INDIA PROPERTY (MAURITIUS) COMPANY II,MAURITIUS vs. ACIT, CIRCLE INT. TAXATION 2(1)(1), NEW DELHI

1 ITA No. 1020/Del/2023 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “D”: NEW DELHI

BEFORE SHRI G.S. PANNU, HON’BLE VICE PRESIDENT AND SHRI ANUBHAV SHARMA, JUDICIAL MEMBER

ITA No.1020 /DEL/2023 Assessment Year: 2018-19

India Property (Mauritius) Company-II, Vs ACIT, C/o Apex Fund & Corporate Services Circle Int. Tax. 2(1)(1), (Mauritius) Ltd., Lot 15 A3, 1st Floor, New Delhi. Cybercity Ebene, Mauritius. PAN- AABCJ8313K APPELLANT RESPONDENT Assessee represented by Sh. Ajay Vohra, Sr. Adv. Sh. Divyanshu Aggarwal, Adv. Department represented by Sh. Vizay B. Vassanta, CIT(DR) Sh. Vivek Vardhan, Sr. DR Date of hearing 07.06.2024 Date of pronouncement 18.07.2024

O R D E R PER ANUBHAV SHARMA, JM:

The assessee has come up in appeal assailing the assessment order dated

10.02.2023 passed under Section 143(3) read with Section 144C(13) of the

income-tax Act, 1961(hereinafter referred as the “Act”), passed by the Assistant

Commissioner of Income-tax, Circle Int. Tax. 2(1)(1), New Delhi (hereinafter

referred in short as “Ld. AO”) pertaining to the assessment year 2018-19, in

2 ITA No. 1020/Del/2023 pursuance to directions dated 19.01.2023 of learned Dispute Resolution Panel-1,

New Delhi (DRP).

by the AO and approved by the learned DRP, by reproducing the findings recorded

by the DRP while deciding objection no. 1:

“Objection No. 1

The assessee M/S India Property Mauritius Company II, has disclosed long

3 ITA No. 1020/Del/2023 term Capital Gains of Rs. 152,61,71,940/- and claimed the same as exempt under India- Mauritius DTAA in accordance with Article 13(4) of the DTAA

The assessee is a foreign company incorporated in Republic of Mauritius and is a fax resident therein. The assessee has sold shares of M/S ASF Insignia SEZ Pvt Limited, M/S Grand Canyon SEZ Pvt Limited, Kings Canyon SEZ Pvt Limited and Citadel Homes Pvt Limited in FY 2017-13, As stated by the assessee, these shares were bought during FY 2007-08 and 2010-11, By claiming the benefits of Article 13(4) of the DTAA between India and Mauritius, the assessee has claimed the resultant Long Term Capital Gains not liable for taxation

The Assessing Officer has, through the draft assessment order (DAO) examined the fund flow, structure, business operation and other aspects of the company and has held that on the principle of doctrine of substance over firm, principal purpose test has proposed the taxability of capital gains as per source rule of the Income Tax Act read with the relevant provision DTAA and that the assessee is not eligible for treaty benefit under clause 13(4) of the India-Mauritius Treaty. In order to reach this conclusion, the assessing officer in the DAO has discussed the fund flows where it is shown on that the sale consideration of equities on receipt on 12,05.2017 is immediately transferred to JP MORGAN BU on 22.05,2017. The acquisition of shares was also done through other JP MORGAN group companies during the financial year of 2007-08 to financial year of 2010-11. These transactions have been discussed In detail at page 7-12 of the DAO, During the assessment proceedings assessee has also not furnished the KYC documents of the banks through which the above transactions took place, Die assessee company has not incurred any expenses on employee's wage or salary, it has no physical assets like land and building nor pays any rent Further, though assessee have 7 directors, none of them were remunerated during the relevant financial year out of 7 directors, 4 directors are nonresidents and 2 directors, namely Jean-Christophe Ehlinger, Colin James Whittington are executive directors of JP MORGAN Asset Management and the board meetings was being . attended by Ms, Adria. Savarese by teleconference who herself also was an executive director at JP MORGAN asset management corporation. In the DAO at page 31 it is mentioned that "3,23 Vide questionnaire dated 14.02.2022, the assessee was asked to provide the details of investment manager of the company and copy of agreement with the investtnent manager.

4 ITA No. 1020/Del/2023

3.24 In reply, the assessee submitted that it does not maintain any investment manager. The reply of the assessee in this regard is reproduced hereunder:-

“We wish to submit that 1PM. 11 has not engaged any investment manager with respect to it sinvesiment activities in India. The investment1 divestment decisions 1activities are taken by the board of directors of 1PM II.”

