TMI Blog2023 (6) TMI 567X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the Income-tax Authorities in India would not go behind the TRC and question the TRC holder s resident status. We are also not in agreement with the observation of the ld. CIT that the assessee has about 21 investors who are non-tax resident of Mauritius and hence the assessee is a conduit. What is relevant is whether the assessee company is a taxable entity in Mauritius or not? Observation of the ld. CIT that the assessee has entered in only two transactions in the whole years in G-sec Bonds and few transactions in cash is only a partial truth. In addition to the investments in bonds and exchange traded cash equities, the assessee has large number of exchange traded derivatives transactions. The same can be proved by examination of the contracts notes which have been already provided to CIT. These contract notes reflect transactions of the assessee on MCX, BSE NSE. In addition to the investments in India, the assessee has also invested in LME, CMX, SSE DGCX. Hence, the contention of the ld. CIT that the income earned by the assessee from derivatives is not a business income also cannot be accepted. Thus, receipt is not taxable in India, hence there is no prejudice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment order was passed dated 24.12.2019. Hence, the assessment order is valid and correct in law. 7. That without prejudice, no independent enquiry has been done by the PCIT and in the absence of same the order passed u/s 263 is illegal, bad in law and without jurisdiction. 8. That, in view of the facts and circumstances of the case and in law, the PCIT has incorrectly invoked Section 263 of the Act without appreciating that if two views are plausible and the AO takes one view, then no revisionary jurisdiction can be exercised. 9. That the impugned notice dated 06.01.2022 and impugned order dated 24.03.2022 passed by the PCIT under Section 263 of the Act is clearly without application of mind. Hence, the impugned notice dated 06.01.2022 and impugned order dated 24.03.2022 passed under Section 263 of the Act is liable to be quashed. 10. That all the facts and circumstances of the case and the material available on record have not been properly considered by the PCIT while passing the impugned order dated 24.03.2022 under Section 263 of the Act. The impugned order is illegal, arbitrary and bad in law. 11. That, even otherwise, specific query was made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auritius. The fund Investors are resident of various countries across the globe. None of the investor to the fund is resident of India. SFL is registered with SEBI as a Foreign Portfolio Investor (FPI) and has no establishment in India. VSFL, to undertake transactions in India) is registered with SEBI as FPI registration number INMUFP251315, certificate dated December 2, 2015 is attached. As per SEBI, the registration of FPI is valid for 3 years. The books of accounts of the fund are maintained outside India in Mauritius. The assessee is managed by the investment management company, Sapien Capital (Mauritius) Limited through its directors, Mrs. Pamela Gopaloodoo and Mr. Nadarajen Anadachee. The fund independently has separate directors Mr. Ramesh Awatar Sing and Mr. Nowrattan Bhurtun. All the named four personnel are residents of Mauritius. 6. The fund or the Management Company managing the fund have no permanent establishment in India. All substantive and material functioning relating to the fund and management company are carried and situated outside India along with the decision-making process, approvals, control and management in relation thereto. SFL became operational in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per section 115A of the Income-tax Act. 12. Aggrieved the assessee filed appeal before us. 13. At the outset, the ld. Counsel for the assessee argued that the case has been taken up for scrutiny for verification of two issues only and expanding the ambit by the ld. CIT is beyond the jurisdiction. He relied on the CBDT instruction Nos. 7/2015, 20/2015 5/2016 and also CBDT letter dated 30.11.2017 and also on the decisions of Co-ordinate Benches of Tribunal in the case of Meena Choudhary Vs. PR. CIT in ITA No. 70/RPR/2020 order dated 12.10.2021, M/s Diamond Dealers Pvt. Ltd. Vs. PCIT in ITA No. 3098/Mum/2019 order dated 27.11.2019, Balvinder Kumar Vs. PCIT (2021) 125 Taxmann.com 83 (Del. Trib.) and Hill Queen Investment (P.) Ltd. Vs. PCIT (2021) 127 Taxmann.com 682 (Kol. Trib.) wherein it was held that where the scope of scrutiny is limited to the issues raised, the revisional authority is not entitled u/s 263 of the Income Tax Act, 1961 to examine the issue not specified in the limited scrutiny assessment. 14. The ld. DR argued that this is not the case of limited scrutiny and hence the order of the ld. CIT was in accordance with the guidelines. It was argued that even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Scheme. Collective investment vehicles (CIVs) generally, do not meet the definition of liable to tax in order to qualify as a resident of a contracting state for the purposes of tax treaties. As a general rule, domestic tax laws of several countries treat the income and gains of CIV as arising directly to the Investors and not to CIV itself. In short, the CIV is treated like a transparent entity. As a result, CIV does not get entitled to the benefits of tax treaties. Therefore, OECD Commentary to Article 1 (2017) in para 31 recommends that the contracting states should publicize their position on this issue bilaterally either by express provision in the tax treaties by stating that CIV is entitled to tax treaty benefits or through exchange of notes. In the absence of such action, the CIV would not be entitled to benefits of tax treaties. Accordingly, as under India-Mauritius DTAA, no such position has been taken, then assessee company being a CIV will not get the benefits of India-Mauritius DTAA. 19. Hence, it was held that the assessee company is not entitled to avail benefits under India- Mauritius DTAA being not a resident for tax purposes because of non-fulfillment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt country doesn t give an automatic right to the revenue authorities to tax the income in the contracting state. 