2025 (1) TMI 561 - AT - Income Tax

Entitlement to DTAA benefits between India and Luxembourg - Multilateral Instrument (MLI) provisions apply to deny treaty benefits - assessee is a limited liability Company incorporated in Luxembourg and it is 100% subsidiary of SC Lowy Primary Investments Limited based in Cayman Islands and the Holding company also 100% subsidiary of SC Lowy Offshore Fund based in Cayman Islands - whether the existence of TRC issued by the Luxembourg authorities is valid for availing DTAA benefits and corresponding existence of LOB in the respective DTAA/MLI compliance to the Art.29 is sufficient? HELD THAT - The revenue has to accept the TRC issued by the competent authority and if the facts on record satisfies the conditions specified in the Article 29 on Limitation of Benefits it cannot stretch beyond the above mandates unless they bring on record the cogent and convincing evidences to prove the existence of assessee being acted as conduit. On careful consideration of MLI with Luxembourg we observe that the article 29 was modified and replaced the sub clause 2 and 3 of the Article by paragraph 1 of Art.7 of MLI as per which benefit under the agreement shall not be granted in respect of income or capital if it is reasonable to conclude leading to relevant facts and circumstances obtaining the benefit is one of the principal purposes of any arrangements or transaction that resulted directly or indirectly in that benefit. It is to be established that obtaining benefit is one of the principle purpose and bring on record the relevant facts and circumstances to prove that purpose of arrangements and transactions only for the purpose of taking treaty benefit. Assessee has submitted the valid TRC and the revenue has not raised any flag on the validity of the TRC - It was incorporated in Luxembourg in the year 2015 and incorporated in Luxembourg as an investment holding company and invested mainly in distressed assets. It also made investments in Italy in its step down subsidiary for making further investments. It is a step-down subsidiary of SC Lowy Offshore Fund incorporated in Cayman Islands as a special purpose vehicle for pooling of funds from various investors. It also registered with SEBI as Category II Foreign Portfolio Investor and has made investment in India only in financial year 2018-19 in securitization trust / securities issued by companies in India. Activities of the assessee is beyond Indian jurisdiction and it also filed tax returns and paid tax in Luxembourg on its worldwide income i.e. income earned from investments made in India as also income from other investments in different jurisdictions. It was submitted and brought to our notice that the assessee has incurred substantial operational expenditure relating to investments in Luxembourg in the nature of consulting fees legal and litigation fees other professional fees apart from other administrative expenses such as rent paid for office premises bank account charges accounting fees etc. As per the directions in the case of Tiger Global International decision 2024 (9) TMI 26 - DELHI HIGH COURT revenue authorities cannot bring on record other conditions to deny the benefit under the treaty when the assessee submits the relevant TRC and proves its existence from the date of its investment in the source country. In our view any economic activities which is not substantial in the earlier of its existence will not alter the position and it also proves that its activities are genuine by bringing on record the various activities and also establishes the fact that it is stand alone entity not depends on the conduct of the holding company it establishes its existence beyond the source country and also without their being any cogent material with the revenue to establish that the assessee is only a conduit the benefit under the treaty cannot be denied. With the above observations we are inclined to direct the AO to grant the treaty benefits to the assessee - Decided in favour of the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The primary issues considered in this legal judgment are:

• Whether the assessee is entitled to the benefits of the Double Taxation Avoidance Agreement (DTAA) between India and Luxembourg.
• Whether the Tax Residency Certificate (TRC) is sufficient to establish the assessee's eligibility for DTAA benefits.
• Whether the assessee is a conduit entity for tax avoidance through treaty shopping.
• Whether the income earned by the assessee should be taxed under the provisions of the Income Tax Act, 1961, or as per the DTAA.
• The applicability of the Multilateral Instrument (MLI) and its impact on the DTAA benefits.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Entitlement to DTAA Benefits