3.25 However, Audited financials received from Mauritius Authorities as per Exchange of Information provisions of the bilateral treaty revealed that that US 'based entity fP Morgan Investment Management Inc is Investment advisor for the fund and also JP Morgan India Pvt Limited is the Sub- adviser to the adviser. The relevant extract of the audited financials wherein the role of advisor and sub-advisor is described are reproduced hereunder:-”

The AO has also found that the Mauritius based directors,- do not have any effective say in. running the company. The nonresident directors and the adviser, M/S JP MORGAN Investment Management (JPMIM) and sub- adviser, JP MORGAN INDIA PVT LIMITED both, based outside Mauritius are running the show. The effective control and management of the assessee company therefore rests outside of Mauritius.

The assessee has argued that it holds a valid IRC and further, as per Circular No.789 dated 13 April 2000, Supreme Court in the case of UOI v. Azadi Bachao Andolan (2003) 263 ITR 706 and various other judicial precedents which have held that Tax Treaty benefits should be granted on the basis of tax: residency certificate ("IRC") issued by Mauritius Revenue Authorities. However, subsequent Judicial Precedents and decisions have held that TRC is not conclusive in deciding tax residency and granting of benefit under DTAA. In the case of Vodafone BV it was held that " 99. It is to be noted that LOB and look through provisions cannot be read into a tax treaty but the question may arise as to whether the TRC is so conclusive that the Tax Department y-y cannot pierce the veil and look at the substance of the transaction. DTAA and Circular No. 789 dated 13,04.2000, in our view, if would not preclude the Income Tax Department from denying the tax treaty benefits, fit is

5 ITA No. 1020/Del/2023 established, on facts, that the Mauritian Company has been interposed as the owner of the shares in India, at the time of disposal of shares to a third party, solely with a view to avoid tax without any commercial substance. Tax Department, in such a situation, notwithstanding the fact that the Mauritian company is required to. be treated as a 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 Income Tax Department to discard the device and take into consideration the real transaction between the parties, and the transaction maybe 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.” The above principles have been reiterated in various case laws, judicial precedents and rulings like TIGER GLOBAL INTERNATIONAL HOLDINGS AB MAURITIUS (2018) 402 ITR 311 (AAR). Further in the Apex Court decision in the GVK Industries case (332) ITR 13 it was held that the income of recipient is chargeable in the country where the source of payment is located.

Therefore, the DRP doesn’t find any infirmity in the DAO and the assessee objection on the above is rejected. The other objections mentioned in 1.2 above is general in nature and doesn’t call for any specific direction from the DRP.”

6 ITA No. 1020/Del/2023 1. The Learned AO has erred in law by passing the final assessment order under section 143(3) read with section 144C(13) of the Act on 10 February 2023, which is beyond the time –limit specified under provisions of section 153 of the Act i.e. 30 September 2021 as extended vide the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 and notifications issued there under.

Learned Sr. counsel has primarily relied on Circular No. 789 of the CBDT 6.

and landmark judgment of the Hon’ble Supreme Court In the case of UOI v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) and judgment of the Hon’ble Delhi High Court in the case of Blackstone Capital Partners (Singapore) VI FDI

Three Pte. Ltd. v. ACIT (2023) 146 taxmann.com 569 (Del.); and of the Delhi

7 ITA No. 1020/Del/2023 Tribunal in MIH India (Mauritius) Ltd. Vs. ACIT [ITA no. 1023/Del/2022], to

submit that the tax residency certificate (TRC) was sufficient evidence for the

purpose of claiming Treaty benefits and the Revenue is under obligation to accept

the status of residence as well as the beneficial ownership for the treaty benefits.

He, therefore, submitted that the capital gains earned during the year by the

appellant company were not taxable in India in accordance with beneficial

provisions of Article 13(4) of IM Treaty.

6.1 As with regard to the allegation of AO that appellant company has no

commercial rationale for set up in Mauritius other than to take advantage of IM

Treaty and that the appellant is a mere conduit entity without any economic

substance, learned Sr. Counsel submitted that assessee company was incorporated

in the year 2006 and is an Investment Fund, held 100% by India Property

Mauritius Company I, (IPM-I) which was formerly known as JP Morgan Indian

Property Mauritius Company I. He pointed out that IPM-I pools capital from

investors based in multiple jurisdictions through series of fund investor vehicles/

feeder funds and invests in appellant company by way of equity infusion. The

Appellant Company, in accordance with its investment objectives, made the

impugned investments in Indian entities, being Grandeur Homes Private Limited

(Demerged entity: Citadel Homes Private Limited) and ASF Insignia SEZ Pvt Ltd

(formerly known as Canton Buildwell Private Limited; on demerger additional shares

