CPI INDIA I LIMITED,MUMBAI vs. ACIT, INT.TAX. CIRCLE-1(2)(1), DELHI
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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SHRI G.S. PANNU, VICE- & SHRI SAKTIJIT DEY, VICE-
IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘D’ NEW DELHI
BEFORE SHRI G.S. PANNU, VICE-PRESIDENT AND SHRI SAKTIJIT DEY, VICE-PRESIDENT
ITA No.382/Del/2023 Assessment Year: 2016-17 . CPI India Ltd., Vs. ACIT, C/o- Vasa Chauhan and International Taxation, Associates Off. No. 41, Circle -1(2)1), 3rd Floor, High Life Premises, Delhi P.M. Road, Santacruz West, Mumbai PAN :AADCC1505G (Appellant) (Respondent)
Assessee by Sh. Ajay Vohra, Sr. Advocate Sh. Divyanshu Agrawal, Advocate Department by Sh. Vizay B. Vasanta, CIT(DR)
Date of hearing 10.11.2023 Date of pronouncement 21.11.2023
ORDER Captioned appeal of the assessee challenges the final
assessment order dated 19.01.2023 passed under section 147
read with section 144C(13) of the Income-tax Act, 1961 (in short
‘the Act’) pertaining to assessment year 2016-17 in pursuance to
directions of learned Dispute Resolution Panel (DRP).
ITA No.382/Del/2023 AY: 2016-17
Ground nos. 1 and 2 are on the validity of the assessment
order passed under section 147 of the Income-tax Act, 1961 (in
short ‘the Act’). Whereas, ground nos. 3 and 4 are on merits
relating to the issue of taxability of capital gain arising on sale of
shares.
Briefly the facts are, the assessee is a non-resident corporate
entity incorporated under the laws of Mauritius and a tax resident
of Mauritius. As stated, the assessee is an investment holding
company incorporated under the Mauritius Companies Act, 2001
on 12th January, 2006. The assessee also holds a valid Tax
Residency Certificate (TRC) for the year under consideration. As
observed by the Assessing Officer, though, for the assessment
year under dispute the assessee has filed a return of income on
29.09.2016, however, such return was not subjected to scrutiny.
Subsequently, information was received from Income Tax Officer,
Ward-2(2)(1), International Taxation, New Delhi that an Indian
company, i.e., M/s. Logix Soft-tel Pvt. Ltd. has remitted an
amount of Rs.162 crores to the assessee towards purchase of
shares of M/s. Noida Cyber Park Pvt. Ltd. without withholding
any tax. Based on the information received, the Assessing Officer
verified the records and found that as per the returns filed by the 2 | P a g e
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assessee for past assessment years, it is continuously claiming
loss. Taking note of the fact that, on one hand, the assessee is
claiming loss, on the other hand, the remittance of Rs.160 crores
was made to the assessee without deduction of tax. The Assessing
Officer reopened the assessment under section 147 of the Act. In
response to the notice issued under section 148 of the Act, the
assessee filed its return of income on 29.04.2021 declaring net
long term capital loss of Rs.33,34,167/-. In course of assessment
proceedings, the Assessing Officer called upon the assessee to
furnish information relating to transactions in purchase and sale
of shares in Indian companies. From the information/details
furnished by the assessee the Assessing Officer noticed that in
the year under consideration, the assessee has received total sum
of Rs.407,32,20,235/- towards sale of shares of four Indian
companies. Whereas, it has claimed net long term loss of
Rs.33,34,167/-. On verifying the computation of income, the
Assessing Officer found that the assessee has computed the
capital gain in respect of sale of shares by applying the provisions
of first proviso to section 48 of the Act read with Rule 115A. He
observed that while doing so, the assessee has not followed the
provisions contained under section 112(1)(c)(iii) of the Act, which 3 | P a g e
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specifically debars the benefits given under the second proviso to
section 48 of the Act. Thus, he held that the assessee cannot
claim benefit under the first proviso to section 48, thereby,
reducing capital gain. After analyzing the issue in detail, the
Assessing Officer ultimately disallowed assessee’s computation of
net long-term capital loss by applying the provisions to the first
proviso to section 48(1) read with Rule 115A. Thus, ultimately, he
held that the assessee had net long-term capital gain of
Rs.141,28,52,811/-, which is subject to tax in India. Having held
so, he also rejected assessee’s claim of exemption under Article
13(4) of India – Mauritius Double Taxation Avoidance Agreement
(DTAA) on the reasoning that the assessee is not entitled to treaty
benefits, as it is mere a paper company created in Mauritius to
avail treaty benefits. Thus, after allowing unabsorbed long-term
capital loss pertaining to assessment year 2012-13, the Assessing
Officer added back net capital gain amounting to
Rs.122,42,10,688/-. Accordingly, he framed the draft assessment
order.
