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TMI Blog2024 (3) TMI 310X X X X Extracts X X X X X X X X Extracts X X X X ..... (3) TMI 563 - BOMBAY HIGH COURT] since the investments were made by the assessee a Mauritius company holding a valid TRC prior to 01.04.2017 the resultant capital gain is not liable to be taxed in India. Respectfully following the decision (supra) we allow the grounds of appeal of the assessee. - Shri G.S. Pannu, Hon ble Vice President And Shri Challa Nagendra Prasad, Judicial Member For the Assessee : Shri Salil Aggarwal, Sr. Adv. And Shri Shailesh Gupta, Adv. For the Revenue : Shri Kanv Bali, Sr. DR ORDER PER C.N. PRASAD, J.M. This appeal is filed by the assessee against the assessment order dated 17.05.2022 u/s 143(3) r.w.s. 144C(13) for the AY 2018-19 pursuant to the directions of the DRP order dated 25.04.2022 passed u/s 144C(5) of the Act. The assessee in its appeal raised the following grounds: - 1. That the Ld.AO/DRP has grossly erred both on facts and in law while making an addition of a sum of Rs. 74,15,54,375/- on account of long term capital gain to be taxed under section 112 of the Act, which is wholly unwarranted and untenable in law. 2. That on the facts and circumstances of the case and in law, the Ld. AO/DRP has failed to appreciate the fact that the assessee-app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company holds the entire shareholding of the assessee company, it does not mean that the assessee company is being run by the said company or Sh. Deepak Seth, being 100 percent owner in Dubai based company, also indirectly holds the entire beneficial holding of assessee company, and as such, the addition so made in unjust and unfair on the facts of the instant case. 6. That the Ld. AO/DRP has further grossly erred both in facts and on law by concluding that the assessee appellant is a conduit of Sh. Deepak Seth since the assessee appellant has made no other investment except the investment made in M/s Pearl Retail Solutions Pvt. Ltd., while doing so, both Ld. AO/DRP have ignored the basic fact that the assessee appellant being a registered Investment Company holding a valid Global Business License, Category I, has always been open to my fruitful and profitable investments and furthermore, even the impugned investment has been made in the year 2010 which has never been disputed by Revenue in the past assessment years. Thus, the aforesaid conclusion so drawn by Ld. AO/DRP is misplaced and misconceived in law and on facts. 7. That further the Ld. AO/DRP has made the impugned addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by it. The assessee vide letter dated 08.02.2021 submitted that assessee company is incorporated outside India and is a non-resident in India and during the year assessee has not carried out any business activity in India and hence, not required to prepare balance sheet, profit and loss account and also Form 3CA and 3CD are not applicable to the assessee company. However, the assessee filed copy of ITR-6 along with computation of income. The assessee also explained that since assessee has not carried on any business activity in India during the year under consideration, no sale/purchase transaction have taken place. It is further submitted that in the year under consideration assessee company sold 2,45,000 shares held as investment in M/s Pearl Retail Solutions Pvt. Ltd. a company incorporated in India to LEI Singapore Holdings Pte. Ltd. a company incorporated in Singapore and a non-resident in India and, therefore, have reported long term capital gain on sale of shares. It was also submitted that since these shares were bought in the years 2010 2011 i.e. prior to 01.04.2017 the resultant capital gain thereon is not liable to tax in India in view of Article 13(4) of DTAA between In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise to it in India. Section 9 of the Act, thereafter, specifies certain types of income that are deemed to accrue or arise in India in certain circumstances. These two sections embody the source rules of income taxation for non-residents in India. The source rule was further explained by the Apex Court in GVK Industries case (332 ITR 130) where in the Apex Court has held that the income of the recipient to be charged in the country where the source of payment is located, to clarify, where the payer is located. 12.2 For the sake of clarity, it may be mentioned here that in view of Explanation 4 and Explanation 5 to section 9(1)(i) of the Act, capital gain arising through or from the transfer of a capital asset situated in India would be deemed to accrue or arise in India in all cases irrespective of whether the capital asset is movable or immovable, tangible or intangible; the place of registration of the document of transfer etc. is in India or outside India; and the place of payment of the consideration for the transfer is within India or outside India, as long as such capital asset derives its value substantially from assets located in India. Therefore, capital gain arising on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is not in accordance with the object and purpose of the relevant