Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SHRI SAKTIJIT DEY, VICE- & DR. B.R.R. KUMAR
IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘D’ NEW DELHI
BEFORE SHRI SAKTIJIT DEY, VICE-PRESIDENT AND DR. B.R.R. KUMAR, ACCOUNTANT MEMBER
ITA No.1815/Del/2023 Assessment Year: 2020-21 . ACCION Africa-Asia Vs. ACIT, Investment Company, International Taxation, C/o- Ankul Goyal, Advocate Circle-1(1)(1), AZB & Partners, A-8, Sector-4, New Delhi Noida PAN :AAJCA1104H (Appellant) (Respondent)
Assessee by Sh. Deepak Chopra, Advocate Sh. Aditya Chandel, Advocate Sh. Ankul Goyal, Advocate Department by Sh. Vizay B. Vasanta, CIT(DR)
Date of hearing 11.10.2023 Date of pronouncement 26.10.2023
ORDER Captioned appeal by the assessee arises out of assessment
order dated 21.05.2023 passed under section 143(3) read with
section 144C(13) of the Income-tax Act, 1961 (in short ‘the Act’),
pertaining to assessment year 2020-21, in pursuance to the
directions of learned Dispute Resolution Panel (“DRP”).
ITA No.1815/Del/2023 AY: 2020-21
Dispute arising in the appeal relates to 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 is a tax resident of Mauritius. As stated by the
Assessing Officer, the assessee holds a Category 1 Global
Business Licence issued by the Financial Services Commissioner
under the Mauritius Financial Services Act, 2007. The Assessing
Officer has further stated that the principal activity of the
assessee is to act as an investment holding company. As an
investment holding company, the assessee has invested in
acquiring equity shares in certain Indian companies. In the year
under consideration, the assessee derived long-term capital gain
on sale of shares of Northern Arc Capital Ltd. and Aye Finance
Pvt. Ltd., two Indian companies, and derived total long term
capital gain of Rs.91,14,47,001/- and Rs.124,90,36,610/-
respectively.
Besides the above long term capital gains, the assessee also
derived short term capital gain amounting to Rs.4,23,62,054/-. In
the return of income filed for the impugned assessment year, the
assessee offered the short term capital gain to tax. Whereas, the
long term capital gain was not offered to tax pleading that the 2 | P a g e
ITA No.1815/Del/2023 AY: 2020-21
assessee, being a tax resident of Mauritius holding a valid Tax
Residency Certificate (‘TRC’), is entitled to avail benefits under
India – Mauritius Double Taxation Avoidance Agreement (DTAA).
It was submitted that in terms of Article 13(4) of India – Mauritius
treaty long term capital gain arising at the hands of a tax resident
of Mauritius can only be taxable in Mauritius and not in India.
The Assessing Officer, however, did not accept the claim of
the assessee. After calling for necessary details relating to
corporate structure of the assessee and its activities, the
Assessing Officer observed that as per information available in
internet, all the group B directors in Assessee Company are
employees/directors of the SANNE GROUP in Mauritius, which
provides directors to such companies, which are structured with
the sole purpose of availing treaty benefits. He observed that
control and management decisions of the company were vested
with a non-resident of Mauritius, rather than director resident in
Mauritius. Further, he made various other allegations, such as,
the company does not own any land/building and pays no rent.
It has no electricity, water and telephone expenses. It has no
employees as wages and salaries and other staff costs are nil etc.
Thus, based on the aforesaid analysis of facts, the Assessing 3 | P a g e
ITA No.1815/Del/2023 AY: 2020-21
Officer observed that the assessee is merely a paper company set
up for availing treaty benefits. Accordingly, he issued a show-
cause notice to the assessee to explain, why the exemption
claimed under the treaty provisions should not be denied and the
capital gain should not be taxed as per the provisions of the Act.
In reply to the show-cause notice, the assessee furnished a
detailed submission reiterating its position that being a genuine
tax resident of Mauritius, having a valid Tax Residency
Certificate, it is entitled to treaty benefits. Hence, long terms
capital gain cannot be taxed in India. The Assessing Officer,
however, remained unconvinced with the submissions of the
assessee and held that the assessee has been incorporated in
Mauritius for the sole purpose of availing exemption under Article
13(4) of the India – Mauritius tax treaty. He observed, since, the
assessee has been set up through a scheme of arrangement to
avoid taxes adopting colourable device, the scheme has to be
regarded as impermissible tax avoidance arrangement. Therefore,
the assessee will not be entitled to treaty benefits. Accordingly, he
proceeded to tax the entire long term capital gain under the
provisions of the Act, while framing the draft assessment order.
