2024 (2) TMI 1454 - HC - Income Tax

Entitlement to treaty benefits of India- Mauritius DTAA - whether scheme of arrangement employed by assessee is a tax avoidance through treaty shopping mechanism? - Whether the ITAT has erred in law by holding that treaty the benefits of India-Mauritius DTAA are available to assessee especially when it is clear from the arrangement that assessee Company is just a conduit and not a beneficial owner of income? HELD THAT - As held by ITAT The facts and materials available on record clearly establish that not only the assessee is a resident of Mauritius, but being a beneficial owner of the income derived from sale of shares, is entitled to the treaty benefits. Undisputedly, the shares sold by the assessee in the year under consideration were acquired in the year 2009, much prior to 01.04.2017. Therefore, the provisions of Article 13(3A) of the tax treaty would not be applicable. That being the case, the capital gain derived by the assessee from sale of shares would fall within the ambit of article 13(4) of the tax treaty. In that view of the matter, the capital gain, being exempt under the treaty provisions, cannot be brought to tax in India. Therefore, we direct the Assessing Officer to delete the addition. These grounds are allowed. As would be manifest from a reading of the order impugned before us, the ITAT has essentially based its conclusions on the valid Tax Residency Certificate TRC which was held by the assessee and the following principles as laid down by this Court in Blackstone Capital Partners 2023 (2) TMI 35 - DELHI HIGH COURT wherein held that Revenue cannot go behind the tax residency certificate issued by the other tax jurisdiction as the same is sufficient evidence to claim treaty eligibility, residence status, legal ownership and accordingly there is no capital gain earned by the petitioner liable to tax in India. Even the clarificatory press release dated March 1, 2013 issued by the Finance Ministry pursuant to the 2013 amendment makes it clear that a tax residency certificate is to be accepted and the tax authorities cannot go behind it. No substantial question of law.

Summary

Issues:
Validity of the order of the Income Tax Appellate Tribunal regarding the availability of treaty benefits under the India-Mauritius Double Taxation Avoidance Agreement (DTAA) and the tax avoidance through treaty shopping mechanism.

Analysis:
The Commissioner of Income Tax, International Taxation -3, appealed against the order of the Income Tax Appellate Tribunal (ITAT) questioning the validity of the ITAT's decision on the availability of treaty benefits under the India-Mauritius DTAA. The key issues raised were whether the ITAT erred in law by holding that the treaty benefits are available to the assessee despite the scheme of arrangement being considered as tax avoidance through treaty shopping mechanism. Additionally, the ITAT was questioned on whether it erred in law by holding that the treaty benefits are available to the assessee when the company is deemed a conduit and not the beneficial owner of the income.

The ITAT, after thorough consideration of the transactions, made several findings. It noted that the acquisition and subsequent sale of shares by the assessee were approved by various regulatory authorities in India after due diligence. The ITAT emphasized that the regulatory authorities scrutinized the shareholding and financial structure of the assessee and its parent companies, indicating that the company was not merely a conduit lacking commercial substance. The ITAT also highlighted the importance of a valid Tax Residency Certificate (TRC) in establishing the residential status of the assessee and its eligibility for treaty benefits under the DTAA.

Referring to the legal position established in previous judgments, including Blackstone Capital Partners case, the ITAT reiterated that the validity of the TRC cannot be questioned by the tax authorities, and holding a valid TRC proves the residential status of the assessee as a resident of Mauritius, making it eligible for treaty benefits. The ITAT concluded that the assessee, being the beneficial owner of the income derived from the sale of shares, was entitled to treaty benefits under the DTAA. As the shares were acquired before a specific date, the capital gain derived from the sale fell within the treaty provisions, exempting it from tax in India.

Based on the principles laid down in previous judgments and the findings of the ITAT, the High Court found no substantial question of law to interfere with the ITAT's order. Consequently, the appeal was dismissed, upholding the availability of treaty benefits to the assessee under the India-Mauritius DTAA.