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Income Tax Appellate Tribunal, DELHI BENCH “D”, DELHI
ORDER
PER VIKAS AWASTHY, JM:
This appeal by the assessee is directed against assessment order dated 31.01.2025 passed u/s. 147 r.w.s 144C(13) of the Income Tax Act,1961(hereinafter referred to as ‘the Act’), for assessment year 2018-19.
Shri Dhanesh Bafna, appearing on behalf of the assessee submits that the assessee is a tax resident of Mauritius. The assesee is an Investment Holding Company. The assessee has obtained Global Business License from the Financial Services Commission Mauritius to carry out investment activities. During the period relevant to assessment year under appeal, the assessee has transferred share of only one Indian Company i.e. BPTP Ltd. (unlisted shares) for a consideration of Rs.129,86,14,415/-. The said transaction resulted in Long Term Capital Loss of Rs.51,87,87,443/-. The said loss was duly reported by the assessee in its return of income for AY 2018-19. The Assessing Officer (AO) in Draft Assessment Order disagreed with the applicability of first proviso to section 48 of the Act and held that the assessee is liable to tax as per the provisions of section 112(1)(c)(ii) of the Act. The AO also denied Treaty benefit on Long Term Capital Loss determined by the assessee. The ld. AR submits that the issue raised in present appeal has already been considered by the Tribunal in assessee’s own in AY 2016-17. The assessee had sold first trench of the securities in the year 2016 i.e. relevant to AY 2016-17. The AO disallowed assessee’s claim for the similar reasons, the assessee carried the issue in appeal before the Tribunal in ITA No.382/Del/2023. The Tribunal vide order dated 21.11.2023 decided the issue in favour of the assessee. The ld. AR referring to the draft Assessment Order submitted that the Tribunal order was brought to the notice of AO during assessment proceedings. The AO could not distinguished findings of the Tribunal on merits but refused to follow Tribunal order for the reason that the Department has not accepted the order of Tribunal and is in the process of filing appeal before the Hon’ble High Court.
The ld. AR pointed that the DRP has observed in its directions dated 10.12.2024 that the grounds of objection and the submissions of the assessee in the impugned assessment year are identical to AY 2016-17. The ld. AR of the assessee thus prayed for deleting addition and granting benefit of Article 13 of India-Mauritius DTAA.
The ld. AR made statement at Bar that he is not pressing ground no. 2 of appeal challenging validity of reassessment proceedings. The ld. AR further submits that if ground no. 5 of appeal is allowed, the other grounds of appeal
would become academic.
5. Per contra, Shri M.S Nethrapal representing the department vehemently defended the impugned order. The ld. DR submits that the assessee is merely a paper company and has been created with sole purpose of evading tax. The ld. DR vehemently placed reliance on para 6.4.2 of DRP directions, the same is reproduced as under:- “6.4.2 However, reiterating the direction of DRP in the A.Y 2016-17, the Panel further observes that the Hon'ble ITAT while adjudicating on the issue for AY 2016-17 has merely relied on the valid TRC held by the assessee and held that since the assessee had furnished all material evidences to establish its residential status, bank statements reflecting details of investment made in foreign currency, Foreign Inward Remittance Certificate (FIRC) and the AO and the DRP after making vague allegations regarding the status of the directors and structure of the company have held that the assessee is a mere paper company and is not entitled to treaty benefits. In this regard, the Panel seeks to buttress the findings and the arguments of the AO to establish that what Hon'ble ITAT had observed was only on the basis of the apparent evidence but the Hon'ble ITAT did not go beyond the facade that was created which the Panel now seeks to unveil and establish that the assessee company in Mauritius was a conduit entity on account of following reasons: • On examining the statement of profit and loss account of the assessee for the year ending 1st December 2016, it was observed that only expenses which were claimed by the assessee were on account of legal and consulting fees, professional fees, audit fees, license fees, administration and miscellaneous services etc and no other expenses for day to day running of the office viz. electricity, water, telephones expenses, transportation, consumables etc. were claimed. Further, there was no land, buildings were owned by the company and no expenses claimed towards rental etc. Further, total expenses amounted to 5.6% of the total income reported in the P&L account by the assessee which is a very negligible amount for the company having income of 6,485,866 USD. Needless to mention that it has been laid down by various courts that for an entity to constitute a proper and genuine business concern, the expenses claimed are an important parameter to establish that the entity has a genuine business activity which is conspicuously missing in the case of the assessee. Thus, this clearly proves that the assessee company is a mere paper/sham entity incorporated merely for the purpose of obtaining Mauritius tax residency and consequential relief under India Mauritius DTAA. • Further, it is also seen that the assessee company is not having any employees and its salaries and wages cost is NIL. Further, though the company has Directors in Mauritius but no Directors remuneration has been paid by the company. This is also circumstantial evidence to prove that the company was basically a sham company. • The Panel also observed that the assessee company's parent entity, CPI Capital Partners Asia Pacific LP, is a company based in Cayman Island. The principal purpose behind incorporation of the company is to act as a facade on behalf of its parent company in Cayman Islands. Had the parent entity in Cayman Island directly made investment in India, it would not have been eligible for tax exemption as available under India Mauritius DTAA.”
