SARVA CAPITAL LLC,NEW DELHI vs. ACIT, CIRCLE-3(1)(2), INTERNATIONAL TAXATION, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘D’ NEW DELHI BEFORE SHRI G.S. PANNU, PRESIDENT AND SHRI SAKTIJIT DEY, VICE-PRESIDENT

ITA No. 2289/Del/2022 Assessment Year: 2019-20 Sarva Capital LLC, Versus ACIT, Circle 3(1)(2), C/o Dinesh Mehta & Co., CAs, International Taxation, 21, Dayanand Road, Darya Ganj, New Delhi. New Delhi PAN: AACCL0102B (Appellant) (Respondent) Assessee by : Sh. Hiren Mehta, CA & Sh. Nirbhay Mehta, Adv. Revenue by : Sh. Vizay B. Vasanta, CIT(DR)

Date of hearing : 15.05.2023 Date of pronouncement: 10.08.2023 ORDER

Captioned appeal has been filed by the assessee challenging assessment order dated 19.07.2022 passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 pertaining to

assessment year 2019-20, in pursuance to the directions of learned Dispute Resolution Penal (DRP).

2 ITA No. 2289/Del/2022

adjudication.

assessee, on instructions, did not press ground No. 2 along with its

sub-grounds. Hence, these grounds are dismissed as not pressed.

common issue with reference to applicability of beneficial provisions

of India-Mauritius Double Taxation Avoidance Agreement (DTAA) to

the income earned under the head ‘capital gain’. In addition to the

aforesaid grounds, the assessee has raised an additional ground vide

letter dated 09.05.2023 on the issue of taxability of long-term capital

gain from sale of shares under Article 13(4) of India-Mauritius DTAA.

Since, the adjudication of additional ground does not require fresh

investigation of facts and can be decided based on the facts already

available on record, we are inclined to admit the additional ground.

well as the additional ground are on the common issue of taxability or

otherwise of capital gain from sale of equity shares under Article

13(4) of India-Mauritius DTAA.

3 ITA No. 2289/Del/2022

non-resident corporate entity incorporated under the laws of Mauritius

and a tax resident of Mauritius. As stated by the Assessing Officer,

the assessee was incorporated primarily for the purpose of making

investments in India in education space, agriculture, healthcare,

microfinance institutions and other financial services. In course of its

business activities, the assessee had made investment in Indian

companies by way of equity shares. In the year under consideration,

the assessee had sold equity shares of two Indian companies, viz.,

Sewa Gruh Rin Ltd. and Veritas Finance Pvt. Ltd. and derived income

under the head ‘long-term capital gain’. In the original return of

income filed for the impugned assessment year on 13.03.2020,

though, the assessee offered the income derived from sale of equity

shares as capital gain, however, claimed it as exempt in terms of

Article 13(4) of the India-Mauritius DTAA. Subsequently, on

13.03.2022, the assessee filed a revised return of income offering the

long-term capital gain derived from sale of equity share of Veritas

Finance Pvt. Ltd. under Article 13(3B) of India-Mauritius DTAA. In

course of assessment proceedings, the Assessing Officer proceeded

to examine assessee’s claim of benefit in terms of Article

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13(3B)/Article 13(4) of India-Mauritius DTAA. While doing so, he

ultimately concluded that the assessee is not entitled for Treaty

benefits due to the following reasons :

“1. The scheme of arrangement employed by the assessee is a tax avoidance through treaty shopping mechanism. 2. The assessee company is just a conduit and the real owner is the shareholders/investors who are tax residents of different countries. 3. The TRC is not sufficient to establish the tax residency if the substance establishes otherwise. 4. The assessee company is also not a beneficial owner of income as control and dominion of fund is not with the company. 5. There is no commercial rationale of establishment of assessee company in Mauritius as the commercial outcomes would identical irrespective of location of funds.”

Assessing Officer brought to tax the entire long-term capital gain

under the provisions of domestic law and accordingly, completed the

assessment. Against the draft assessment order, so passed by the

Assessing Officer, the assessee raised objections before learned

DRP. However, learned DRP, in sum and substance, endorsed the

views of the Assessing Officer.

submitted, the assessee is not only incorporated in Mauritius but also

a resident of Mauritius, which is demonstrated from the Tax

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Residency Certificate (TRC) issued by Mauritius revenue authorities.

