SAIF 2-SE INVESTMENTS MAURITIUS LTD,NEW DELHI vs. ACIT, CIRCLE INTERNATIONAL TAXATION (3)(1)(2) DELHI, NEW DELHI

He submitted, when the regulatory authorities in India have scrutinized assessee’s and its holding companies’ credentials and have found nothing adverse, the Assessing Officer, on mere suspicion, cannot treat the assessee as conduit company having no commercial rationale or substance. He submitted, even after partially exiting from the investments made in the equity shares of NSE, the assessee still holds substantial part of the equity shares and assessee’s share holding in NSE has been reduced from 5% to 3.5% only. Thus, he submitted, the allegations of the departmental authorities on the residential and business status of the assessee is wholly unsustainable.

Without prejudice, he submitted, the fact that the assessee has been incorporated in Mauritius and holding a valid TRC is beyond dispute. He submitted, under section 73(1)(b) of the Mauritius Income Tax Act, a company is said to be resident in Mauritius, if it satisfies either of the two conditions, i.e., the company is incorporated in Mauritius and has its central 8 | P a g e management and control in Mauritius. He submitted, in assessee’s case, both the conditions are satisfied. He submitted, as per the provisions of Mauritius Financial Services Act, 2007, Category 1 GBL, per se, establishes that its control and management is in Mauritius.

Without prejudice, he submitted, as per the requirement of Mauritius Financial Services Act, the assessee is having two directors, who are residents of Mauritius, its principal bank account is in Mauritius, it maintains accounting records and preparing auditing financial statements in Mauritius. Therefore, the residential status of the assessee cannot be doubted or disputed. He submitted, the TRC and Category 1 GBL licence issued to the assessee, not only establishes its residential status as a resident of Mauritius, but also establishes that its control and management is in Mauritius. He submitted, once the assessee is holding TRC, the departmental authorities cannot go behind the TRC to question the residential status of the assessee.

In this context, he relied upon CBDT Circular Nos. 682, dated 30th March, 1994 and 789, dated 14th April, 2000. He also relied upon the following decisions: i. UOI Vs. Azadi Bachao Andolan and Another [2003] 263 ITR

He submitted, the decision of the Hon’ble Supreme Court in case of Vodafone International Holding B.V. [2012] 341 ITR 1 (SC) relied upon by the Assessing Officer favours the assessee. In this context, he drew our attention to the observations of the Hon’ble Supreme Court in paragraph 97 of the judgment. Thus, he submitted, the assessee, being a resident of Mauritius, is entitled to avail treaty benefits, which is more beneficial. Therefore, capital gain arising out of sale of equity shares has to be declared as exempt under Article 13(4) of the tax treaty.

Learned Departmental Representative strongly relied upon the observations of learned DRP and Assessing Officer.

We have patiently and carefully considered rival submissions in the light of decisions relied upon and perused the materials on record. The core issue arising for consideration is, whether the assessee can be treated as a tax resident of Mauritius. Consequentially, can the assessee claim benefit of exemption from taxability of capital gain on sale of equity shares under Article 13(4) of the tax treaty. For deciding this issue, few basic facts are required to be considered. Undisputedly, on perusal of certificate of incorporation issued by Registrar of Company, Mauritius, it is observed, the assessee has been incorporated on 7th January, 2008 as a private limited company.

It is further relevant to observe, assessee’s holding company, viz., SAIF II, acquired 5% unlisted equity shares of NSE, being 11 | P a g e 22,50,000 shares at a price of USD 55.55 per share for a total consideration USD 125 million. At the time of acquisition of shares by SAIF II, the various regulatory authorities of the Government of India, such as, FIPB, SEBI, RBI, NSE India undertook due diligence with regard to the credentials of the assessee by verifying all the documents regarding the corporate structure of the company, beneficial ownership, financial structure and various other factors. While conducting the due diligence all necessary and relevant documents were examined, which clearly disclose the share holding pattern and structure of not only the assessee, but also assessee’s holding companies and as also the holding company of SAIF II and SAIF III based in Cayman Island. After thoroughly conducting the due diligence, acquisition of shares by SAIF II was approved and Government of India issued a Press Release disclosing the FDI in relation to 13 entities, including assessee.

