2024 (5) TMI 387 - AT - Income Tax

Taxability of income in India - Validated by a Tax Residency Certificate (TRC) - Proof of residence - assessee s claim of benefit under Article 13(4) of the India-Mauritius DTAA - Long Term Capital Gain arising from sale of shares of certain Indian companies - assessee is a non-resident corporate entity incorporated under laws of Mauritius - AO concluded that the assessee was controlled and managed from outside and does not have any commercial substance or real economic activity in Mauritius - Whether assessee being a shell/conduit company is not entitled to avail benefits under India-Mauritius DTAA? HELD THAT - Since, the capital gain is derived from shares acquired prior to 01.04.2017, they are not taxable in terms with Article 13(4) India Mauritius Tax Treaty. In our view, the AO has failed to establish on record that the assessee is a shell/conduit company through proper evidence. Therefore, in our view, assessee remains entitled to treaty benefits. DRP has referred to the LOB clause under Article-27A of the India Mauritius Tax Treaty. In our view, the reference to Article 27A is totally irrelevant as the assessee has not claimed any benefit under Article 13(3B) of India Mauritius Tax Treaty. Even assuming for the sake of argument that Article 27A gets attracted, however, the Department has failed to demonstrate the fulfilment of conditions of shell/conduit company as per Article 27A of the tax treaty. We may further observe, the directions issued by learned Dispute Resolution Panel leaves a lot to be desired. Thus we are of the view that the assessee, being entitled to claim exemption under Article 13(4) of India- Mauritius Treaty, the addition made is unsustainable. Accordingly, the Assessing Officer is directed to delete it.

Summary

Issues Involved:
1. Rejection of assessee's claim of benefit under Article 13(4) of the India-Mauritius Double Tax Avoidance Agreement (DTAA) regarding Long Term Capital Gain from the sale of shares.

Summary of Judgment:

Issue 1: Rejection of Assessee's Claim under Article 13(4) of India-Mauritius DTAA

The appeal was filed by the assessee challenging the final assessment order passed u/s 143(3) read with section 144C(13) of the Income Tax Act, 1961, following the directions of the Dispute Resolution Panel (DRP) for the Assessment Year 2020-21. The primary issue raised was the rejection of the assessee's claim of benefit under Article 13(4) of the India-Mauritius DTAA concerning Long Term Capital Gain from the sale of shares.

The assessee, a non-resident corporate entity incorporated in Mauritius and a tax resident of Mauritius, claimed exemption on Long Term Capital Gain under Article 13(4) of the DTAA. The Assessing Officer (AO) rejected this claim, arguing that the assessee was controlled and managed from outside Mauritius, lacked commercial substance, and was a shell company used for treaty shopping. The AO's decision was based on various observations, including the lack of operational expenses, absence of physical office premises, and key decisions being taken by the ultimate holding company in the USA.

The DRP directed the AO to verify the assessee's contention by a speaking and reasoned order without conducting any fresh enquiry. However, the AO retained the addition proposed in the draft assessment order.

Before the Tribunal, the assessee reiterated its stand, emphasizing the issuance of a Tax Residency Certificate (TRC) by the Mauritius Revenue Authority and compliance with the Financial Service Act of Mauritius. The assessee argued that the TRC is sufficient evidence of tax residency as per CBDT Circular No.789 dated 13.04.2000, upheld by the Supreme Court in UOI vs Azadi Bachao Andolan. The assessee also highlighted its substantial investments in India and other jurisdictions and the continuation of investment activities even after the capital gain became taxable under the amended treaty provisions.

The Tribunal observed that the AO did not provide conclusive evidence to prove that the control and management of the assessee were not in Mauritius. It was established that the assessee was incorporated in Mauritius in 2006, held a Category-1 Global Business License, and was registered as a Foreign Venture Capital Investor with SEBI. The Tribunal noted that the TRC issued by the Mauritius Tax Authorities and the Category-1 Global Business License are sufficient to prove the tax residency of the assessee. The Tribunal emphasized that the Indian Income Tax Authorities cannot question the correctness of the TRC issued by the Mauritius Tax Authority.

The Tribunal concluded that the assessee is entitled to claim exemption under Article 13(4) of the India-Mauritius DTAA for capital gains derived from shares acquired before 01.04.2017. The denial of treaty benefits by the AO was held to be against the CBDT Circular No.789 and the Supreme Court's decision in Azadi Bachao Andolan. The Tribunal also noted that the DRP's directions were not properly implemented by the AO, and the final assessment order was non-speaking and repetitive of the draft assessment order.

Therefore, the Tribunal directed the AO to delete the addition made on account of Long Term Capital Gain, allowing the appeal partly in favor of the assessee.