CPI INDIA I LIMITED,MUMBAI vs. ACIT, INT.TAX. CIRCLE-1(2)(1), DELHI

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.

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 validity of reopening of assessment under section 147 of the Act.

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.

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:

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

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 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.

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 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.

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 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 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 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.