2024 (7) TMI 1052 - AT - Income Tax

Income taxable in India - capital gains as exempt as per Article 13(4) of the India- Mauritius Tax - Denial of Treaty benefits - Appellant transferred shares of Indian Companies and thereby earned long term capital gains on such transfers -assessee company claimed to be holding valid tax residency certificate ( TRC ) and Global Business License-I ( GBL- I License ) issued by the Financial Services Commission, Mauritius HELD THAT - In the case in hand present assessee company was incorporated in 2006 as an investment fund and held by company formerly known as JP Morgan India Property Mauritius Company I, which was also incorporated in Mauritius. Being investment fund, the appellant company pools capital from investors from countries through series of funds investor vehicles / feeder funds creating a master fund which is used for investment into various entities in India and particularly in regard to companies for which alleged gains has been attributed the companies were joint ventures or real estate. The investment in four companies allegedly giving rise to the capital gains were made in A.Y. 2007-08 to 2011-12. There is no allegation of the AO on the basis of any evidence that any investment flowing from India was received for creating the present appellant company. It is coming up that the investments are held for over five years before they are transferred and as observed earlier, appellant was earlier also making investment and divestments and still holds investment in various other companies. Certainly the assessee was holding the investment in its own name beneficially and legally. It cannot be called as a fly by night operator created merely for tax avoidance purposes. To question the genuineness of the activities of assessee on the basis of the fact that Directors were not residents of Mauritius or absence of operational expenditures and Directors remunerations, when analyzed in the light of aforesaid facts as to how the assessee company had come into existence as a subsidiary company of IPM-I, the assessee company has validly discharged its burden by establishing that the external service provider has been outsourced, the day to day administrative activities of assessee company as per the law of land and payments were being made for those services. It is the wisdom and discretion of company as to how the day to day activities are managed and without establishing that on sham basis administrative activities are being shown, Revenue cannot question genuineness of the business operations of an assessee. AO has attributed conduit status to the assessee alleging that the investment funds and the consideration received from liquidation were immediately transferred to the assessee before investment and the assessee immediately transferred the consideration in the form of share buyback and dividend. When assessee is incorporated as a investment fund, then such model of transaction is obvious. What is material is to see that for how long the investments were held and whether the investments had commercial expediencies. No presumption of conduit status merely on the basis of transfer of the consideration immediately after divestments can be drawn because ultimately the funds under investments were to be returned with whatever gains made. AO himself has reproduced in the order, the resolutions of the assessee company indicating as to why the divestments are being made and how the proceeds of divestments shall be accounted back to the investors. The commercial rationale for the existence of the assessee company in Mauritius is thus not any scheme of tax avoidance but a business model to attract funds from different jurisdictions for investment in India. As emphasized in the case of Azadi Bachao Aandolan 2003 (10) TMI 5 - SUPREME COURT when the whole endeavor of the Government of India is to procure investment in joint venture and infrastructure projects for the benefit of economy then attributing a malice to investment funds like the assessee is not justified. We are of the firm belief that except for suspicion there was no evidence with learned AO to rebut the statutory evidence of presumption of genuineness of business activity of assessee company on basis of TRC held by the assessee and consequently we are inclined to allow these two grounds no. 2 3 in favour of the assessee.

Summary

Issues Involved:
1. Validity of the final assessment order under Section 143(3) read with Section 144C(13) of the Income-tax Act, 1961.
2. Denial of exemption under Article 13 of the India-Mauritius Tax Treaty.
3. Compliance with CBDT Circular No. 789 and Supreme Court ruling in Azadi Bachao Andolan.
4. Levy of interest under Sections 234A and 234B of the Act.
5. Initiation of penalty proceedings under Section 270A of the Act.

Issue-wise Detailed Analysis:

1. Validity of the Final Assessment Order:
The appellant argued that the final assessment order dated 10 February 2023 was beyond the time limit specified under Section 153 of the Act, which was extended by the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020. The Tribunal noted that the final assessment order was liable to be passed by 08 April 2022, and thus, the order was time-barred and void ab initio. Reliance was placed on the decision of the Hon'ble Madras High Court in CIT v. Roca Bathroom Products (P.) Ltd. and other relevant judgments.

2. Denial of Exemption under Article 13 of the India-Mauritius Tax Treaty:
The appellant, a company incorporated in Mauritius, claimed exemption on long-term capital gains under Article 13(4) of the India-Mauritius Tax Treaty. The Revenue denied the Treaty benefits, arguing that the appellant lacked commercial substance and was a conduit entity. The Tribunal observed that the appellant held a valid Tax Residency Certificate (TRC) and had made investments long before the impugned transactions. The Tribunal emphasized that the appellant was not a fly-by-night operator and had genuine business operations. The Tribunal relied on the Supreme Court ruling in Azadi Bachao Andolan, which held that TRC is sufficient evidence for claiming Treaty benefits. The Tribunal concluded that the Revenue's suspicion was not supported by evidence and allowed the appellant's claim for exemption.

3. Compliance with CBDT Circular No. 789 and Supreme Court Ruling in Azadi Bachao Andolan:
The appellant argued that the TRC issued by Mauritius Revenue Authorities should be sufficient to claim Treaty benefits, as upheld by CBDT Circular No. 789 and the Supreme Court in Azadi Bachao Andolan. The Tribunal agreed with the appellant, stating that the TRC is conclusive evidence of residency and beneficial ownership for Treaty benefits. The Tribunal noted that the Revenue's reliance on the Vodafone BV case was misplaced, as the appellant had genuine commercial operations and was not created solely for tax avoidance.

4. Levy of Interest under Sections 234A and 234B of the Act:
The appellant contended that the interest levied under Sections 234A and 234B was consequential and should not apply as the amounts received were subject to TDS under Section 195 of the Act. The Tribunal agreed, citing the Supreme Court judgment in Director of Income Tax Vs. Mitsubishi Corporation and other relevant cases, which held that interest under Section 234B does not apply when the entire tax is deductible at source for non-residents.

5. Initiation of Penalty Proceedings under Section 270A of the Act:
The appellant challenged the initiation of penalty proceedings for underreporting of income. The Tribunal did not specifically adjudicate this issue, as the primary grounds on merits were decided in favor of the appellant, rendering the penalty proceedings academic.

Conclusion:
The Tribunal allowed the appeal, setting aside the final assessment order and granting the appellant the claimed Treaty benefits. The Tribunal emphasized the validity of the TRC and the genuine commercial operations of the appellant, rejecting the Revenue's allegations of the appellant being a conduit entity. The interest levied under Sections 234A and 234B was also set aside, and the penalty proceedings were deemed academic.