8 ITA No. 1020/Del/2023 of Kings Canyon SEZ Private Limited and Grand Canyon SEZ Private Limited

received), during the period FY 2007-08 to FY 2011-12, on various dates. These

investments were made through proper banking channels, with appropriate Know

Your Customer (‘KYC') checks in place and in accordance with the Foreign Direct

Investment Regulations and Foreign Exchange Management Act, 1999. These

investments were held as capital assets in its own right and the Appellant was the

sole legal and beneficial owner of the shares. Hence, the shares held by the

Appellant were in its own name - legally and beneficially. Further, the economic

substance of the transactions was well established. He submitted that after holding

these investments for a period of more than 5 years, the impugned shares were

transferred and thereby capital gains were earned during the year under consideration.

6.2 It was also submitted that appellant has held TRC consistently over the years,

since its incorporation and the Mauritius Revenue Authorities (MRA) have laid certain

stringent conditions/ parameters, which were fulfilled by the assessee company to

enable it to obtain TRC. It was thus submitted that the assessee cannot be called as fly

by night operator and entering into preordained transaction created for tax avoidance

purposes.

9 ITA No. 1020/Del/2023 6.3 Learned Sr. Counsel submitted that AO has fallen in error in alleging that

majority of directors of appellant company were based outside Mauritius, therefore,

effective control and management lie outside Mauritius. It was submitted that details of

directors are provided to the AO mentioning that out of four directors two are Mauritius

resident directors and two were non-resident of Mauritius and there were three

alternative directors who acted as substitute to these directors. It was submitted that all

key management and commercial decisions including investment and disinvestments

were taken by Board of Directors holding meetings held in Mauritius.

6.4 Learned Sr. Counsel submitted that learned AO has given too much stress on the

fact that there were no operational expenditure including non-payment of Director’s

remuneration. Learned Sr. Counsel submitted that limitation of benefit clause (LOB)

under Article 27A of the IM Treaty, which, inter alia, prescribes expenditure threshold

for the purpose of claiming IM Treaty benefits are applicable only with respect to capital gains derived from sale of investment acquired after 1st April 2017 and are not applicable on grandfathered investments made before 1st April 2017. He has stressed on

the fact that as per the Financial Services Act, 2007 (Mauritius), corporations holding a

GBL-I License are required to be administered at all the times by a management

company holding Global Business License-II (‘GBL-II License’). Accordingly, the

Appellant had appointed an administrator for various administrative services, for which

10 ITA No. 1020/Del/2023 professional fees was paid by the Appellant. Further, considering that the Appellant

is an investment holding company, where decisions with respect to investment/

divestment are taken by the board of directors and the day-to-day administration

activities are outsourced to external service provider(s), the Appellant was not

required to have any employees or incur fixed expenditure such as rental expenses,

electricity expenses, property tax etc..

6.5 Next with regard to observation of AO that appellant did not provide the

required KYC forms/documents to verify the actual operator/manager of the funds of

the company and as such the appellant concealed the actual operator/manager of its

bank account maintained in Mauritius, the learned AR submitted that the accounts were

opened around 15 years ago and those documents as submitted to bank were not readily

available.

6.6 Learned Sr. counsel submitted that learned AO has fallen in error in alleging that

assessee is a conduit on the basis that consideration received from liquidation of assets

was immediately transferred in the form of share buyback and dividend. He submitted

that appellant company had made investment out of funds invested by the parent entity

IPM-I and were kept invested for a substantial period, ranging from five to ten years.

Thus, there was justification to transfer the consideration back in the form of dividend

and buy back of shares to reap benefit out of investment made in India. It was thus

11 ITA No. 1020/Del/2023 submitted that it was a commercial and business decision which could not be

questioned by the Revenue authorities.

6.7 Learned Sr. Counsel has pointed out that certain employees belonging to JP

Morgan Group attended the board meetings by teleconference, as they were investment

advisers engaged by IPM-I. In this context minutes of Board Meetings made available

on the paper book were relied to submit that these employees had only attended the

meeting but the decisions were taken by the Board of Directors. He thus contended that

AO made erroneous conclusion that decisions were taken by employees of J.P Morgan

Group.

6.8 It was submitted by learned Sr. Counsel that AO has fallen in error in relying

upon the Notes to Financial Statements to allege that appellant had entered into

agreement with the Investment Advisors and sub-advisers. It was submitted that Notes

to Financial Statements merely describe the funds structure.

