had already considered this issue and concluded that the transaction was not designed for tax avoidance. The Petitioner did not challenge the AAR's interim order and subsequently contested the matter on merits, thus waiving their right to raise this jurisdictional issue later.

7. Delay in filing the Writ Petition:
The Petitioner filed the Writ Petition eight months after the AAR's ruling. The Respondent argued that the delay should bar the Petition. While the Court acknowledged the delay, it chose to decide the case on merits rather than dismissing it on procedural grounds.

Conclusion:
The Court dismissed the Writ Petition, affirming the AAR's ruling that the Respondent was entitled to the benefits of the India-Mauritius Tax Treaty, and the capital gains from the transfer of shares were not taxable in India. The Court held that the AAR's findings were based on evidence and were not perverse, and the Treaty provisions superseded the Income Tax Act. The Court did not find any procedural errors or jurisdictional overreach by the AAR.

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