24. The revenue further argued that the assessee is not a legitimate resident and the assessee is a classic case to treaty shopping to avoid payment of taxes. The arguments of the revenue are as under: The preamble of the DTAA (in this case India-Mauritius DTAA) put forth the object and intent of the DTAA. As general rules of interpretation of the provisions of the DTAAs, the text must be read along with its object and purpose. The object and purpose of the DTAAs including the India-Mauritius DTAA is not only to avoid double taxation but also the prevention of fiscal evasion. The preamble of India-Mauritius DTAA is reproduced as under: Whereas the annexed Convention between the Government of the Republic of India and the Government of Mauritius for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains and for the encouragement of mutual trade and investment has come into force on the notification by both the Contracting States to each other on completion of the procedures required by their r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled in the Final Report on Article 6 of Preventing the granting of Treaty benefits in inappropriate circumstances. Relying on the post BEPS scenario, the revenue argued that India has deposited the Instrument of Ratification to OECD, Paris along with its Final Position in terms of Covered Tax Agreements (CTAs), Reservations, Options and Notifications under the MLI, as a result of which MLI will enter into force for India on 01st October, 2019 and its provisions will have effect on India s DTAAs from FY 2020-21 onwards. Two modifications were made. One, in the light of Article 6 of the MLI India had agreed to modify the Purpose of a CTA. This is done through insertion of a line in the Preamble of the treaty stating that the parties intend to avoid creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, as well as through treaty shopping. Therefore, post-BEPS, the issue becomes explicit that tax residents using treaty shopping to avoid payment of legitimate taxes is no more entitled to tax treaty benefits. Second, in view of Article 7 of MLI dealing with Prevention of treaty abuse, envisages the following approaches in bilateral treaties to cur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility of the cross-border transaction in India, the business activities as a whole is required to be ascertained. 28. It was argued that under the India-Mauritius DTAA, the taxing rights over the capital gains was with the country of residence. Alternatively, India being a source country had no rights to tax capital gains arising from transfer of shares of Indian companies. On the other hand, if the fund is invested from the UK, the capital gains that arise in India would suffer source taxation in India under India-UK DTAA. The other disadvantages is that CIVs are treated as transparent entities in the UK and therefore, prima facie would not be entitled to tax treaty benefits being not a resident for tax purposes in the UK. 29. On the top of it, the incorporation in Mauritius would provide several tax benefits at the level of Mauritius. For instance, there is no capital gains tax in Mauritius. There is no withholding tax on dividend and interest in Mauritius. There is no exchange control in force and funds can be repatriated freely. The maximum income tax liability on a fund which is tax resident in Mauritius is 3%. A fund can claim underlying taxes and benefit from tax spar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the company would not be entitled to tax treaty benefits under India-Mauritius DTAA as it is not a legitimate tax resident. Taking the arguments further, the revenue argued that the arrangement is a conduit and also that TRC is not conclusive and treaty allows control management test in case of dual residency. 32. Rebutting the arguments of revenue, the ld. AR argued that the ld. CIT has erred in stating that India and Mauritius both have signed the MLI and ratified their tax treaties to include Article 6 of MLI whereas, in fact Mauritius has not notified its tax treaty with India as a covered tax agreement in its submission to OECD to implement MLI. Setting up a fund in Mauritius is a commercial decision based on many factors sans the incidental tax benefits the jurisdiction might provide. The jurisdiction also offers a complete range of financial products such as treasury/investment/asset management, investment funds (closed-end, open- ended, retailed etc), protected cell companies, captive insurance, family offices and trusts, which adds to the completeness of the eco system being made available to Fund Managers for an efficient structuring of their businesses. It was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of the Indo-Mauritius DTAC of 1983 apply to residents of both India and Mauritius. Article 4 of the DTAC defines a resident of one State to mean any person who, under the laws of that State is liable to taxation therein by reason of his domicile, residence, place of management or any other crite-rion of a similar nature. Foreign Institutional Investors and other investment funds, etc., which are operating from Mauritius are invariably incorporated in that country. These entities are liable to tax under the Mauritius Tax law and are, therefore, to be considered as residents of Mauritius in accordance with the DTAC. 2. Prior to 1-6-1997, dividends distributed by domestic companies were taxable in the hands of the shareholder and tax was deductible at source under the Income-tax Act, 1961. Under the DTAC, tax was deductible at source on the gross dividend paid out at the rate of 5% or 15% depending upon the extent of sharehold-ing of the Mauritius resident. Under the Income-tax Act, 1961, tax was deductible at source at the rates specified under section 115A, etc. Doubts have been raised regarding the taxation of dividends in the hands of investors from Mauriti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nefits of the DTAA. The same words are proposed to be introduced in the Income-tax Act as sub-section (5) of section 90. Hence, it will be clear that nothing new has been done this year which was not there already last year. However, it has been pointed out that the language of the proposed sub-section (5) of section 90 could mean that the Tax Residency Certificate produced by a resident of a contracting state could be questioned by the Income Tax Authorities in India. The government wishes to make it clear that that is not the intention of the proposed subsection (5) of section 90. The Tax Residency Certificate produced by a resident of a contracting state will be accepted as evidence that he is a resident of that contracting state and the Income Tax Authorities in India will not go behind the TRC and question his resident status. In the case of Mauritius, circular no. 789, dated 13-4-2000 continues to be in force, pending ongoing discussions between India and Mauritius. 38. Further, the Hon ble High Court of Delhi in the case of Blackstone Capital Partners (Singapore) VI FDI Three Pte. Ltd. Vs. ACIT in CM Appeal 7332/2022 vide order dated 30.01.2023 reiterated that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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