6.9 Lastly Learned Sr. counsel submitted that AO has relied judicial decisions which

were distinguishable on facts.

the same is consequential in nature. At the same time it was submitted that amounts

received by appellant company in respect of transfer of shares were subject to TDS @

0.1% u/s 195 of the Act, in accordance with the lower tax deduction certificates (LDC)

12 ITA No. 1020/Del/2023 obtained from Indian Tax Authorities. Therefore, no advance tax was payable. It was

submitted that otherwise interest u/s 234B is applicable in case of short payment of

advance tax. However, in the case of non-resident, the entire amount of tax applicable

on a particular transaction is deductible u/s 195 of the Act. He relied on the judgment of

Hon’ble Supreme Court in the case of Director of Income Tax Vs. Mitsubishi

Corporation [2021] 130 taxmann.com 276 (SC); and the Tribunal’s decision in the

case of Hitachi High Technologies Singapore Pte Ltd. v. DCIT [2020] 113

taxmann.com 327 (Delhi-Trib), to support aforsaid submissions.

appellant has a case that the embargo created vide proviso to section 209(1)(d) is not

applicable in the present case. The said proviso is applicable if the person responsible

for deducting tax has paid or credited such income without deducting the said tax. In the

present case, since the taxes were deducted under section 195 of the Act read with section

197 of the Act, therefore the proviso is not applicable in the present case. Judgment of

Delhi Bench of Tribunal in BG International Limited v. DCIT, DDIT/ADIT

(International Taxation) (ITA No. 31/DDN/2020) (31.12.2020) (Delhi-Trib.) was

relied and it submitted that same was further followed in the case of Amadeus IT

Group SA v. DCIT (ITA No.2007/Del./2017) (29.01.2021) (Delhi-Trib.)

under appeal, is time barred and hence liable to be quashed, being bad in law and void

13 ITA No. 1020/Del/2023 ab initio. Ld. Sr. Counsel submitted that as per section 153 of the Act, read with the

Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 and

notifications issued there under, the final assessment order was liable to be passed by 08

April 2022. In this regard, reliance was placed upon the decision of Hon’ble Madras High

Court in the case of CIT v. Roca Bathroom Products (P.) Ltd. ([2022] 140

taxmann.com 304) which was further relied upon in the decision of Delhi Bench of

Tribunal in the case of Super Brands Ltd. (UK) v. ADIT ([2023] 147

taxmann.com 323 (Delhi - Trib.) and Jodhpur Bench in the case of Hindustan Zinc

Limited v. National Faceless Assessment Centre, Delhi (ITA Nos. 127 &

128/JODHI2022) (Jodhpur- Trib.) Ld. Sr. Counsel also pointed out that the Hon’ble

Bombay High Court in its recent decision in the case of Shelf Drilling Ron Tappmeyer

Limited v. ACIT (Writ Petition No. 2340 of 2021) (Bombay High Court)

(04.08.2023) has re-enunciated the principle that the limit prescribed under section 153 of

the Act prevails over and above the time limit prescribed under section 144C of the Act and

the entire procedure has to be commenced and concluded within the twelve months period

provided under Section 153 of the Act.

investments were made long back and apart from what has been disinvested to earn the

capital gain assessee still holds a good investment. Learned AR in that regard has

indicted by filing details of holdings and divestments made by the appellant showing

14 ITA No. 1020/Del/2023

that divestments were made prior to FY 2017-18 on which no such capital gain was

alleged by the Revenue and the assessee had a holding on 31.12.2022. It will be

appropriate to reproduce herein below the details as provided on page 1 of the Paper

book.

Details of investment held as on 31 December 2022 Particulars Investee Company Date of Acquisition Cost of shares acquired (USD) Investment held as Suadela Constructions 12-Nov-08 3,66,84,082 on 31 Dec. 2022 Private Limited (Hiranandani/Shoden) Core Hotels Ventures 31.Oct-08 2,47,22,069 Private Limited (Oberoi) Viceroy Bangalore 19-Jul-11 3,44,73,003 Hotels Private Limited (Renaissance) Amrapali Zodiac 24-Sep-10 47,77,798 Developers Private Limited Total 10,06,56,952

11.1 The learned AO seems to have proceeded to question the TRC of the assessee on

the basis of Hon’ble Bombay High Court judgment in the case of Vodafone BV, as he

has relied on para 99 of the said judgment on page 48 and para 8.2 of his order and the

same is reproduced herein below for further convenient reference in the discussion.