Assessee’s parent company subsequently transferred the shares of NSE to the assessee in the year 2009. At the time of transfer of shares from SAIF II to the assessee, the regulatory authorities again carried out due diligence and approved the transfer of shares. Again at the time of part sale of shares of NSE 12 | P a g e by assessee in the impugned assessment year, the regulatory authorities carried out the necessary verification as per the laid out procedure and approved the sale. Thus, as could be seen from the aforesaid facts, not only the acquisition of shares by the assessee, but even sale of shares was approved after thorough inquiry by various regulatory authorities in India.

Thus, it has to be assumed that while granting approval the regulatory authorities have gone into the share holding and financial structure of the assessee and its parent companies and all other relevant factors. Thus, when the assessee holds a valid TRC all and Category 1 GBL and, moreover, the entire process relating to acquisition of shares of NSE and its sale went through a process of scrutiny and approval by various Government Authorities and Agency, doubt entertained by the Assessing Officer regarding residential and commercial status of the assessee company is quite surprising. The findings of the departmental authorities that the assessee is a conduit company lacking commercial substance runs in the teeth of approval granted by various Government agencies and authorities approving the purchase and sale of shares by assessee. Rather, the observations of the departmental authorities that assessee is 13 | P a g e a conduit implies that various other Government agencies have approved the purchase and sale of shares by the assessee, that too, of a Government company, without undertaking a reality check. In other words, the Assessing Officer is pointing an accusing finger to other Government agencies. This, in our view, is preposterous, hence, unacceptable.

It is a fact on record that the assessee is holding the shares in NSE for more than a decade, since the year 2009, and even as on date, is still holding 3.5% shares in NSE. Thus, holding period of shares by the assessee demonstrates the status of the assessee as a genuine entity carrying on the business in holding investment. It is now fairly well settled that TRC issued by an authority in the other tax jurisdiction is the most credible evidence to prove the residential status of an entity and the TRC cannot be doubted. In fact, the CBDT, specifically in the context of India – Mauritius treaty, has issued Circular No. 682, dated 30th March, 1994 and 789, dated 14th April, 2000 clarifying that TRC issued by Mauritius Tax Authorities proves the residential status of a resident of Mauritius and no other evidence is required. In case of UOI Vs. Azadi Bachao Andolan (supra), the Hon’ble Supreme Court has not only upheld the validity of the 14 | P a g e aforesaid CBDT Circulars, but has also held that “liable to taxation” as used in Article 4 of India-Mauritius DTAA does not mean that merely because tax exemption under certain specified head of income including capital gain from sale of shares has been granted under the domestic tax laws of Mauritius, it can lead to the conclusion that the entities availing such exemption are not liable to taxation. The Hon’ble Supreme Court categorically rejected Revenue’s contention that avoidance of double taxation can arise only when tax is actually paid in one of the contracting States. Hon’ble Court held that ‘liable to taxation’ and ‘actual payment of tax’ are two different aspects. The Hon’ble Supreme Court has further observed that for economic development, initially, many developing countries allowed some amount of treaty shopping to attract FDI.

In case of Black Stone Capital Partners (Singapore) VI FDI Three Pte. Ltd. (supra), the Hon’ble Jurisdictional High Court has again reiterated the legal position that the departmental authorities cannot question the validity of TRC, which proves the residential status of the entity. Thus, applying the ratio laid down in these decisions, it has to be held that once the assessee holds a valid TRC, it proves the residential status of the assessee as 15 | P a g e resident of Mauritius, hence, it will be eligible to treaty benefits.

In our view, the facts and materials available on record clearly establish that not only the assessee is a resident of Mauritius, but being a beneficial owner of the income derived from sale of shares, is entitled to the treaty benefits.

Ground no. 8 relating to levy of interest under sections 234A and 234B, being consequential in nature, and ground no. 9, challenging the initiation of penalty under section 270A of the Act, being premature at this stage, are dismissed.

In the result, appeal is partly allowed.