provisions of the treaty. This is affirmed by the following observations in Model OECD Commentary on Article 29 in the context of treaty abuse- 174. The provisions of paragraph 9 established that a contracting state may deny the benefits of a tax convention where it is reasonable to conclude, having considered all the relevant facts and circumstances, that one of the principal purposes of an arrangement or transaction was for the benefit under a tax treaty to be obtained. The provision is intended to ensure that tax conventions apply in accordance with the purpose for which they were entered into, i.e. to provide benefits in respect of bona fides exchanges of goods and services, and movements of capital and persons as opposed to arrangements whose principal objective is to secure a more favourable tax treatment. 175. The term benefit includes ail limitations (e.g. a tax reduction, exemption, deferral or refund) on taxation imposed on the state of source under Articles 6 through 22 of the Convention, the relief from double taxation provided by Article 23, and the protection afforded to residents and nationals of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner preclude the examination of the transactions on their own merits. It is seen from the following financial statement for the year ended 31.03.2018 that the assessee company had negligible business operations and no real and continuous business activities carried out in Mauritius 2.12 Despite the primary activity of the company stated to be investment activity had providing of consultancy services, it is seen that no other investment activity in any uncontrolled / third party companies / entities was undertaken after purchase of the shares of M/s Pearl Retail Solutions Private Limited in 2010 until its sale in 2017. There is also no continuous business of providing consultancy activity during these years barring the amount of USD 3,69,000 in 2018 as compared to nil consultancy services in the preceding financial year. This indicates that the company has not undertaken any significant active and continuous business activity after the share investment in 2010. The fact that the company has no employees also evidences negligible or nil business operations and no real and continuous business activities. Such characteristic defines it to be a shell entity which has been interposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... izations for signing share transfer deeds and other relevant documents along with his son Mr. Pulkit Seth. The AO brought on record that Mr. Pulkit Seth was so authorized by the assesses company even though he was neither a director nor a key managerial person of the assessee company. The contention of the assessee that such authorization was given as he was the son of Mr. Deepak Seth only proves that Mr. Deepak Seth is the beneficial owner who ultimately owns/exercises ultimate effective control over the assessee company and M/s Pearl Retail Solutions Private Limited. 2.15 Further, no expense relating to remuneration to any of the eight Directors including the resident directors has been incurred. There is also no evidence to substantiate the actual conduct of full board meetings in which key decisions can be seen to have been discussed and taken in regard to the purchase of shares of M/s Pearl Retail Solutions Private Limited and sale of the same as well as other investment opportunities and consultancy activities. Given the above, the assessee s contention that all decisions of the company with respect to its business, investments etc., are undertaken by the Board of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween States A and B and it is for that purpose that the assets and rights giving rise to the dividends, interest or royalties have been transferred to it. The income is exempt from tax in State A, e.g. in the case of dividends, by virtue of a participation exemption provided for under the domestic laws of State A or under the treaty between States A and B. In that case, Company X constitutes a direct conduit of its shareholder who is a resident of State C. 2.17 The illustration above is seen to be squarely applicable to the present case. Under these circumstances the conclusion drawn by the AO that the company lacks commercial substance and is a shell / conduit company is not interfered with. It is settled law that where there is evidence brought out regarding use of the treaty for tax evasion, as laid out in the Preamble which details the object and purpose of the tax convention, treaty benefit will no longer be available. This is affirmed by UN Model Commentary on Article 1 as under- 22....A guiding principle is that the benefits of a double taxation convention should not be available where main purpose for entering into certain transactions or arrangements was to secure a more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to avoid taxes in India. It is submitted that the aforesaid findings so recorded by learned AO at page 39 to 40 of its final assessment order, is misconceived in law, as admittedly, the assessee is a resident of Mauritius and is holding valid TRC, as such, is entitled to