He submitted, assessee’s registered office is situated in Mauritius

and it maintains regular books of account and other statutory records

in the registered office. He submitted, the key policy decisions, such

as, fund flow, investment activities, divestment of investments are

taken collectively outside India by assessee’s board of directors, who

are all non-residents including the resident directors in Mauritius. In

this context, he drew our attention to share holding patterns of the

assessee company as well as the details of the directors. He

submitted, the assessee is continued with its business activities as on

date and is holding multiple investments in Indian companies. He

submitted, the assessee was primarily incorporated for making

investments in microfinance institutions in India and from this very

institution, the assessee is making investments in India in more than

15 companies aggregating to US Dollar 58 million approximately. He

submitted, all investment decisions have been taken in the board

meetings in Mauritius. In this regard, he drew our attention to the

details of board meetings held in the year under consideration, as

placed in the paper book. Drawing our attention to the audited

financial statement of the assessee, learned counsel submitted, the

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assessee has incurred substantial operational expenditure in past

years, which proves that neither it is a sham entity nor a conduit

company, as alleged by the Assessing Officer. He submitted, once,

the Mauritius Revenue authorities have issued TRC to the assessee,

the residential status of the assessee cannot be doubted by the

departmental authorities in view of CBDT Circular No. 789 dated

13.04.2000 and Circular No. 684 dated 30.03.1994. In this context,

he also heavily relied upon the decision of Hon’ble Supreme Court in

case of Union of India vs. Azadi Bachao Andolan, 132 Taxman 373

(SC). He submitted, even, the Hon’ble jurisdictional High Court in

case of Blackstone Capital Partners (Singapore) VI FDI Three Pte

Ltd. vs. ACIT, 146 taxmann.com 569 (Del) has categorically held that

tax authorities cannot go behind TRC, as the TRC issued by the

competent authority of another country is sufficient evidence to claim

Treaty eligibility, residential status and legal ownership. He also relied

upon a decision of the Tribunal in case of MIH India (Mauritius) Ltd.

vs. ACIT (ITA No. 1023/Del/2022). Thus, he submitted, in view of the

binding judicial precedents, the departmental authorities could not

have denied the Treaty benefits to the assessee by holding that the

assessee cannot be treated as tax resident of Mauritius despite TRC,

7 ITA No. 2289/Del/2022

having been issued in favour of the assessee. He submitted, the

decision of the departmental authorities in denying the Treaty benefits

to the assessee doubting the residency is all the more unacceptable

considering the fact that in assessment year 2016-17 and 2017-18,

the Assessing Officer, while, completing the assessments under

section 143(3) of the Act has allowed Treaty benefits to the assessee

in respect of capital gain. Thus, he submitted, rule of consistency has

to be applied.

counsel submitted, though, the assessee on conservative basis had

offered the capital gain from sale of shares of Varitas Finance Pvt.

Ltd. under Article 13(3B) of India-Mauritius DTAA, however, capital

gain from sale of equity shares is not at all taxable in view of Article

13(4) of the DTAA, as the shares were acquired prior to 01.04.2017

and the amended provisions of Article 13 as well as the limitation of

benefit (LOB) clause as provided under Article 27A of the Treaty

would not be applicable as it is applicable only with reference to

Article 13(3B) of the Treaty.

8 ITA No. 2289/Del/2022

Article 27A are not applicable to the assessee, as the assessee

cannot be considered to be a shell / conduit company, as neither the

assessee has negligible or nil business operations nor its expenses

are below the threshold limit prescribed in Article 27A. Thus, he

submitted, the long-term capital gain derived from sale of equity

shares is not taxable under any circumstance in case Article 13 of

India-Mauritius DTAA is applied. Thus, he submitted, the long-term

capital gain wrongly offered to tax in the revised return of income is not taxable under Article 13(4) of the India-Mauritius DTAA.

and learned DRP, learned Departmental Representative submitted

that the share holders of the assessee company are not based in

Mauritius, but are residents of other countries. He submitted, all

decisions relating these activities are taken out of Mauritius, as the

board meetings are mostly through video conferencing. He submitted,

since, the share holders are residents of countries, who have LOB

clause incorporated in their respective Treaties in India, they have set

up the assessee’s company in Mauritius as a conduit for the purpose

9 ITA No. 2289/Del/2022

of Treaty shopping. He submitted, the assessee does not have any

second business activities in Mauritius and its investment activities in

India after 01.04.2017 have reduced. Thus, he submitted, these facts

suggest that the assessee has set up for availing Treaty benefits. He

further submitted, the assessee’s income in Mauritius is not taxable

and over the years, it has shown loss. Thus, he submitted, the

assessee is fiscally transparent entity. He submitted, since, the

assessee is not liable to tax in Mauritius, it cannot be treated as a

resident of Mauritius in view of Article 4(2) of the Treaty. Thus, he

submitted, the long-term capital gain has been rightly brought to tax

by applying the provisions of domestic law.