4 | P a g e
ITA No.1815/Del/2023 AY: 2020-21
Against the draft assessment order so framed, the assessee
raised objections before learned DRP. Learned DRP dismissed the
objections of the assessee with the following observations:
‘3.3.5 The Panel has gone through the line of argument of the assessing officer and the assessee. It is seen that the ultimate holding company are not based in Mauritius nor the ultimate beneficiary of the transaction. The assessee company doesn't have any significant infrastructure, employees base or any other business activity apart from investing in shares. The control and management of the company also resides outside Mauritius. The assessee company has been interposed as a conduit company to avail the treaty benefit. As per the well laid principle purpose test under BEPS, a treaty benefit may be denied to the entity if its very existence and sum and substance to get the benefit from the treaty only, notwithstanding the fact that assessee has a valid TRC for the above period. The DRP is in agreement with the stand taken by the assessing officer. The assessee objections on the above is therefore, rejected.”
Before us, learned counsel appearing for the assessee
submitted that the decision of the Assessing Officer to tax the
long term capital gain under the provisions of the domestic law by
denying treaty benefits is completely erroneous and
unsustainable. He submitted, the fact that the assessee is a tax
resident of Mauritius holding a valid TRC and is a investment
holding company having a Category 1 Global Business Licence,
has not been disputed by the Departmental Authorities. He
submitted, once the assessee holds a valid TRC, the residential
status of the assessee cannot be questioned. In support of such
5 | P a g e
ITA No.1815/Del/2023 AY: 2020-21
contention, he relied upon the decision of the Hon’ble Supreme
Court in case of Union of India vs. Azadi Bachao Andolan
(2003) 263 ITR 706 and CBDT Circular No. 789, dated
13.04.2000. He submitted, there is no dispute that the assessee
has acquired the shares in the Indian companies, prior to
01.04.2017. Therefore, the long-term capital gain derived by the
assessee is exempt under Article 13(4) of India – Mauritius DTAA.
He submitted, without invoking the General Anti Avoidance
Rule (GAAR) provisions, the Assessing Officer has erroneously
concluded that the long-term capital gain arising to the assessee
is as a result of impermissible tax avoidance arrangement. He
submitted, without following the statutory mandate and without
bringing sufficient material on record to establish impermissible
tax avoidance arrangement, the Assessing Officer cannot deny
treaty benefits to the assessee. He further submitted, even GAAR
provisions would not apply to capital gain arising out of sale of
shares acquired prior to 01.04.2017. He submitted, this is further
fortified from the fact that neither the Assessing Officer nor
learned DRP have invoked the Limitation of Benefit (LOB) clause
under Article 27A of the treaty. Thus, he submitted, without
establishing the fact through cogent evidence that the assessee is 6 | P a g e
ITA No.1815/Del/2023 AY: 2020-21
a conduit company, exemption claimed by the assessee under
Article 13(4) cannot be denied on flimsy grounds. Further, he
submitted, the issue is otherwise fully covered by the decision of
the Coordinate Bench in case of Leapfrog Financial Inclusion
India (II) Ltd. Vs. ACIT, ITA No.365 & 366/Del/2023, dated
11.08.2023.
Learned Departmental Representative strongly relied upon
the observations of the Assessing Officer and learned DRP.
We have considered rival submissions and perused the
materials on record. The short issue arising for consideration is
whether the capital gain derived by the assessee from sale of
shares of two Indian companies is taxable in India or not, in view
of Article 13(4) of India – Mauritius Tax Treaty.
Undisputed facts are, the assessee is a tax resident of
Mauritius and is an investment holding company. It has been
granted a Category 1 Globla Business Licence by the competent
authority in Mauritius. The assessee is also having a valid TRC
for the assessment year under dispute. It is also a fact on record
that the shares of Indian companies, on sale of which, the
assessee derived long-term capital gain in the impugned
assessment year were acquired prior to 01.04.2017. Now, it is 7 | P a g e
ITA No.1815/Del/2023 AY: 2020-21
fairly well settled that the TRC issued by the competent of a
particular country determines the tax residency of a particular
person/entity. The aforesaid position has not only been accepted
by the Revenue in Circular No. 78, dated 13.04.2000, but while
upholding the validity of the aforesaid Circular, the Hon’ble
Supreme Court in case of Azadi Bachao Andolan (supra) has also
held that the person/entity holding a valid TRC would be entitled
to the treaty benefits. Subsequently, the aforesaid legal position
has been followed in many decisions, including the recent
decision of Hon’ble Jurisdictional High Court delivered in case of
Blackstone Capital Partners (Singapore) VI FDI Three Pte. Ltd. Vs.
ACIT [2023] 452 ITR 111 (Delhi HC).