Against the draft assessment order so passed, the assessee
raised objections before learned DRP, both on the merits of the
addition made towards long-term capital gain as well as on the 4 | P a g e
ITA No.382/Del/2023 AY: 2016-17
validity of reopening of assessment under section 147 of the Act.
However, learned DRP dismissed the objections of the assessee.
Before us, learned Senior Counsel appearing for the
assessee submitted that reopening of assessment under section
147 of the Act is invalid, as there is no escapement of income.
Drawing our attention to the reasons recorded for reopening of
assessment, a copy of which is at page 9 of the paper-book,
learned counsel submitted that as per the reasons recorded,
assessment has been reopened obviously for the reason that the
assessee having received huge amount of Rs.162 crores is
claiming huge losses year after year and has not offered the
amount of Rs.162 cores to tax. He submitted, the allegations of
the Assessing Officer in the reasons recorded that the assessee
has failed to make full and true disclosure of its income is totally
misplaced, as in the return of income furnished for the year
under consideration, the assessee has shown the gain from sale
of shares in India, including the sale of shares of Noida Cyber
Park Pvt. Ltd. He submitted, since, the assessee is a tax resident
of Mauritius capital gain, is not subject to tax in India under
India – Mauritius DTAA, as shares were purchased prior to
01.04.2017. Further, he submitted, Rs.162 crores referred to by 5 | P a g e
ITA No.382/Del/2023 AY: 2016-17
the Assessing Officer in the reasons recorded is the gross sale
consideration, out of which, the cost of acquisition has to be
deducted for computing capital gain. Therefore, he submitted, the
Assessing Officer’s observations that the amount of Rs.162 crores
has escaped assessment, is wholly erroneous. He submitted,
reasons must have nexus with formation of belief and formation
of belief cannot be on vacuum. In support of such contention, he
relied upon the decision of the Hon’ble Supreme Court in case of
ITO Vs. Lakhmani Mewal Das (1976) 103 ITR 437. Further, he
submitted that there was no tangible material available before the
Assessing Officer to reopen the assessment. He submitted, the
information based on which the Assessing Officer reopened the
assessment was already there in the return of income filed by the
assessee. He further submitted that without properly examining
the facts, the competent authority has approved the reopening of
assessment mechanically, which is against all cannons of law. In
this context, he relied upon the decision of the Hon’ble Supreme
Court in case of CIT Vs. M/s. Kelvinator of India Ltd. (2010) 187
Taxman 312. Thus, he submitted, reopening of assessment under
section 147 of the Act is invalid. Hence, the assessment order is
unsustainable. 6 | P a g e
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On merits, learned counsel submitted, as per the first
proviso to section 48 of the Act, in case of a non-resident, capital
gains arising from transfer of shares and debentures of Indian
company shall have to be computed by converting the cost of
acquisition, expenditure incurred wholly and exclusively in
connection with transfer of shares and the full value of
consideration received as a result of transferred into the same
foreign currency, which was utilized in the purchase of the shares
and debentures, and the capital gain so computed, in such
foreign currency, shall be converted in Indian currency. He
submitted, if the capital gain in case of the assessee is computed
in the mode and manner provided under the first proviso to
section 48 read with Rule 115A of the Act, then there will be a
loss, hence, section 112 of the Act would not apply. He submitted,
section 112 of the Act, does not override the computation
mechanism in section 48 of the Act. Only if there is a position
income from capital gain, then section 112 gets triggered. In
support, he relied upon the following decisions:
1) Commissioner of Customs (Import) Mumbai Vs. Dilip Kumar & Co. (2018) 95 Taxmann.com 327. 2) Mathuram Agrawal Vs. State of Madhya Pradesh (1999) 8 SCC 667