We have heard the submissions made by rival sides and have examined the orders of authorities below. The solitary issue raised by the ld.AR of the assessee before us is with respect to taxability of Long Term Capital Gains/Loss on sale of shares by the assessee. It has been contended before us that the assessee has sold shares of the same Indian company in the year 2016 i.e. relevant to AY 2016- 17 and has suffered Long Term Capital Loss. The claim of the assessee was rejected by the AO for the reason recorded by the AO and the DRP in the impugned assessment year. The DRP has also recorded the fact that the legal and factual matrix in AY 2016-17 and AY 2018-19 is the same. The Coordinate Bench after examining facts of the case in AY 2016-17 decided assessee’s claim of exemption under Article 13(4) of India-Mauritius DTAA as under:-
“13. We have given a thoughtful consideration to the rival contentions and perused the materials on record. We have also applied our mind to the decisions relied upon by both sides. In our view, the core issue arising for consideration is taxability of capital gain on sale of shares under the treaty provisions. Therefore, at the very outset, we will proceed to address the issue from that perspective.
Undisputedly, the 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. It is a fact on record that the assessee is in existence since January, 2006 and has been carrying on business activities. In terms with its objects, the assessee has invested in shares of various Indian companies through Foreign Direct Investment (FDI) route. For the year under consideration, the assessee had sold shares of four Indian companies, including the shares of Noida Cyber Park Pvt. Ltd. Before the Assessing Officer, the assessee had claimed exemption on capital gain arising on sale of shares by taking shelter under Article 13(4) of India – Mauritius tax treaty. However, both the Assessing Officer and learned DRP have rejected assessee’s claim by holding that assessee being a mere paper company is not entitled to treaty benefits.
In our view, the 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 Assessing Officer, 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 (supra). In a recent decision of Hon’ble Jurisdictional High Court in case of Blackstone Capital Partners (Singapore) VI FDI Three PTE. Ltd. (supra), it has been held that once the assessee holds a valid TRC, the Departmental Authorities cannot go behind it to question residential status. Though, the Assessing Officer referred to certain observations of the Hon’ble Supreme Court in case of Vodafone International Holdings B.V. Vs. Union of India [2012] 17 taxmann.com 202 (SC), however, no material has been brought on record to establish that there is round-tripping of money or any other illegal activities. Though, the Revenue has authority to dispute the residential status of the assessee merely on the strength of TRC, however, it is incumbent upon the Revenue to make proper inquiry and to establish the fact that the party claiming benefit and the strength of the TRC is a shell/conduit company.
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.
Pertinently, there is nothing on record to suggest that the departmental authorities are disputing the fact that the assesse had made investment in the shares giving rise to the capital gain prior to 07.04.2017. That being the established factual position, assessee will certainly be entitled to the benefit provided under Article 13(4) of the tax treaty. Interestingly, though, the Assessing Officer 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 of Rs.18,86,42,123/- 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, in the aforesaid view of the matter, 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. Ground no. 4 is allowed.” [Emphasized by us]
Since, the issue has been already considered and decided by the Coordinate Bench in assessee’s own case in preceding assessment year and no material is placed before us to controvert findings of the Tribunal, we see no reason to take a different view. The addition made by AO is thus, directed to be deleted for parity of reasons. Hence, the assessee succeeds on ground no. 5 of appeal.
Since, the assessee gets relief on primary ground of appeal
raised as ground No. 5, the grounds of appeal No. 3, 4, 6 and 7 have become academic.
9. The assessee has not pressed ground no. 2 of appeal, hence, the same is dismissed.
10. The assessee in ground no. 8 of appeal has assailed levy of interest u/s.234B of the Act. Charging of interest under said section is mandatory and consequential, hence, ground no 8 of appeal is dismissed.
11. In ground no. 9 of appeal, the assessee has assailed initiation of penalty proceedings u/s.270A of the Act. Challenge to penalty proceedings at this stage is premature, hence, ground no. 9 of appeal is dismissed.