9911796707
TMI Blog2024 (5) TMI 387X X X X Extracts X X X X X X X X Extracts X X X X ..... P has referred to the LOB clause under Article-27A of the India Mauritius Tax Treaty. In our view, the reference to Article 27A is totally irrelevant as the assessee has not claimed any benefit under Article 13(3B) of India Mauritius Tax Treaty. Even assuming for the sake of argument that Article 27A gets attracted, however, the Department has failed to demonstrate the fulfilment of conditions of shell/conduit company as per Article 27A of the tax treaty. We may further observe, the directions issued by learned Dispute Resolution Panel leaves a lot to be desired. Thus we are of the view that the assessee, being entitled to claim exemption under Article 13(4) of India- Mauritius Treaty, the addition made is unsustainable. Accordingly, the Assessing Officer is directed to delete it. X X X X Extracts X X X X X X X X Extracts X X X X ..... from the USA. Further the structure of assessee company is transparent/pass through without adequate substance the investment pooling vehicles in Mauritius are mere intermediary holding company of the assessee without actual business operations or adequate substance in Mauritius. • Not fulfilling the requirement of Management and Control for Category 1 Global Business entities as per Section 71(4) of the Financial Services Act 2007 as it reported in /TR that 100% beneficially owned by persons who are not Resident of Mauritius. • NIL expenses for operational requirements for running a business/commercial venture in Mauritius e.g. employees, salary, rent, electricity, telephone charges, internet charges and other expenses of operations nature. • The company do not pay any rent and it does not own any land or building is noted from their financial statements, this indicates that it does not have actual physical office premise in possession or rent. Only a contact address is provided that also belongs to SANNE Mauritius in Mauritius, • The assessee company do not have any employees apart from part time directors as wages and salaries as well as other staff c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -Mauritius DTAA. Accordingly, he framed the draft assessment order by bringing to tax the income derived from long term capital gain on sale of shares. 7. Against the draft assessment order so framed, the assessee raised objections before learned DRP. 8. While disposing of the objections of the assessee, learned DRP directed the Assessing Officer to factually verify assessee's contention by a speaking and reasoned order. While doing so, learned DRP also directed the Assessing Officer not to conduct any fresh enquiry and to undertake verification of facts on the basis of documents/submissions available in the assessment records. 9. While implementing the directions of DRP, the Assessing Officer retained the addition as was proposed in the draft assessment order. 10. Before us, learned counsel appearing for the assessee reiterated the stand taken before the Departmental Authorities. The learned counsel submitted, assessee was incorporated as company in Mauritius as early as in September, 2006. He submitted that as an investment holding company, the assessee has made investments in not only in India but other jurisdictions such as Mauritius and Singapore. He submitted that the Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions under Mauritius Income Tax Act. He submitted, once the Mauritius Tax Authorities have issued TRC after verifying the residential status of the assessee, the Assessing Officer cannot question it. He submitted, as per the Financial Service Act of Government of Mauritius, the conditions for issuance of a Global Business License are, the company must carry out its core income generating activities in or from Mauritius as required under the Income Tax Act of Mauritius, be managed and controlled from Mauritius and be administered by a management company. He submitted, upon fulfilment of all these conditions the assessee was given Category-1 Global Business License. Therefore, credibility of the assessee cannot be doubted. He submitted, two of the Directors of the company are located in Mauritius. He submitted, the assessee has registered office in Mauritius and has a bank account in Mauritius. Therefore, it cannot be said that the control and management of the assessee is not in Mauritius. 13. He submitted, only because the parent company provides funds to the assessee for the purpose of investment, that alone cannot be a factor to conclude that the assessee is a shell or conduit c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany as per Article 27A of the India-Mauritius tax treaty, are not fulfilled. Thus, he submitted, the assessee is entitled to claim exemption under Article 13(4) of the India- Mauritius Tax Treaty. 15. He submitted, while disposing of the objections of the assessee, learned DRP has clearly held that the Assessing Officer has not properly appreciated the facts submitted by the assessee and accordingly directed the Assessing Officer to pass a speaking and reasoned order after verifying the facts and submissions of the assessee. He submitted, while passing the final assessment order, the Assessing Officer has not implemented the directions of learned DRP in letter and sprit and has simply repeated the additions made in the draft assessment order through a non-speaking order. 16. Strongly relying upon the observations of the Assessing Officer and learned DRP, learned Departmental Representative submitted that the Assessing Officer has brought enough facts and materials on record to establish that the assessee has no real economic and commercial activity in Mauritius. He submitted, the control and management of the assessee company is completely with the parent company in USA, hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer apparently has rejected assessee's claim by holding that the control and management of the assessee company is entirely vested with the parent company in USA and the assessee has no economic and commercial substance in Mauritius. He has further held that the assessee has been interposed as an entity in Mauritius only for claiming treaty benefit. On a perusal of the draft as well as the final assessment orders, we do not find any conclusive evidence brought on record by the Assessing Officer to prove the fact that the control and management of the assessee is not in Mauritius, hence, is a shell/conduit company. On the contrary, the evidences brought on record prove otherwise. 