• Legal Framework and Precedents: The DTAA between India and Luxembourg provides for reduced tax rates and exemptions on certain types of income. The assessee claimed benefits under Articles 7, 11, and 13(6) of the DTAA.
• Court's Interpretation and Reasoning: The court examined whether the assessee, as a tax resident of Luxembourg, is entitled to the DTAA benefits. It considered the validity of the TRC and the economic substance of the assessee's operations.
• Key Evidence and Findings: The assessee provided a valid TRC, filed tax returns, and paid taxes in Luxembourg. The geographical distribution of investments showed substantial activity outside India.
• Application of Law to Facts: The court applied the provisions of the DTAA and the principles established in the case of Tiger Global International III Holdings, emphasizing the importance of the TRC and the absence of fraud or sham transactions.
• Treatment of Competing Arguments: The Revenue argued that the assessee is a conduit and the TRC is insufficient. The court rejected these arguments, citing the lack of evidence for fraud or sham transactions.
• Conclusions: The court concluded that the assessee is entitled to the DTAA benefits, as the TRC is valid and there is no evidence of the assessee being a conduit.

Issue 2: Sufficiency of Tax Residency Certificate (TRC)

• Legal Framework and Precedents: Circular No. 789 of 2000 and the decision in Azadi Bachao Andolan established that a TRC is sufficient evidence of residency for DTAA benefits.
• Court's Interpretation and Reasoning: The court held that the TRC issued by Luxembourg authorities is sacrosanct and should be given due weight unless there is evidence of fraud or sham transactions.
• Key Evidence and Findings: The assessee held a valid TRC, and there was no evidence presented by the Revenue to challenge its validity.
• Application of Law to Facts: The court applied the principles from the Tiger Global case, affirming the sufficiency of the TRC in establishing tax residency.
• Treatment of Competing Arguments: The Revenue's challenge to the TRC was dismissed due to a lack of evidence.
• Conclusions: The TRC is sufficient to establish the assessee's tax residency and entitlement to DTAA benefits.

Issue 3: Conduit and Treaty Shopping Allegations

• Legal Framework and Precedents: The court considered the principles of beneficial ownership and the concept of treaty shopping as discussed in the Tiger Global case.
• Court's Interpretation and Reasoning: The court found no evidence that the assessee was a conduit or engaged in treaty shopping, as the investments were substantial and geographically diverse.
• Key Evidence and Findings: The assessee's investments were not limited to India, and it had operational expenses and tax filings in Luxembourg.
• Application of Law to Facts: The court applied the substance over form principle, finding that the assessee had control over its income and investments.
• Treatment of Competing Arguments: The Revenue's argument of the assessee being a conduit was not supported by evidence.
• Conclusions: The assessee is not a conduit, and treaty benefits cannot be denied on this basis.

Issue 4: Taxation of Income

• Legal Framework and Precedents: The court examined the applicability of sections 115AD, 115UB, and 115TCA of the Income Tax Act in light of the DTAA provisions.
• Court's Interpretation and Reasoning: The court held that the income should be taxed as per the DTAA, given the assessee's eligibility for treaty benefits.
• Key Evidence and Findings: The income from investments was characterized as business income, capital gains, and interest income, with the DTAA providing exemptions or reduced rates.
• Application of Law to Facts: The court applied the DTAA provisions, allowing the reduced tax rates and exemptions claimed by the assessee.
• Treatment of Competing Arguments: The Revenue's recharacterization of income was rejected due to the applicability of the DTAA.
• Conclusions: The income should be taxed as per the DTAA, with the assessee entitled to the claimed benefits.

3. SIGNIFICANT HOLDINGS

• Verbatim Quotes of Crucial Legal Reasoning: "A validity and sanctity of TRC issued by competent authority must be considered to be sacrosanct and due weightage must be accorded to the same as it constitutes the relevant entity being a bona fide entity having beneficial ownership domiciled in the contracting state to pursue a legitimate business purpose in the contracting state."
• Core Principles Established: The TRC is sufficient for establishing tax residency; treaty benefits cannot be denied without evidence of fraud; the DTAA provisions prevail over domestic tax laws in the presence of a valid TRC.
• Final Determinations on Each Issue: The assessee is entitled to DTAA benefits; the TRC is sufficient for tax residency; the assessee is not a conduit; income should be taxed as per the DTAA.