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2023 (6) TMI 567 - AT - Income TaxRevision u/s 263 - Income taxable in India - evidence of residence - TRC produced by a resident of a contracting state - benefits under India- Mauritius DTAA being not a resident for tax purposes because of non-fulfillment of condition of liable to tax criteria - An order erroneous or prejudicial to the interest of the Revenue or not - Two view are possible - whether the income earned by the assessee who is a tax resident of Mauritius, out of the gains on currency derivates and the interest income on bonds is taxable in India or not? - HELD THAT - The revenue cannot deny the benefit of India-Mauritius Tax Treaty to the assessee which is the assessee is legally entitled to on the strength of TRC issued by the Mauritian Tax Authorities. The Finance Ministry, through a clarification dated 2 March 2013, also clarified that the TRC produced by a resident of a contracting state would be accepted as evidence of residency in that contracting state and the Income-tax Authorities in India would not go behind the TRC and question the TRC holder s resident status. We are also not in agreement with the observation of the ld. CIT that the assessee has about 21 investors who are non-tax resident of Mauritius and hence the assessee is a conduit. What is relevant is whether the assessee company is a taxable entity in Mauritius or not? Observation of the ld. CIT that the assessee has entered in only two transactions in the whole years in G-sec Bonds and few transactions in cash is only a partial truth. In addition to the investments in bonds and exchange traded cash equities, the assessee has large number of exchange traded derivatives transactions. The same can be proved by examination of the contracts notes which have been already provided to CIT. These contract notes reflect transactions of the assessee on MCX, BSE NSE. In addition to the investments in India, the assessee has also invested in LME, CMX, SSE DGCX. Hence, the contention of the ld. CIT that the income earned by the assessee from derivatives is not a business income also cannot be accepted. Thus, receipt is not taxable in India, hence there is no prejudice caused to the revenue and as the result, the order passed of ld. CIT u/s 263 is liable to be obliterated. Decided in favour of assessee.
Issues Involved:
1. Legality and jurisdiction of the notice and order under Section 263 of the Income Tax Act, 1961. 2. Examination of the original assessment order under Section 143(3) of the Act. 3. Taxability of gains on derivatives and interest income under the India-Mauritius Double Taxation Avoidance Agreement (DTAA). 4. Allegations of tax avoidance through treaty shopping. 5. Validity of the Tax Residency Certificate (TRC) and its implications. Summary: 1. Legality and Jurisdiction of Notice and Order under Section 263 of the Income Tax Act, 1961: The assessee challenged the notice dated 06.01.2022 and the order dated 24.03.2022 issued under Section 263, claiming they were illegal, bad in law, and without jurisdiction. The Principal Commissioner of Income Tax (PCIT) was argued to have erred in not establishing how the Assessing Officer (AO) committed any error in the assessment order dated 24.12.2019 under Section 143(3). The Tribunal found that the PCIT expanded the scope beyond the issues specified in the limited scrutiny, which was beyond jurisdiction. 2. Examination of the Original Assessment Order under Section 143(3) of the Act: The assessment was completed under Section 143(3) on 24.12.2019, accepting the returned income at Rs. Nil after considering the exempted income. The PCIT held that the AO did not verify the nature of the income claimed as exempt. However, the Tribunal found that detailed questionnaires were issued, and the assessment order was passed after due application of mind, making the original assessment valid and correct in law. 3. Taxability of Gains on Derivatives and Interest Income under the India-Mauritius DTAA: The assessee, a tax resident of Mauritius, claimed that gains on derivatives and interest income were not taxable in India under the India-Mauritius DTAA. The PCIT argued that the scheme was a tax avoidance mechanism and that the TRC was not sufficient to establish tax residency. However, the Tribunal found that the assessee was entitled to the benefits of the DTAA, as the TRC issued by the Mauritian authorities was sufficient evidence of residency. 4. Allegations of Tax Avoidance through Treaty Shopping: The revenue argued that the assessee was a conduit for tax avoidance through treaty shopping, lacking commercial rationale for establishment in Mauritius. The Tribunal, however, found that the assessee's operations and management were genuinely based in Mauritius, and the benefits of the DTAA could not be denied based on allegations of treaty shopping. 5. Validity of the Tax Residency Certificate (TRC) and Its Implications: The Tribunal emphasized that the TRC issued by the Mauritian authorities was sufficient evidence of the assessee's residency in Mauritius. The Tribunal relied on CBDT Circular No. 789 and the Supreme Court's validation of the circular, which upheld the TRC as conclusive evidence of residency for DTAA benefits. Conclusion: The Tribunal concluded that the receipt was not taxable in India, and there was no prejudice caused to the revenue. Consequently, the order passed by the PCIT under Section 263 was obliterated, and the appeal of the assessee was allowed. The judgment was pronounced in open court on 08/06/2023.
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