19. It is established on record that the assessee was incorporated as a company in Mauritius in 2006. The SEBI, a Government of India agency has issued a certificate to the assessee as a Foreign Venture Capital Investor as early as on 17th July, 2007. A copy of the certificate is placed at page 94 of the paper book. Thus, it has to be accepted that while issuing the certificate of registration to the assessee, the SEBI must have verified the credentials of the assessee as an Investor Company and being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of the Department that TRC is not enough to prove the residence of the assessee. In this context, learned Departmental Representative has submitted that the Mauritius Tax Authorities have issued the TRC without proper verification, whether the assessee has fulfilled the conditions of resident or not. In our view, the income tax authorities sitting in India cannot question the correctness of the TRC issued by the Mauritius Tax Authority. Once, the concerned authorities in Mauritius have issued the TRC and the Category-1 Global business license, it has to be assumed that all facts and evidences were verified by them and only after being satisfied that the relevant conditions have been fulfilled, the certificates have been issued. 23. The very fact that the assessee has started its operations in India since 2007, indicates that it is a genuine investor. Materials have been placed before us to demonstrate that even after capital gain became taxable under the India- Mauritius treaty post 01.04.2017, the assessee had made substantial investment in India to the tune of US $37,68,86,444. The aforesaid facts clearly indicate that the assessee is not a fly by night operator and made inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the said aspect. The Apex Court in a case of Azadi Bachao Andolan (referred to supra) has observed as under : "There are many principles in fiscal economy which, though at first blush might appear to be evil, are tolerated in a developing economy, in the interest of long-term development. Deficit financing, for example, is one; treaty shopping, in our view, is another. Despite the sound and fury of the respondents over the so-called "abuse" of "treaty shopping", perhaps, it may have been intended at the time when the Indo-Mauritius DTAC was entered into. Whether it should continue, and, if so, for how long, is a matter which is best left to the discretion of the executive as it is dependent upon several economic and political considerations. This court cannot judge the legality of treaty shopping merely because one section of thought considers it improper. A holistic view has to be taken to adjudge which is perhaps regarded in contemporary thinking as a necessary evil in a developing economy." 9. The Apex Court in the said Judgment further observed that Section 90 is specifically intended to enable and empower the Central Government to issue a no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 98 of the Vodafone International Holdings B.V. (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 Court cited above have clearly upheld the conclusivity of the TRC absent fraud or illegal activities. Nowhere in the impugned ruling the existence of TRC has been denied. In fact in paragraph 2 of the impugned Ruling, the Authority has itself set out the existence of a valid TRC in the name of the Petitioner. Further, except bald allegations, no material has been placed on record to demonstrate or establish that Petitioner was a device to avoid tax or that there was fraud or any illegal activity. There is hardly any discussion in the impugned Ruling on the applicability of the said Circulars No. 682, 789 or the Press Releases by the CBDT/Ministry of Finance discussed above. 46. From the facts on record it cannot be said that the Indian Authorities were not aware of the change or the introduction of the Petitioner as pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B) 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 made reference to Press Release dated 29th August 2016 issued by the CBDT post amendment to Mauritius DTAA which was effective from 1st April 2017. The said Press Release is quoted as under:- "Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes PRESS RELEASE New Delhi, 29th August, 2016. Subject: Notification of Protocol for amendment of the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains, and for the encouragement of mutual trade and investment between India and Mauritius - regarding The Protocol for amendment of the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsparency 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 acquired with effect from 1st April 2017 in a company resident in India viz. from Financial year 2017-18. Investments made before 1st April 2017 have been grandfathered and will not be subject to capital gains taxation in India. 51. The Authority appears to have clearly missed the clear import of this Circular as the entire sale by Petitioner was prior to 1st April, 2017. The arguments of the Revenue with respect to shell company/conduit can only be considered for investments with effect from 1st April 2017 and not case at hand. 52. Therefore, to say that in the JV, Petitioner is a shell company without any tangible employees, space, assets, etc., incorporated only a few days before bidding or that it has no management experts or financial advisors on its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcular, it is incumbent upon the authorities in India to accept the certificates of residence issued by the Mauritian authorities. Circular No. 789 is a statutory circular issued under section 119 of the Act. It is obviously based upon the trust reposed by the Indian authorities in the Mauritian authorities. Once it is accepted that the certificate has been issued by the Mauritian authorities, the validity thereof cannot be questioned by the Indian authorities. This is a convention/treaty entered into between two sovereign States. A refusal to accept the validity of a certificate issued by the contracting States would be contrary to the convention and constitute an erosion of the faith and trust reposed by the contracting States in each other. It is for the Government of India to decide whether or not such a certificate ought to be accepted. Once it is established that it has been issued by the contracting State i.e. Mauritius, a failure to accept the residence certificate issued by the Mauritian authorities would be an indication of breakdown in the faith reposed by the Government of India in the Government of Mauritius and the Mauritian authorities reiterated in and evidenced by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to Article 13(4) of the Tax Treaty or the domestic law, whichever is more beneficial to the assessee. Article 13 of the Tax Treaty prior to its amendment read 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 of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State, 3. Notwithstanding the provisions of paragraph (2) of this article, gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B. However, the tax rate on the gains referred to in paragraph 3A of this Article and arising during the period beginning on 1st April, 2017 and ending on 31st March, 2019 shall not exceed 50% of the tax rate applicable on such gains in the State of residence of the company whose shares are being alienated; I 7[4. