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2023 (1) TMI 202 - AT - Income TaxLong term capital gains arising from transfer of shares - Treaty protection under article 13(4) of the India Mauritius Double Taxation Avoidance Agreement - concept of beneficial ownership - Indo Mauritius tax treaty - assessee before us is a company incorporated in, and fiscally domiciled in, the Republic of Mauritius - as incorporated and it holds a global business licence (GBL) issued by the Financial Services Commission, Mauritius - assessee is also registered as a foreign venture capital investor (FVCI) with the Securities and Exchange Board of India as issued a tax residency certificate‟ by the Mauritian Revenue Authority - HELD THAT - Fundamental assumption, underlying the proposition advanced by the Assessing Officer, cannot be taken as granted - as the AO has apparently taken it to be. Therefore, rather than putting the elaborate arguments in furtherance of the said proposition to test of judicial scrutiny, in our considered view, we must first put with this fundamental assumption, underlying the proposition, to the test of judicial scrutiny. If this fundamental assumption is found to be incorrect, we will not be required to deal with the question, which would be academic in that case, as to whether the detailed arguments in support of the reasoning adopted by the AO to hold the view that the assessee is not the actual or true beneficiary of the transactions leading to capital gains in question. AO has clearly fallen in error in proceeding on the basis that the concept of beneficial ownership is relevant in the context of article 13, without assigning any specific and cogent reasons in support of this inference. We are unable to approve this approach. We, therefore, deem it fit and proper to vacate the impugned assessment order and remit the matter to the file of the AO for deciding the fundamental issue as to whether the requirement of beneficial ownership can be read into the scheme of Article 13 of the Indo Mauritius tax treaty, and it is only in the event of the answer being in the affirmative that the question of the beneficial ownership of the assessee, in respect of the shares, can be examined. Of course, there is one more step in the process and which is equally critical and foundational, and that is giving a categorical finding on the connotations of beneficial ownership‟ in the treaty context. There is huge debate globally on the meanings of beneficial ownership‟ in the context of the treaties. As we have seen earlier in this order, the United Nations Committee International Tax Committee has commissioned a report on the use of the beneficial ownership concept in the tax treaty provisions, and this report, which is available in the public domain, has an enlightening discussion about what constitutes beneficial ownership and which meaning of this term, the domestic law meaning or the international fiscal meaning, is to be adopted. There is also OECD Conduit Companies Report 1986 on this issue, and there are several decisions, whatever their utility and relevance, from the judicial forums abroad. It is not at the whim or fancy of a tax authority to decide as to what constitutes beneficial ownership‟; it is absolutely fundamental that as what constitutes beneficial ownership‟ must also be examined and categorical findings are given as to how these requirements of beneficial ownership are satisfied in the present case. These reasons are also necessary so that, if necessary, we, as indeed the Hon‟ble Courts above, can take a call on the correctness of the stand of the AO. Both of these foundational issues, i.e. whether the concept of beneficial ownership‟ is inbuilt in the scheme of Article 13 and, if so, what are the connotations of beneficial ownership‟ in this context, need to be adjudicated upon by the AO. As these fundamental issues are being remitted to the file of the AO for adjudication by way of a speaking order, in accordance with the law and after giving a fair and reasonable opportunity of hearing to the assessee, all other issues raised in the appeal are rendered infructuous as on now. It will be premature, even if at all necessary, to deal with those issues, and very erudite arguments by both the parties on those issues, at this stage.
Issues Involved:
1. Declining treaty protection under Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement (DTAA). 2. Determining the beneficial ownership of capital gains. 3. Relevance of beneficial ownership in Article 13 of the Indo-Mauritius tax treaty. 4. Procedural correctness of the Assessing Officer’s approach. Issue-wise Detailed Analysis: 1. Declining Treaty Protection under Article 13(4) of the India-Mauritius DTAA: The core issue in the appeal is whether the authorities were justified in denying treaty protection under Article 13(4) of the India-Mauritius DTAA to the assessee for long-term capital gains amounting to Rs 904,98,16,345 from the transfer of shares of CMS Info Systems Ltd. The assessee, a company incorporated and domiciled in Mauritius, claimed treaty benefits, but the Assessing Officer denied these benefits, asserting that the beneficial owner of the capital gains was an entity based outside Mauritius. 2. Determining the Beneficial Ownership of Capital Gains: The Assessing Officer conducted a detailed examination and concluded that the effective ownership, administrative control, source of investment, transaction trail, and directions for transactions were all linked to Cayman Island-based entities. The officer argued that the assessee was merely a conduit for these entities and that the corporate veil should be lifted to reveal the true beneficial owners. This conclusion was based on principles from judicial precedents, including the Supreme Court’s decision in McDowell & Co Ltd Vs CTO and other relevant cases. 3. Relevance of Beneficial Ownership in Article 13 of the Indo-Mauritius Tax Treaty: The tribunal found that the Assessing Officer’s fundamental assumption—that beneficial ownership is relevant to Article 13—was flawed. Unlike Articles 10 and 11 of the Indo-Mauritius tax treaty, which explicitly require beneficial ownership for treaty protection, Article 13 does not contain such a provision. The tribunal emphasized that the concept of beneficial ownership cannot be inferred or assumed in the absence of specific treaty language. This interpretation aligns with international tax literature and the principle of pacta sunt servanda, which mandates that treaties must be performed in good faith. 4. Procedural Correctness of the Assessing Officer’s Approach: The tribunal criticized the Assessing Officer for not providing specific and cogent reasons to support the inference that beneficial ownership is relevant under Article 13. The tribunal vacated the assessment order and remitted the matter back to the Assessing Officer to decide whether the requirement of beneficial ownership can be read into Article 13. The tribunal also instructed the Assessing Officer to provide a categorical finding on the connotations of beneficial ownership in the treaty context, considering global debates and judicial precedents. Conclusion: The tribunal allowed the appeals for statistical purposes, restoring the matter to the Assessing Officer for a fresh adjudication on the foundational issues. The Assessing Officer is directed to issue a speaking order, in accordance with the law, after giving a fair and reasonable opportunity of hearing to the assessee. All other issues raised in the appeal were rendered infructuous pending the resolution of these foundational issues.
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