2024 (2) TMI 268 - AT - Income Tax

Taxability of capital gain arising on sale of shares under the treaty provisions - taxability of income in India - assessee is a tax resident of Mauritius holding a valid TRC and is engaged in the business as an investment holding company having a Category 1 global business licence issued by the competent authority in Mauritius - AO and DRP have rejected assessee s claim by holding that assessee being a mere paper company is not entitled to treaty benefits - HELD THAT - Reasoning, on which, the departmental authorities have denied assessee s claim of benefit under Article 13(4) of the tax treaty are unacceptable. It is evident, in course of proceedings before the departmental authorities, the assessee has furnished all materials and evidences to establish its residential status, bank statements reflecting details of investments made in foreign currency, Foreign Inward Remittance Certificate (FIRC) and various other documents have been submitted by the assessee before the departmental authorities. Whereas, neither the AO, nor DRP, except making vague allegations regarding the status of the directors and the structure of the company have held that since, the assessee is a mere paper company, it is not entitle to treaty benefits. This, in our view, is against the spirit of CBDT Circular no. 789, dated April 13, 2000 and the ratio laid down by the Hon ble Supreme Court in case Union of India Vs. Azadi Bachao Andolan ( 2003 (10) TMI 5 - SUPREME COURT ). In a recent decision of Blackstone Capital Partners (Singapore) VI FDI Three PTE. Ltd. ( 2023 (2) TMI 35 - DELHI HIGH COURT it has been held that once the assessee holds a valid TRC, the Departmental Authorities cannot go behind it to question residential status. In the facts of the present appeal, except making vague allegations, the departmental authorities have failed to bring on record any cogent material to substantiate their allegations that the assessee is merely a paper company, hence, cannot be treated as a genuine tax resident of Mauritius. Interestingly, though, the AO has made various allegations regarding the status and genuineness of the assessee while denying benefit under Article 13(4) of the tax treaty, however, while computing the capital gain he has allowed set off of long-term capital loss relating to the assessment year 2012-13. This fact shows that the Assessing Officer to certain extent has accepted the genuineness of the activities carried on by the assessee, i.e., investment in shares of Indian companies. Thus, we hold that the assessee is entitled to claim exemption under Article 13(4) of the tax treaty qua the capital gain arising on sale of shares. Therefore, the amount in dispute is not taxable in India. Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the assessment order under section 147 of the Income-tax Act, 1961.
2. Taxability of capital gain arising on the sale of shares.
3. Entitlement to treaty benefits under Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement (DTAA).

Summary:

Issue 1: Validity of the Assessment Order under Section 147 of the Income-tax Act, 1961

The assessee, a non-resident corporate entity incorporated in Mauritius, challenged the reopening of the assessment under section 147. The assessee argued that there was no escapement of income as the capital gains were disclosed in the return and were not taxable in India under the India-Mauritius DTAA. The Tribunal noted that the Assessing Officer reopened the assessment based on the information that the assessee received Rs. 162 crores without tax deduction. However, the Tribunal found that the reasons for reopening must have a nexus with the formation of belief and cannot be on a vacuum, citing the Supreme Court's decision in ITO Vs. Lakhmani Mewal Das. The Tribunal also noted that the reopening was done without tangible material and was mechanically approved by the competent authority, making the reopening invalid.

Issue 2: Taxability of Capital Gain on Sale of Shares

The assessee argued that the capital gains should be computed by converting the cost of acquisition and consideration into the same foreign currency used for purchase, as per the first proviso to section 48 read with Rule 115A. The Tribunal noted that section 112(1)(c)(iii) of the Act specifically excludes the applicability of the second proviso to section 48. The Tribunal agreed with the assessee that section 112 does not override the computation mechanism in section 48 and that if the computation results in a loss, section 112 would not apply. The Tribunal also acknowledged that when two interpretations are possible, the view favorable to the assessee should be adopted, citing CIT Vs. Vegetable Products Ltd.

Issue 3: Entitlement to Treaty Benefits under Article 13(4) of the India-Mauritius DTAA

The Tribunal found that the assessee, holding a valid Tax Residency Certificate (TRC), is entitled to treaty benefits. The Tribunal emphasized that the Departmental Authorities cannot question the residential status of the assessee if a valid TRC is held, as per the CBDT Circular No. 789 and the Supreme Court's decision in Union of India Vs. Azadi Bachao Andolan. The Tribunal noted that the Department failed to provide cogent material to prove that the assessee was a mere paper company. The Tribunal concluded that the assessee is entitled to claim exemption under Article 13(4) of the tax treaty for the capital gains arising from the sale of shares, making the disputed amount not taxable in India.

Conclusion:

The appeal was partly allowed. The Tribunal held that the reopening of the assessment under section 147 was invalid and that the assessee is entitled to claim exemption under Article 13(4) of the India-Mauritius DTAA for the capital gains, making the amount in dispute not taxable in India. Other grounds were rendered academic and were not adjudicated.