Representative submitted, in the revised return of income, the

assessee itself has offered the capital gain to tax under Article 13(3B)

of the Treaty. He submitted, the issue now raised was never raised

before the departmental authorities. Therefore, the fresh claim made

by the assessee should not be entertained.

relied upon and perused materials on record. The core issue arising

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for consideration in this appeal is, whether, the assessee is entitled to

the benefits of Article 13, more specifically, Article 13(4) of India-

Mauritius DTAA qua the capital gain income. Undisputedly, the assessee is a tax resident of Mauritius holding valid TRC. However,

the Assessing Officer has declined to grant Treaty benefits to the

assessee for the following reasons :

(i) That the scheme of arrangement employed by the

assessee is tax avoidance through treaty shopping mechanism;

(ii). that the assessee is set up as a conduit company and the

beneficial owners of the capital gain income are residents of

different countries;

(iii). that the TRC is not sufficient to establish the tax

residency;

(iv). that the assessee is not a beneficial owner of income as

control and dominion of fund is not with the assessee;

(v). that there is no commercial rationale of establishment of

assessee in Mauritius as it has nil or negligible business; that

the assessee cannot be a tax resident of Mauritius , as it is not

11 ITA No. 2289/Del/2022

liable to tax in Mauritius in terms of Article 4(1) of the Treaty. Of

course, learned DRP has agreed with the views expressed by

the Assessing Officer.

authorities, let us examine the issue at hand.

to be decided. As discussed earlier, from its very inception, the

assessee has been granted TRC by Mauritius tax authorities.

Though, the Assessing Officer is conscious of this fact, however, he

has brought the theory of substance over form to deny Treaty

benefits to the assessee despite valid TRC. In our view, the aforesaid

decision of the Assessing Officer cannot be accepted under any

circumstance. Now, it is well settled that once the tax resident of

Mauritius is holding a valid TRC, the Assessing Officer in India cannot

go behind the TRC to question the residency of the entity. In fact,

since, there were considerable number of disputes due to non-

acceptance of TRC as a valid piece of evidence for tax residency by

the departmental authorities, the CBDT issued circular No. 789 dated

13.04.2000, specifically, with reference to India-Mauritius DTAA

12 ITA No. 2289/Del/2022

clearly stating that once, the TRC has been issued by the competent

authority of the other tax jurisdiction, it will be treated as a valid piece

of evidence in so far as tax residency status is concerned. The

sanctity of the aforesaid circular issued by the CBDT was challenged

before the Hon’ble High Court and while, ultimately, deciding the

issue, Hon’ble Supreme Court in case of Union of India vs. Azadi

Bachao Andolan (supra), not only upheld the validity of Circular No.

789 dated 13.04.2000, but held that once, the TRC has been issued

by the competent authority of the other country, it will demonstrate

the tax residency of the entity and the concerned entity would be

eligible to avail the benefits under India-Mauritius DTAA. The ratio

laid down by the Hon’ble Supreme Court as aforesaid, was followed

subsequently in a number of decisions and in a recent decision of

Hon’ble jurisdictional High Court in case of Blackstone Capital

Partners (Singapore) VI FDI Three Pte Ltd. vs. ACIT (supra), has

reiterated that the tax authorities in India cannot go behind the TRC

issued by the competent authority in other tax jurisdiction, as the TRC

is sufficient evidence to claim not only the residency and legal

ownership but also Treaty eligibility. In case of MIH India (Mauritius)

Ltd. vs. ACIT (supra), identical view has been expressed by the

13 ITA No. 2289/Del/2022

coordinate Bench. Thus, in our view, the Assessing Officer has

committed a fundamental error in denying Treaty benefits to the

assessee in spite of the fact that the assessee is having a valid TRC.

assessee, being a fiscally transparent entity having no liability to tax

in Mauritius due to exemption in capital gain income under the

domestic laws of Mauritius, cannot claim benefits of avoidance of

double taxation. In our view, this issue has also been addressed by

Hon’ble Supreme Court in case of Azadi Bachao Andolan (supra).

While dealing with this particular issue, the Hon’ble Supreme Court

interpreted the expression “liable to taxation” as used in Article 4 of

India-Mauritius DTAA as well as the domestic law of Mauritius and

held 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 cannot 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.

14 ITA No. 2289/Del/2022

Hon’ble Court held that ‘liable to taxation’ and ‘actual payment of tax’

are two different aspects. Thus, keeping in view the ratio laid down by

Hon’ble Supreme Court, as aforesaid, the reasoning of the Assessing

Officer that since, the assessee is not liable to tax under Article 4 of

the India-Mauritius Treaty, it cannot claim benefit of Treaty provisions,

is liable to be rejected.

assessee has been set up as a scheme of arrangement for tax

avoidance through Treaty shopping, in our view, such allegation of

the Assessing Officer is thoroughly misconceived and not borne out

from any material/evidence brought on record. Further, the allegation

of the Assessing Officer to the effect that the assessee is a conduit

company is also not borne out from any cogent evidence or material

brought on record by the Assessing Officer. The allegation of the

Assessing Officer regarding absence of commercial rationale or

substance behind setting up of the assessee company, is also in the

realm of imagination, rather than based on any concrete evidence.