apply the provisions of DTAA between India and Mauritius i.e. Article 13(4) of the said treaty, wherein, tax on capital asset needs to be borne in the resident state, which is admittedly, Mauritius in the instant case. Thus, it is submitted that going by the provisions of section 90 of the Income Tax Act, which provided a choice to assessee to adopt the Act or DTAA whichever is more beneficial, the assessee sought the benefit of India - Mauritius DTAA. Heavy reliance, is placed on the Protocol issued by Ministry of Finance dated 10.05.2016 and 29.08.2016, wherein, the investments made prior to 01.04.2017 have been grandfathered and even the amendments in India - Mauritius DTAA provides said protection has been made available to the assessee - appellant. It is submitted in brief as under: - i) The press release issued by Ministry of Finance dated 10th May 2016 and 29.08.2016 copy enclosed at pg 285 of PB - I, captio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Protocol and holds that in view of grandfathering clause, investments made prior to 01.04.2017 cannot be taxed in India. (c) MIH India (Mauritius) Ltd. vs ACIT (ITAT Delhi) in ITA No. 1023/Del/2022 (kindly see pages 9 to 30 of PB - II, Relevant Page 22 of PB - II Para 11). (d) Union of India vs. Azadi Bachao Andolan and Another (263 ITR 706), (e) Vodafone International holdings B.V Vs Union of India Anr 341 ITR 1 [2012] 5.3 In view of the aforesaid submissions and case laws, Ld. Counsel submitted that the assessee is a resident of Mauritius and entitled to the benefit given under India-Mauritius Tax treaty and more so, the investments so made by assessee appellant are clearly grandfathered/ protected by Government of India Press Release dated 29.08.2016 and also by the amendments in India - Mauritius DTAA. As such, the sale of the said investment in the impugned assessment year is not taxable in India. Heavy reliance is placed on the judgment of Hon ble High Court of Bombay in the case of Bid Services Division (Mauritius) Ltd. vs AAR reported in 453 ITR 461. In view of the above, it is submitted that the benefit of DTAA being available to the Assessee Company, the transaction i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn the attention of this Court to the provisions of Section 90(2) of the Act as well as Article 13(4) of the Mauritius DTAA to emphasize that the gains arising from the transaction of sale of shares effected pursuant to the Share Purchase Agreement dated 1st March 2011 held by the Petitioner in MIAL would not be liable to tax in India. Learned Senior Counsel would submit that since Petitioner is incorporated in Mauritius, it is liable to tax in Mauritius. He submits that, besides, Petitioner held Category 1 Global Business License and also a valid TRC issued by the Mauritian Authorities establishing the fact that it was a tax resident of Mauritius and would be entitled to the beneficial provisions of the Mauritius DTAA. 24. Ld. Sr. Counsel has also drawn the attention of this Court to Circular No.682 dated 30th March 1994 issued by the Central Board of Direct Taxes ( CBDT ) which mentions that capital gains arising to a resident of Mauritius on transfer of shares in an Indian company would be liable to tax only in Mauritius. 25. Learned Senior Counsel has further placed reliance upon Circular No.789 dated 13th April 2000 issued by the CBDT which clarifies that companies which are r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ritius DTAA was inserted with effect from 1st July 2017 whereas the sale transaction pertains to Financial Year 2011-2012. Learned Senior Counsel would therefore submit that the Treaty benefit should have been given to Petitioner. Learned Senior Counsel also refers to Press Release dated 29th August, 2016 by the CBDT and submits that investments made before 1st April, 2017 have been grandfathered and will not be subject to capital gains taxation in India. 26. Learned Senior Counsel would submit that surprisingly, Respondent no. 1-Authority did not accept the contentions raised on behalf of the Petitioner regarding the non-taxability of the gain arising from the transaction of sale of shares to be effected pursuant to the SPA dated 1st March, 2011 held by the Petitioner in MIAL, by virtue of Article 13(4) of the Mauritius DTAA and passed ruling dated 10th February, 2020 rejecting the contentions raised by the Petitioner holding that the Petitioner is not entitled to the benefits under Article 13(4) of the Mauritius DTAA. 27. Aggrieved by the aforesaid Ruling, Petitioner has filed this Petition for the following principal reliefs: (a) That this Hon ble Court may please to issue a Wri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the GVK-SA Consortium. That when the expression of interest was filed by the Consortium on 20th July 2004, the Petitioner was not even in existence. That, right from the issue of ITREOI, filing of expression of interest, short listing of pre-qualified bidders by AAI, issue of RFP to pre-qualified bidder, Airport visits, site inspection and discussions with government agencies etc., Bidvest i.e. the ultimate holding company, was involved as member of the