The only reason on which the Assessing Officer has declined
the treaty benefits to the assessee is because, according to him,
the assessee is a stepping stone conduit entity set up in
Mauritius only for the purpose of availing treaty benefits, hence, it
is an impermissible tax avoidance arrangement. Though, the
Assessing Officer has made various allegations to conclude that
the assessee is a conduit entity, however, such conclusion is not
backed by any substantive and cogent material brought on
record. In sum and substance, the Assessing Officer has made 8 | P a g e
ITA No.1815/Del/2023 AY: 2020-21
mere allegations and has failed to substantiate the fact that the
assessee is a conduit company through clinching evidences.
Unfortunately, learned DRP without going deep into the issue
factually, has simply endorsed the view of the Assessing Officer.
At this stage, we must observe, as per sub-section (2) of
section 90 of the Act, wherever the Government of India has
entered into an agreement with any other country outside India
for granting relief of tax or for avoidance of double taxation, then
in relation to the concerned assessee to whom the agreement
applies the provisions of the Act, shall apply to the extent they are
more beneficial to that assessee. In other words, if the provisions
of the DTAA are more beneficial to that particular assessee, the
provisions of DTAA would override the domestic law. However,
Finance Act, 2013, introduced in sub-section (2A) of section 90
w.e.f. 01.04.2016, which reads as under:
“(2A) Notwithstanding anything contained in sub-section 2), the provisions of Chapter X-A of the Act shall apply to the assessee even if such provisions are not beneficial to him.”
As could be seen from reading of the aforesaid provision,
with the introduction of sub-section (2A), earlier overriding effect
of the treaty provisions to some extent has been curtailed as the 9 | P a g e
ITA No.1815/Del/2023 AY: 2020-21
provisions of GAAR as provided under Chapter XA of the Act shall
apply irrespective of the fact that such provisions are not
beneficial to the concerned assessee. Thus, the department has
been empowered under the statue w.e.f. 01.04.2016 to deny
treaty benefits to the assessee in a case where GAAR is
applicable.
Undisputedly, the provisions of section 90(2A) read with
Chapter XA of the Act are applicable to the impugned assessment
year. Though, the Assessing Officer has alleged that the assessee
is a conduit company and has been set up as a part of
impermissible tax avoidance arrangement, surprisingly, he has
not invoked the provisions of GAAR as provided under Chapter
XA of the Act. Even, the Departmental Authorities have not
invoked the LOB clause as provided under Article 27A of India –
Mauritius DTAA. Thus, facts on record clearly indicate that the
departmental authorities were accepting the fact that the shares
in the Indian companies having been acquired prior to
01.04.2017, hence, the capital gain derived from sale of such
shares would be exempt from taxation in India in terms of Article
13(4) of the Indian – Mauritius DTAA. Only for the purpose of
defeating assessee’s claim of exemption under Article 13(4) of the 10 | P a g e
ITA No.1815/Del/2023 AY: 2020-21
treaty, the Assessing Officer has introduced the theory of
impermissible tax avoidance arrangement and Conduit Company.
Since, the allegations of the departmental authorities that
the assessee is a conduit company and has been set up under a
scheme of impermissible tax avoidance arrangement remains
unsubstantiated through cogent evidence brought on record, we
are inclined to accept assessee’s claim of exemption under Article
13(4) of India – Mauritius DTAA, qua the capital gain derived from
sale of subject shares held in two Indian entities. The Assessing
Officer is directed to delete the addition.
For the sake of completeness, we must observe, though, the
Assessing Officer has made an attempt to derive strength from
certain observations of Hon’ble Supreme Court in case of
Vodafone Intl. Holding Vs. Union of India [2012] 17 taxmann.com
202, however, in our view, the observations of the Hon’ble
Supreme Court have to be applied keeping in view the factual
context.
In the facts of the present appeal, since, the departmental
authorities have failed to establish that the assessee is a conduit
company, the TRC issued by the competent authority in
11 | P a g e
ITA No.1815/Del/2023 AY: 2020-21
Mauritius would not only determine the residential status of the
assessee, but also its entitlement under the treaty provisions.
Since, the Assessing Officer has not invoked the provisions
contained under Chapter XA of the Act, the various grounds
raised by the assessee relating to non-applicability of GAAR
provisions are of pure academic nature, hence, do not require
adjudication. However, the issues are kept open.
In the result, the appeal is allowed, as indicated above.
Order pronounced in the open court on 26th October, 2023
Sd/- Sd/- (DR. B.R.R KUMAR) (SAKTIJIT DEY) ACCOUNTANT MEMBER VICE-PRESIDENT Dated: 26th October, 2023. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi
12 | P a g e