Moreover, the departmental authorities have miserably failed to

establish the fact of the assessee, being a conduit company with

15 ITA No. 2289/Del/2022

reference to Article 27A of India-Mauritius DTAA (Limitation on

Benefit clause). Therefore, having regard to the relevant facts and

ratio laid down in the judicial precedents, discussed above, we have

no hesitation in holding that the assessee, having been granted a

valid TRC, has to be treated as tax resident of Mauritius, hence,

eligible to avail benefit under India-Mauritius DTAA.

whether, capital gain derived by the assessee from sale of equity

shares is exempt under Article 13(4) of India-Mauritius tax Treaty. As

discussed earlier, in the year under consideration, the assessee has

derived capital gain from sale of equity shares of two companies, viz.,

Sewa Gruh Rin Ltd. and Veritas Finance Pvt. Ltd. In so far as sale of

equity shares of Sewa Gruh Rin Ltd. and the resultant capital gain of

Rs. 92,28,289/- is concerned, in our view, there cannot be any

dispute with regard to assessee’s claim of exemption under Article

13(4) of India-Mauritius DTAA, as, undisputedly, the shares were

acquired prior to 01.04.2017. Therefore, the gain derived from sale of

such equity shares is taxable only in the country of residence of the

assessee, i.e., Mauritius and not in India. However, in so far as the

16 ITA No. 2289/Del/2022

capital gain arising from sale of shares of Veritas Finance Pvt. Ltd. is

concerned, the facts are slightly different. Though, in the original

return of income, the assessee claimed the resultant capital gain to

be exempt under Article 13(4), however, subsequently, the assessee

filed revised return of income offering the capital gain to tax under the

provisions of Article 13(3A) read with Article 13(3B) of the Treaty by

claiming beneficial tax rate under grandfathering clause.

reversing the stand taken in the revised return of income and has

claimed exemption under Article 13(4) of the Tax Treaty in respect of

capital gain arising from sale of equity shares of Veritas Finance Pvt.

Ltd. It is the case of the assessee that it had acquired the cumulative

convertible preference shares (CCPS) of Veritas Finance Pvt. Ltd. on

18.03.2016, whereas, the CCPS were converted to equity shares on

04.08.2017. Thus, it is the case of the assessee that the shares of

Veritas Finance Pvt. Ltd. were acquired prior to 01.04.2017, hence, it

will not be covered under Article 13(3A) and 13(3B), rather, under

Article 13(4) of the Treaty. In our considered opinion, assessee’s

claim is acceptable.

17 ITA No. 2289/Del/2022

01.04.2017, which stood converted into equity shares as per terms of

its issue without there being any substantial change in the rights of

the assessee. As rightly contended by learned counsel for the

assessee, conversion of CCPS into equity shares results only in

qualitative change in the nature of rights of the shares. The

conversion of CCPS into equity shares did not, in fact, alter any of the

voting or other rights with the assessee at the end of Veritas Finance

Pvt. Ltd. The difference between the CCPS and equity shares is that

a preference share goes with preferential rights when it comes to

receiving dividend or repaying capital. Whereas, dividend on equity

shares is not fixed but depends on the profits earned by the

company. Except these differences, there are no material differences

between the CCPS and equity shares. Moreover, a reading of Article

13(3A) of the tax treaty reveals that the expression used therein is

‘gains from alienation of shares’. In our view, the word ‘shares’ bas

been used in a broader sense and will take within its ambit all shares,

including preference shares. Thus, since, the assessee had acquired

the CCPS prior to 01.04.2017, in our view, the capital gain derived

from sale of such shares would not be covered under Article 13(3A)

18 ITA No. 2289/Del/2022

or 13(3B) of the Treaty. On the contrary, it will fall under Article 13(4)

of India-Mauritius DTAA, hence, would be exempt from taxation, as

the capital earned is taxable only in the country of residence of the

assessee. No doubt, the assessee has offered the capital gain under

Article 13(3B) of the Treaty in its revised return. However, that will not

preclude the assessee from claiming benefit under Article 13(4) of the

Treaty when the capital gain clearly falls within the ambit of Article

13(4) of the Treaty. In view of the aforesaid, we allow assessee’s

additional ground and hold that the capital gain derived by the

assessee from the sale of equity shares is not taxable in terms of

Article 13(4) of the India-Mauritius DTAA. Grounds are decided

accordingly.

Order pronounced in the open court on 10/08/2023.

Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT VICE-PRESIDENT

Dated: *aks/- Copy forwarded to: 1. Appellant 2. Respondent

19 ITA No. 2289/Del/2022