Consortium and not the Petitioner. That, it is only at Stage 2 of the bidding process that the Petitioner was substituted in place of Bidvest. That, no prior approval of AAI was obtained by the Consortium at any stage before filing of technical and financial bid which was the requirement as per paragraph 6.4 of the RFP and paragraph 6.1 of ITREOI. The evaluated entities at prequalified bidding stage were GVK, ACSA and Bidvest. That, it is GVK as well as Bidvest holding company and not Petitioner who have the financial muscle and management capabilities to undertake the project and ACSA had the necessary technical expertise and experience in the field of operation and maintenance of the airport. That, the two business groups and ACS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore interposed only as a device to avoid tax. 33. Although settled law suggests that scrutiny in writ jurisdiction of orders passed by Advance Ruling Authorities is minimal, however the same can be interfered with if the Ruling is without considering the entire material on record or the submissions made on behalf of the parties or the Ruling suffers from a fundamental error or is absurd or perverse. 34. Mr. Pardiwala, learned Senior Counsel had relied upon Article 13 of the Mauritius DTAA to submit that in view of Circular 789 income from capital gains arising in India on sale of shares would not be taxable in India in view of Article 13(4) of the Mauritius DTAA. For ease of reference the said Article 13 is quoted as under: ARTICLE 13 CAPITAL GAINS 1. Gains from the alienation of immovable property, as defined in paragraph (2) of Article 6, may be taxed in the Contracting State in which such property is situated. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r than those mentioned in the proceedings paragraphs and gives the right of taxation of capitals gains only to that State of which the person deriving the capital gains as a resident. In terms of paragraph 4, capital gains derived by residents of Mauritius by alienation of shares of companies shall be taxable only in Mauritius according to Mauritius Tax Law. Therefore, any resident of Mauritius deriving income from alienation of shares of Indian Companies will be liable to capital gains tax only in Mauritius as per Mauritius tax law and will not have any capital gains tax liability in India. 4. Paragraph 5 defines alienation to mean the sale, exchange, transfer or relinquishment of the property or the extinguishment of any rights in it or its compulsory acquisition under any law in force in India or in Mauritius. Circular : No.682, dated 30-3-1994 37. It is clear from the aforesaid that capital gains derived by a resident of Mauritius by alienation of shares of companies shall be taxable in Mauritius only and will not have any capital gains tax liability in India. 38. Further, reliance was placed upon another Circular No.789 dated 13th April 2000 issued by the CBDT which clarified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eficial ownership for the purposes of the Mauritius DTAA and that capital gains arising from sale of shares would not be taxable in India. It is not in dispute that Circular No.789 dated 13th April 2000 continued to be in force between India and Mauritius at the relevant time. 40. A press release dated 1st March 2013 from the Finance Ministry which is quoted as under also unequivocally declares that the TRC produced by resident of a contracting State will be accepted as evidence that he is a resident of that contracting State and the Income Tax Authorities will not go behind the TRC and question his residence status. FINANCE MINISTRY'S CLARIFICATION ON TAX RESIDENCY CERTIFICATE (TRC) PRESS RELEASE, DATED 1-3-2013 Concern has been expressed regarding the clause in the Finance Bill that amends Section 90 of the Income-tax Act that deals with Double Taxation Avoidance Agreements. Sub-section (4) of section 90 was introduced last year by Finance Act, 2012. That subsection requires an assessee to produce a Tax Residency Certificate (TRC) in order to claim the benefit under DTAA. DTAAs recognize different kinds of income. The DTAAs stipulate that a resident of a contracting state wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the provisions of sections 4 and 5 of the Income-tax Act, 1961 by virtue of section 90(1) of the Act. If, in the teeth of this clarification, the assessing officers chose to ignore the guidelines and spent their time, talent and energy on inconsequential matters, we think that the CBDT was justified in issuing 'appropriate' directions vide circular no.789, under its powers under section 119, to set things on course by eliminating avoidable wastage of time, talent and energy of the assessing officers discharging the onerous public duty of collection of revenue. The circular no.789 does not in any way crib, cabin or confine the powers of the assessing officer with regard to any particular assessment. It merely formulates broad guidelines to be applied in the matter of assessment of assessees covered by the provisions of the DTAC. 50. We do not think the circular in any way takes away or curtails the jurisdiction of