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 3A shall be taxable only in the Contracting State of which the alienator is a resident] 5. For the purposes of this article, the term "alienation" means the sale, exchange, transfer, or relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in force in the respective Contracting States. 11. On a reading of Article 13 post amendment, it becomes quite clear that some changes were made to the pre-amended Article 13 by insertion of paragraph 3A and 3B and substitution of paragraph 4 with a new paragraph 4. Paragraph 3A of Article 13 specifically deals with gains from alienation of shares acquired on or after 1st April, 2017 by providing taxing power to the source country. Paragraph 3B allowed gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvest in shares of Citrus India, ipso facto, cannot be a reason to treat the assessee as a conduit company. 13. The CBDT Circular no. 789 dated 13.04.2000, while dealing with the issue of TRC issued by Mauritian Authorities and applicability of the beneficial provisions of India - Mauritius Tax Treaty on the strength of such TRC, states as under: "It is hereby clarified that wherever a certificate of residency is issued by the Mauritian Authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAA accordingly." Thus, as per the aforesaid circular issued by CBDT, wherever a certificate of residency is issued by the Mauritian Tax Authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as the beneficial ownership for applying the provisions of India - Mauritius Tax Treaty. The validity of the aforesaid CBDT Circular came up for consideration before Hon'ble Supreme Court in case of Union of India & Another Vs. Azadi Bachao Andolan (supra). Relevant facts relating to this case are, a Public Interest Litigation (PIL) was filed befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment, which is yet to see the light of the day. In our view, without unreservedly following the binding ratio of the Hon'ble Supreme Court in case of Azadi Bachao Andolan (supra), which is the law of the land under Article 141 of the Constitution of India, the Assessing Officer has allowed his mind to be clouded by extraneous considerations and contingent events to deny the benefit of India - Mauritius Tax Treaty to the assessee, which the assessee is legally entitled to on the strength of the TRC issued by the Mauritian Tax Authorities and as per CBDT Circular No. 789, dated 13.04.2000. In view of the aforesaid, we have no hesitation in holding that the gain derived by the assessee on sale of shares of Citrus India to PayU India is not taxable in India as per pre-amended Article 13(4) of India - Mauritius Tax Treaty. While coming to such conclusion, we have followed the binding ratio of the Hon'ble Supreme Court in case of Azadi Bachao Andolan (supra) and CBDT Circular no. 789, dated 13.04.2022. 15. Having held so, for the sake of completeness, it is necessary to examine, in case, we accept Assessing Officer's reasoning that the assessee is not entitled to claim benefit under In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om any angle, the short-term capital gain arising on sale of shares is not taxable in India. In view of the aforesaid, we delete the addition made by the Assessing Officer. Ground nos. 3 and 4 being consequential and premature, do not require adjudication at this stage. 28. Thus, on a conspectus of ratio laid down in the decisions cited above, the irresistible conclusion one can reach is, since, the capital gain is derived from shares acquired prior to 01.04.2017, they are not taxable in terms with Article 13(4) India Mauritius Tax Treaty. In our view, the Assessing Officer has failed to establish on record that the assessee is a shell/conduit company through proper evidence. Therefore, in our view, assessee remains entitled to treaty benefits. At this stage, we must observe, learned DRP has referred to the LOB clause under Article-27A of the India Mauritius Tax Treaty. In our view, the reference to Article 27A is totally irrelevant as the assessee has not claimed any benefit under Article 13(3B) of India Mauritius Tax Treaty. Even assuming for the sake of argument that Article 27A gets attracted, however, the Department has failed to demonstrate the fulfilment of conditions of sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO must factually verify the assessee's contention by passing a speaking and reasoned order and complete the assessment within the ambit of the law. The Panel hastens to clarify that the AO shall not conduct any fresh inquiry in this regard; the verification shall be made on the basis of documents/submissions available on the assessment records. The ground of objection is disposed of accordingly. 29. As could be seen from the aforesaid observations of learned DRP, apart from referring to the LoB clause under India Mauritius DTAA, the only observation on merits is to the effect that the Assessing Officer needs to factually verify assessee's contention and pass a speaking order. Thus, in sum and substance, without deciding the issue on merits, learned DRP has restored it to the Assessing Officer. On a reading of subsections 5, 6, 7 and 8 of section 144C of the Act as a whole, it is quite clear that learned DRP has no power to set-aside the issue to the Assessing Officer. This is so because, as per the scheme of section 144C, once a direction is issued by learned DRP, as per section 144C(13) of the Act, the Assessing Officer shall have to pass the final assessment order in confo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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