"99. It is to be noted that LOB and look through provisions cannot be read into a tax treaty but the question may arise as to whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at the substance of the transaction. DTAA and Circular No 789 dated 13.04.2000, in our view, it would not preclude the Income Tax Department from denying the tax treaty benefits, if it is established, on facts, that the Mauritian Company has been interposed as the owner of the shares in India, at the time of disposal of shares to a third party, solely with a view to avoid tax

15 ITA No. 1020/Del/2023 without any commercial substance. Tax Department, in such a situation, notwithstanding the fact that the Mauritian company is required to be treated as a 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 Income Tax Department to discard the device and take into consideration the real transaction between the parties, and the transaction maybe 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."

11.2 As we appreciate this paragraph of Hon’ble Bombay High Court judgment in

Vodafone BV we find that the Hon’ble High Court had made a conscious distinction of

the companies established for investments and has been interposed as the owner of the

shares in India ‘at the time of disposal of shares to a third party’, solely with a view to

avoid tax without any commercial substance. Then what comes up is that here in the

case in hand present assessee company was incorporated in 2006 as an investment fund

and held by company formerly known as JP Morgan India Property Mauritius

Company I, which was also incorporated in Mauritius. Being investment fund, the

appellant company pools capital from investors from countries through series of funds

investor vehicles / feeder funds creating a master fund which is used for investment into

various entities in India and particularly in regard to companies for which alleged gains

has been attributed the companies were joint ventures or real estate. The investment in

four companies allegedly giving rise to the capital gains were made in A.Y. 2007-08 to

16 ITA No. 1020/Del/2023 2011-12. There is no allegation of the AO on the basis of any evidence that any

investment flowing from India was received for creating the present appellant

company. It is coming up that the investments are held for over five years before they

are transferred and as observed earlier, appellant was earlier also making investment

and divestments and still holds investment in various other companies. Certainly the

assessee was holding the investment in its own name beneficially and legally. It cannot

be called as a fly by night operator created merely for tax avoidance purposes.

11.3 To question the genuineness of the activities of assessee on the basis of the fact

that Directors were not residents of Mauritius or absence of operational expenditures

and Directors’ remunerations, when analyzed in the light of aforesaid facts as to how

the assessee company had come into existence as a subsidiary company of IPM-I, the

assessee company has validly discharged its burden by establishing that the external

service provider has been outsourced, the day to day administrative activities of

assessee company as per the law of land and payments were being made for those

services. It is the wisdom and discretion of company as to how the day to day activities

are managed and without establishing that on sham basis administrative activities are

being shown, Revenue cannot question genuineness of the business operations of an

assessee.

11.4 Learned AO has attributed conduit status to the assessee alleging that the

investment funds and the consideration received from liquidation were immediately

17 ITA No. 1020/Del/2023 transferred to the assessee before investment and the assessee immediately transferred

the consideration in the form of share buyback and dividend. When assessee is

incorporated as a investment fund, then such model of transaction is obvious. What is

material is to see that for how long the investments were held and whether the

investments had commercial expediencies. No presumption of conduit status merely on

the basis of transfer of the consideration immediately after divestments can be drawn

because ultimately the funds under investments were to be returned with whatever

gains made. The AO himself has reproduced in the order, the resolutions of the

assessee company indicating as to why the divestments are being made and how

the proceeds of divestments shall be accounted back to the investors. The

commercial rationale for the existence of the assessee company in Mauritius is thus

not any scheme of tax avoidance but a business model to attract funds from

different jurisdictions for investment in India. As emphasized by Hon’ble Supreme

Court in the case of Azadi Bachao Aandolan when the whole endeavor of the

Government of India is to procure investment in joint venture and infrastructure

projects for the benefit of economy then attributing a malice to investment funds

like the assessee is not justified. In the light of aforesaid we are of the firm belief

that except for suspicion there was no evidence with learned AO to rebut the

statutory evidence of presumption of genuineness of business activity of assessee

18 ITA No. 1020/Del/2023

company on basis of TRC held by the assessee and consequently we are inclined

to allow these two grounds no. 2 & 3 in favour of the assessee.

has successfully established the grounds on merits the other grounds are merely of

academic in nature as no addition as made is sustained, these grounds require no

adjudication and are left open.

assessment order is set aside with consequential effects.

Order pronounced in open court on 18.07.2024.

Sd/- Sd/- (G.S. PANNU) (ANUBHAV SHARMA) VICE PRESIDENT JUDICIAL MEMBER

*MP* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI Draft dictated 13.06.2024 Draft placed before author 13.06.2024 Approved Draft comes to the Sr. PS/PS Order signed and pronounced on File comes to P.S. File sent to the Bench Clerk Date on which file goes to the AR Date on which file goes to the Head Clerk Date of dispatch of Order Date of uploading on the website

19 ITA No. 1020/Del/2023