the assessing officer to assess the income of the assessee before him. In our view, therefore, it is erroneous to say that the impugned circular No.789 dated 13.4.2000 is ultra virus the provisions of section 119 of the Act. In our judgment, the powers conferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Mauritian company is required to be treated as the beneficial owner of the shares under Circular No. 789 and the Treaty is entitled to look at the entire transaction of sale as a whole and if it is established that the Mauritian company has been interposed as a device, it is open to the Tax Department to discard the device and take into consideration the real transaction between the parties, and the transaction may be subjected to tax. In other words, TRC does not prevent enquiry into a tax fraud, for example, where an OCB is used by an Indian resident for round- tripping or any other illegal activities, nothing prevents the Revenue from looking into special agreements, contracts or arrangements made or effected by Indian resident or the role of the OCB in the entire transaction. 44. Although paragraph 98 of the Vodafone International Holding B.V. v. Union of India (supra) has been quoted in the impugned ruling, however, paragraph 97 which is also relevant, appears to have been missed out by the authority. 45. No doubt mere holding of a TRC cannot prevent an enquiry if it can be established that the interposed entity was a device to avoid tax. However, the decisions of the Apex C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000 or Indian Rs. 2,700,000 in the respective Contracting State as the case may be, in the immediately preceding period of 12 months from the date the gains arise. 4. A resident of a Contracting State is deemed not to be a shell/conduit company if: (a) it is listed on a recognized stock exchange of the Contracting State; or (b) its expenditure on operations in that Contracting State is equal to or more than Mauritian Rs. 1,500,000 or Indian Rs. 2,700,000 in the respective Contracting State as the case may be, in the immediately preceding period of 12 months from the date the gains arise. Explanation : The cases of legal entities not having bona fide business activities shall be covered by Article 27A(1) of the Convention. 48. It is observed that this Article disentitles benefits of Article 13(3B) if the affairs were arranged for the primary purpose to take advantage of the benefits of Article 13(3B). The Article has been inserted with effect from 1st April 2017. According to this Article, with effect from 1st April 2017, a shell or a conduit company that claims to be a resident of a contracting State shall not be entitled to benefits of Article 13(3B). 49. The Petitioner has also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of debt claims or loans made after 31st March, 2017. However, interest income of Mauritian resident banks in respect of debt-claims existing on or before 31st March, 2017 shall be exempt from tax in India as per existing provisions in the Convention. The Protocol also provides for updating of the Exchange of Information Article as per the international standard, provision for assistance in collection of taxes, source-based taxation of other income, amongst other changes. The Protocol will tackle treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between the two Contracting Parties. It will improve transparency in tax matters and will help curb tax evasion and tax avoidance. (Meenakshi J Goswami) Commissioner of Income Tax (Media and Technical Policy) Official Spokesperson, CBDT. 50. The said press release expressly provides for grandfathering of capital gains exemption provided under the erstwhile Mauritius DTAA. The protocol provides for source based taxation of capital gains arising from alienation of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA for plugging such transactions have been made effective from 1 st April 2017, unless there is a fraud or any illegal activity involved. In fact, as noted above, the investments prior to 1st April 2017 have been grandfathered and are not subject to capital gains taxation in India. The Press Release dated 29th August 2016 quoted above also takes care of the transition period from 1st April 2017 to 31st March 2019 where the tax rate has been limited to 50% of domestic tax rate in India. That taxation in India at full domestic rate is stated to take place from financial year 2019-20 onwards, subject to other conditions. 55. Although the observations of the Authority in paragraph 62 with respect to the claim of treaty shopping of as well as the doctrine of substance over formed in paragraph 63 cannot be faulted with, however, it needs to be emphasized that the LOB clause has been made effective for investments only from 1st April 2017. As noted above, even the press release dated 29th August 2016 confirms that investments made before 1st April 2017 will not be subject to capital gains taxation in India. That being the position these observations of the authority appear to be mispla ..... X X X X Extracts X X X X X X X X Extracts X X X X
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