COMSTAR MAURITIUS LIMITED,MUMBAI vs. CIT (IT) MUMBAI-2, MUMBAI

ITA No. 1529/Mum/2023 is filed by Comstar Mauritius Ltd (assessee / appellant) for A.Y. 2018-19 against the revisionary order passed by the Commissioner of Income Tax (IT), Mumbai-2 (the learned CIT) dated 30th March, 2023, under Section 263 of the Income-tax Act, 1961 (the Act), wherein it has been held that assessment order passed under Section 143(3) of the Income-tax Act, 1961 (the Act) on 1st March, 2021, by the Asst. Commissioner of Income Tax, International Taxation, Circle 2(1)(1), Mumbai (the learned AO) is held to be erroneous in so far as it is prejudicial to the interest of the Revenue and assessment order was set aside directing the learned Assessing Officer to make a fresh assessment.

The assessee is aggrieved and has raised following grounds of appeal:-

Facts noted from the orders of the lower authorities shows that assessee is a non-resident foreign company based on Mauritius and is in the business of investment in securities. Assessee filed its return of income on 11 October 2018, declaring nil income. The return was picked up for scrutiny by issuing notice under Section 143(2) of the Act on 23 September 2019. The learned Assessing Officer noted that during the year assessee has sold Indian securities and earned capital gain on the same. Its income consists of gain on sale of such securities,

The learned CIT examined the records and noticed that assessee has earned long term capital gain of ₹724,17,60,629/- on sale consideration of ₹790,86,38,427/- on sale of 64441564 equity shares of face value of Rs 10 /- each of Comstar Automotive Technologies Pvt Ltd [ an Indian Company] [ being 99.87 % shareholding in that Indian company] acquired in F Y 2007-08 sold to Singapore VII TOPCO III PTE Limited [ A company incorporated under the laws of Singapore] claimed as exempt as per Article 13 of Double Taxation Avoidance Agreement between India and Mauritius. The CIT perused [1] the questionnaire issued by the learned Assessing Officer and the submissions filed by the assessee, [2] return of income, computation of total income and the assessment records. Based on this examination, a show cause notice was issued under Section 263 of the Act on 25th January, 2023, holding that the learned Assessing Officer has not conducted any enquiry to ascertain whether the capital gain on sale of share claimed as exempt as per Article 13 was allowable or not in pursuance to note no.4 of the financial statements of the assessee company wherein it is mentioned that capital gain arising on disposal of shares by the Mauritius Company acquired on or after 1st April, 2017 and disposed off before 1st April, 2019, would be taxed in India at the rate of 50% of the applicable rate if the affairs of the Mauritian Company are not arranged with the primary purpose of taking benefits of the lower tax rate. Further, the Mauritius Company should pass main purpose test and a bonafide business test and it is not a Shell/ conduit company. The gain arising on shares acquired on or after 1st April, 2017 and transferred on or after April, 2019, will be taxed fully in India as per Indian tax laws. He further noted that there is nothing to show that the learned Assessing Officer has conducted any enquiry to ascertain whether the assessee passes main purpose test or bonafide business test or whether it is a shell/ conduit company or whether the affairs of the company have been arranged with the primary purpose of taking benefit of the lower tax rate. He further noted that

The explanation 2 was invoked and it was stated no enquiries were made by the learned Assessing Officer during the course of assessment proceedings and the learned Assessing Officer has failed to verify and examined the claim of the assessee accepting the long term capital gain as exempt and therefore, the assessment order passed is erroneous as well as prejudicial to the interest of the Revenue.

The assessee submitted a reply on 23 February 2023, claiming that

It was claimed that notice under Section 143(2) of the Act was issued for the reason that tax was deducted at source on sale of shares by the purchaser, which has resulted in refund. In the return of income, assessee claimed exemption. The learned Assessing Officer vide letter dated 22nd February, 2021, questioned assessee about the exemption benefit claimed as per Double Taxation Avoidance Agreement, which was replied by the assessee on 25th February, 2021. It was claimed that the amendment in Double Taxation Avoidance Agreement does not apply as the shares were sold are purchase before 1 April, 2017. Thus, during the course of assessment proceedings, the claim of the assessee was completely verified and hence, the show cause notice under Section 263 of the Act is not proper. Assessee also stated that the main purpose test, bonafide business test, shell/conduit companies are the terms emerging from the amendment to the DTAA on or after 2017 onwards. Assessee also

Thus, assessee concluded that the shares were purchased before 1st April, 2017 by resident of Mauritius by producing the tax residency certificate and assessee is entitled to exemption of long term capital gain in accordance with the Provisions of Double Taxation Avoidance Agreement. It further stated that the assessee has claimed exemption in accordance with the unamended Article 13(4) and therefore, the Article 27A is not applicable. Further, the learned Assessing Officer has carried out the necessary enquiries, which could have been made, and therefore, the assessment order granting exemption to the assessee on long-term capital gain according to Article 13 is neither erroneous nor prejudicial to the interest of the Revenue.

The learned CIT after considering the explanation of the assessee held that

The assessee is aggrieved with the same and is in appeal before us.

