2023 (11) TMI 692 - AT - Income Tax

Treaty benefits - gains from alienation of shares - taxability or otherwise of capital gain from sale of equity shares under Article 13(4) of India-Mauritius DTAA - beneficial tax rate under grandfathering clause - treating the assessee as a conduit company set up - assessee is non-resident corporate entity and tax resident of Mauritius holding a valid TRC - HELD THAT - Departmental authorities have miserably failed to establish the fact of the assessee being a conduit company with reference to Article 27A of India-Mauritius DTAA (Limitation on Benefit clause). Therefore having regard to the relevant facts and ratio laid down in the judicial precedents discussed above we have no hesitation in holding that the assessee having been granted a valid TRC has to be treated as tax resident of Mauritius hence eligible to avail benefit under India-Mauritius DTAA. There cannot be any dispute with regard to assessee s claim of exemption under Article 13(4) of India-Mauritius DTAA as undisputedly the shares were acquired prior to 01.04.2017. Therefore the gain derived from sale of such equity shares is taxable only in the country of residence of the assessee i.e. Mauritius and not in India. However in so far as the capital gain arising from sale of shares of Veritas Finance Pvt. Ltd. is concerned the facts are slightly different. Though in the original return of income the assessee claimed the resultant capital gain to be exempt under Article 13(4) however subsequently the assessee filed revised return of income offering the capital gain to tax under the provisions of Article 13(3A) read with Article 13(3B) of the Treaty by claiming beneficial tax rate under grandfathering clause. The word shares bas been used in a broader sense and will take within its ambit all shares including preference shares. Thus since the assessee had acquired the CCPS prior to 01.04.2017 in our view the capital gain derived from sale of such shares would not be covered under Article 13(3A) or 13(3B) of the Treaty. On the contrary it will fall under Article 13(4) of India-Mauritius DTAA hence would be exempt from taxation as the capital earned is taxable only in the country of residence of the assessee. No doubt the assessee has offered the capital gain under Article 13(3B) of the Treaty in its revised return. However that will not preclude the assessee from claiming benefit under Article 13(4) of the Treaty when the capital gain clearly falls within the ambit of Article 13(4) of the Treaty. In view of the aforesaid we allow assessee s additional ground and hold that the capital gain derived by the assessee from the sale of equity shares is not taxable in terms of Article 13(4) of the India-Mauritius DTAA.

Summary

Issues Involved:
1. Applicability of beneficial provisions of India-Mauritius Double Taxation Avoidance Agreement (DTAA) to the income earned under the head 'capital gain'.
2. Taxability of long-term capital gain from the sale of shares under Article 13(4) of India-Mauritius DTAA.
3. Validity of Tax Residency Certificate (TRC) and its sufficiency to establish tax residency.
4. Allegations of tax avoidance through treaty shopping and the status of the assessee as a conduit company.

Summary:

Issue 1: Applicability of India-Mauritius DTAA to Capital Gains
The assessee, a non-resident corporate entity incorporated in Mauritius, claimed exemption for long-term capital gains from the sale of shares under Article 13(4) of the India-Mauritius DTAA. The Assessing Officer denied the Treaty benefits, alleging tax avoidance through treaty shopping, and treated the assessee as a conduit company with real owners being residents of different countries.

Issue 2: Taxability of Long-Term Capital Gains
The assessee sold shares of two Indian companies and claimed the resultant capital gains as exempt under Article 13(4) of the DTAA. The Assessing Officer taxed the gains under domestic law, but the Tribunal held that the gains from shares acquired before 01.04.2017 are taxable only in Mauritius, thus exempt in India under Article 13(4).

Issue 3: Validity of TRC
The Tribunal emphasized that a valid TRC issued by Mauritius tax authorities is sufficient to establish the tax residency of the assessee. It cited the Supreme Court's decision in Union of India vs. Azadi Bachao Andolan, which upheld the validity of TRC as evidence of tax residency, making the assessee eligible for Treaty benefits.

Issue 4: Allegations of Tax Avoidance
The Tribunal rejected the Assessing Officer's allegations of tax avoidance and the assessee being a conduit company. It found no concrete evidence to support these claims and noted that the assessee had substantial business operations and incurred operational expenses, proving it was not a sham entity.

Conclusion:
The Tribunal concluded that the assessee, holding a valid TRC, is a tax resident of Mauritius and eligible for DTAA benefits. The capital gains from the sale of shares acquired before 01.04.2017 are exempt from tax in India under Article 13(4) of the India-Mauritius DTAA. The appeal was partly allowed, granting the assessee the claimed exemptions.

Order pronounced in the open court on 10/08/2023.