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3) Indian Banks’ Association Vs. Devkala Consultancy Services [2004] 4 JT 587 4) Consumer Online Foundation Vs. Union of India (2011) 5 SCC 360 5) Sulltana Begum Vs Prem Chand Jain (1997) 1 SCC 373 7. Finally, he submitted, when two interpretations are possible,
the views favourable to the assessee needs to be adopted. For
such proposition, he relied upon the following decisions: 1) CIT Vs. Vegetable Products Ltd. 88 ITR 192 (SC) 2) CIT Vs. J.K. Hosiery Factory, 159 ITR 85 (SC)
Without prejudice, learned counsel submitted, the assessee,
being a tax resident of Mauritius holding a valid TRC is entitled to
treaty benefits. He submitted, there is not disputed between the
parties that the shares, sales of which, resulted in capital gain
were purchased by the assessee prior to 01.04.2017. Thus, he
submitted, in terms of Article 13(4) of India – Mauritius DTAA,
long-term capital gain arising on sale of shares is exempt. He
submitted, as per CBDT Circular No. 789, TRC is the
determinative factors for tax residency. Therefore, the
departmental authorities cannot go behind the TRC to decline the
treaty benefits to the assessee by questioning the residential
status of the assessee. In support, he relied upon the following
decisions: 8 | P a g e
ITA No.382/Del/2023 AY: 2016-17
1) MIH India (Mauritius) Ltd. Vs. ACIT (Delhi ITAT), ITA No.1023/Del/2022 2) Blackstone Capital Partners (Singapore) VI FDI Three PTE. Ltd. Vs. ACIT (IT)
Thus, he submitted, under no circumstances long-term
capital gain arising to the assessee on sale of shares can be made
taxable in India.
Learned Departmental Representative submitted that, since,
huge remittances were made to the assessee without deduction of
tax at source and the issue was never examined at any stage due
to mere processing of return under section 143(1) without any
scrutiny assessment. The Assessing Officer has validly formed the
belief that income chargeable to tax has escaped assessment. He
submitted, since, the issue was never examined earlier, there is
no change of opinion while reopening of assessment.
Insofar as merits of issue is concerned, learned counsel
submitted that the assessee’s claim that capital gain has to be
computed by applying the provisions of first proviso to section 48
of the Act read with Rule 115A without applying the provisions of
section 112 is thoroughly misconceived as section 112(1)(c)(ii)
specifically excludes applicability of second proviso to section 48
of the Act. In certain circumstances assessee’s claim cannot be
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accepted. He submitted, the decisions relied upon by learned
counsel for the assessee are prior to the introduction of section
112(1)(c)(ii) of the Act, hence, may not be relevant for deciding the
issue at hand. In support of his contention, learned counsel relied
upon the decision of the Coordinate Bench in case of Legatum
Ventures Ltd. Vs. ACIT (IT) [2013] 149 taxmann.com 436
(Mumbai – Trib.).
Insofar as assessee’s claim of exemption under Article 13(4)
of India – Mauritius DTAA, learned Departmental Representative
relied upon the observations of the Assessing Officer and learned
DRP.
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 10 | P a g e
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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 11 | P a g e
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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 12 | P a g e
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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 13 | P a g e
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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.
Insofar as ground nos. 1, 2 and 3 are concerned, in view of
our decision in ground no. 4, they have become academic and do
not require adjudication at this stage. However, the issues are
kept open.
Ground no. 5, being consequential in nature, does not
require adjudication.
In the result, the appeal is partly allowed, as indicated
above.
Order pronounced in the open court on 21st November, 2023
Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) VICE-PRESIDENT VICE-PRESIDENT Dated: 21st November, 2023. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi
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