2023 (11) TMI 231 - AT - Income Tax

Income taxable in India - capital gain derived by the assessee from sale of shares of two Indian companies in view of Article 13(4) of India Mauritius Tax Treaty - GAAR applicability - Allegations of the departmental authorities that the assessee is a conduit company and has been set up under a scheme of impermissible tax avoidance arrangement - assessee is a tax resident of Mauritius and is an investment holding company - only reason on which the AO has declined the treaty benefits to the assessee is because assessee is a stepping stone conduit entity set up in Mauritius only for the purpose of availing treaty benefits, hence, it is an impermissible tax avoidance arrangement - HELD THAT - If the provisions of the DTAA are more beneficial to that particular assessee, the provisions of DTAA would override the domestic law. With the introduction of sub-section (2A), of section 90 w.e.f. 01.04.2016 earlier overriding effect of the treaty provisions to some extent has been curtailed as the provisions of GAAR as provided under Chapter XA of the Act shall apply irrespective of the fact that such provisions are not beneficial to the concerned assessee. Thus, the department has been empowered under the statue w.e.f. 01.04.2016 to deny treaty benefits to the assessee in a case where GAAR is applicable. Undisputedly, the provisions of section 90(2A) read with Chapter XA of the Act are applicable to the impugned assessment year. Though, the Assessing Officer has alleged that the assessee is a conduit company and has been set up as a part of impermissible tax avoidance arrangement, surprisingly, he has not invoked the provisions of GAAR as provided under Chapter XA of the Act. Departmental authorities were accepting the fact that the shares in the Indian companies having been acquired prior to 01.04.2017, hence, the capital gain derived from sale of such shares would be exempt from taxation in India in terms of Article 13(4) of the Indian Mauritius DTAA. Only for the purpose of defeating assessee s claim of exemption under Article 13(4) of the treaty, AO has introduced the theory of impermissible tax avoidance arrangement and Conduit Company. Since, the allegations of the departmental authorities that the assessee is a conduit company and has been set up under a scheme of impermissible tax avoidance arrangement remains unsubstantiated, we are inclined to accept assessee s claim of exemption under Article 13(4) of India Mauritius DTAA, qua the capital gain derived from sale of subject shares held in two Indian entities. AO directed to delete the addition. Decided in favour of assessee.

Summary

Issues:
The judgment involves the taxability of capital gain arising on the sale of shares by a non-resident corporate entity incorporated in Mauritius, under the India-Mauritius Double Taxation Avoidance Agreement (DTAA).

Details of the Judgment:

Issue 1: Taxability of Long-Term Capital Gain
The Assessing Officer denied treaty benefits to the assessee, alleging it was a conduit company set up for tax avoidance. The DRP upheld this view. However, the Tribunal found the allegations unsubstantiated and ruled in favor of the assessee, stating that the TRC issued by Mauritius determined tax residency and treaty benefits entitlement.

Issue 2: Application of General Anti Avoidance Rule (GAAR)
The assessee argued that GAAR provisions were erroneously not invoked by the Assessing Officer. The Tribunal noted that GAAR provisions were not applied and found the grounds raised by the assessee on this issue to be of academic nature, as the TRC determined the tax residency and treaty benefits entitlement.

Issue 3: Compliance with Treaty Provisions
The Tribunal emphasized that the TRC issued by Mauritius determined the entitlement under the treaty provisions, and the departmental authorities failed to establish the assessee as a conduit company. Therefore, the long-term capital gain derived from the sale of shares in Indian entities was exempt from taxation under the India-Mauritius DTAA.

Separate Judgment by the Tribunal:
The Tribunal allowed the appeal, directing the Assessing Officer to delete the addition of the long-term capital gain. The Tribunal highlighted that the failure to establish the assessee as a conduit company meant that the TRC determined the residential status and treaty benefits entitlement, leading to the exemption of the capital gain from taxation in India.