The learned Authorized Representative briefly stated the facts referring to his paper book containing 416 pages. He referred to the copy of the notice dated 20th February, 2021, issued by the learned Assessing Officer, which is placed at paper book page no.30 to 31. He submitted that vide item no.1, the learned Assessing Officer asked the working of the long term capital gain and by item no.2 asked for the details of relevant benefits of double taxation avoidance

Even otherwise, he submitted that the order under Section 263 of the Act passed by the learned CIT does not says that in the given circumstances what are those relevant enquiries that the learned Assessing Officer should have made but has failed to made. He therefore submitted that the revisionary order passed by the learned CIT (A) is not sustainable.

The learned Departmental Representative supported the order of the learned CIT and stated that the learned Assessing Officer has not applied his mind to the claim of the assessee for the exemption as per Article 3 of Double Taxation Avoidance Agreement but has accepted whatever has been submitted by the assessee would conducting in independent enquires. He therefore, submitted that the order of the learned CIT under Section 263 of the Act is correct and valid.

The learned Authorized Representative to support his contention further relied upon the decision of the Hon'ble Bombay High Court in case of bid services division Mauritius Limited Vs. Authority for Advance ruling dated 8th December, 2023 (2023) 148 taxmann.com 215 (Bom), wherein it is categorically held that wherein assessee being Mauritius company sold its shares and claimed the same as exempt in view of Article 13(4) and Article 27A of Double Taxation Avoidance Agreement which are applicable with effect from 1st April, 2017, does not apply where the investment as well as sale was made prior to 1st April, 2017 and the capital gain earned by the assessee could not taxable in India. He submitted that though in that case, the sale was also prior to 1st April, 2017, and acquisition also but the grandfathering provisions will apply if shares are acquired prior to 1st April, 2017, even if this will sold after 1st April, 2017. It was further stated that the issue is thus squarely covered in favour of the assessee even otherwise.

He submitted that the learned Assessing Officer has taken one possible view about the non taxability of such shares in India based on several circulars and

We have carefully considered the rival contentions and perused the orders of assessing authority as well as revisionary authority. The brief fact shows that assessee is a company incorporated in Mauritius by CO no.68664-C1/ GBL-1 on 8th February, 2007, as per certificate of incorporation issued under Section 24 of the Companies Act, 2001 of Republic of Mauritius the original name of the company was Vistone International Holding (Mauritius Limited), which was changed by another certificate as per GBL license 1 to Comstar Mauritius Limited. The assessee was holding category 1 Global Business License pursuant to Section 72(6) of the Financial Services act, with effect from 8th February, 2007. The assessee was also issued tax residency certificate from 28th May, 2016 to 27th May, 2017 by certificate dated 29th August, 2016 and further from 28th May, 2017 to 27th May, 2018 by certificate dated 22nd May, 2017.

During the financial year 2007-08, the assessee has acquired 8,59,22,085/- equity shares of ₹10 each for consideration of US $ 2,03,98,342/- representing 99.9% stake in a Indian company namely Comstar Automative Technology Pvt. Ltd. During the same year Indian company has bought back 2,14,80,521/- equity shares of ₹ 10 each at a price of ₹20 per share at a total consideration of US $ 1,08,59,702/- resulting into gain of US $ 57,60,117/- on such buy back. Thus, Assessee company was left with 6,44,41,564 equity shares representing 99.9% stake in the Indian entity, which has the object of manufacture and sale of automotive components. These shares were sold by the assessee by entering into share purchase agreement dated 1st January, 2018, to Singapore VII TOPCO (III) Pte Ltd. a company incorporated under the laws of Singapore. The assessee has categorically stated in the agreement that assessee is the legally and beneficial owner of the above share. It was also stated that assessee is owned as subsidiary of ComstarBVI . Sale consideration was received of ₹790,86,33,427/- on which capital gain was worked out of ₹724,17,60,629/-. Based on the above transaction assessee filed its return of income on 11th October, 2018 at Rs nil claiming refund of tax deduction at source of ₹71,37,90,865/-. This has arisen because of the tax deduction made by the buyer under Section 195 of the

The assessee replied by letter dated 25th February, 2021, submitting all the details and explaining the transaction along with all the necessary details asked for. Justifying the claim for exemption under Article 30, the assessee specifically stated that if the shares are acquired prior to 1st April, 2017, then amended double taxation avoidance agreement as per protocol dated 10th August, 2016 does not apply. The assessee also explained that the shares were acquired in 2007 and therefore, Article 3A and 3B does not apply. The assessee also referred to Circular no.682 stating that the person resident of the Mauritius deriving capital gain on sale of shares of Indian companies will be taxable only in Mauritius and does not have liability for taxation in India. Circular no.789 dated 13th April, 2000, was also put to the attention of the learned Assessing Officer to show that wherever tax residency certificate is issued shall constitute a sufficient evidence for status of residency as well as beneficial ownership for applying the Double Taxation Avoidance Agreement . Assessee also placed reliance on the decision of UOI v. Azadi Bachao Andolan (2003) 263 ITR 706 and also relied up on several other judicial precedence. Regarding copy of the balance sheet and profit and loss account of the buyer of the shares assessee gave the brief background of the buyer that it is part of the Black stone group. The assessee also submitted the valuation report of Comstar Automotive Technologies Private Limited, the value of equity shares of ₹ 10 each was determined at ₹152.76 per share. The assessee also submitted on 1st March, 2021, the details of the shareholding of the company, brief description of business activities carried out by the assessee company, details of the directors of the company and details of bank account of the assessee company. Based on

In the result, the appeal of the assessee is allowed.