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TMI Blog2022 (11) TMI 1390X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Residency Certificate (TRC) by Mauritian Tax Authorities entitling the assessee to claim benefit under India - Mauritius Double Taxation Avoidance Agreement (DTAA), to the extent it is more beneficial to the assessee. It is an accepted factual position that the assessee had no Permanent Establishment (PE) in India in the year under consideration. Be that as it may, the assessee was holding equity shares of Citrus Payments Solutions Pvt. Ltd. (In short 'Citrus India'), a company incorporated in India. As it may, as stated by the Assessing Officer, by share purchase agreement dated 13th September, 2016, the assessee purchased following equity shares of Citrus India: 1. 4,52,652/- equity shares from Jitendra Gupta and Shivani Gupta; and 2. 19,64,515/- cumulative preference shares from White Pay Pte. Ltd. 3.1 Subsequently, the assessee purchased 1,02,435 equity shares of the same company on 1st September, 2016. All these equity shares and cumulative preference shares of Citrus India were sold to another Indian based corporate entity, PayU Payments Pvt. Ltd. (in short 'PayU India') on 28th March, 2017 for a consideration of Rs.223,35,26,327/-. The resultant short term capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etherlands. Hence, the provisions of India - Netherlands DTAA would be applicable. While coming to such conclusion, the Assessing Officer referred to the protocol to India - Mauritius Tax Treaty effective from 01.04.2017. 3.2 Further, referring to the fact that India is a signatory to Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) which may completely alter the position of taxation of capital gain under Article 13(4) after its amendment on implementation of MLI preamble, subject to, Mauritius signing the MLI, the Assessing Officer held that the prevailing legal position based on the ratio laid down by the Hon'ble Supreme Court in case of Union of India Vs. Azadi Bachao Andolan, 263 ITR 706 (SC) would significantly change and even if the assessee is having a valid TRC, still it would not be entitled to tax exemption under the Treaty. Further, he observed, since, the effective control and management of the assessee company rests at the hands of the holding company in Netherlands, the provisions of India - Mauritius Tax Treaty would not apply to taxability of capital gain. The Assessing Officer observed, to ascertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted prior to its amendment by protocol to the treaty issued by Notification No. SO 2680(E), dated 10.08.2016 w.e.f. 01.04.2017, he submitted, gains derived from sale of shares by a resident of a particular country is taxable in that country alone. He submitted, after the amendment to the Tax Treaty, the capital gain arising out of sale of shares acquired on or after 1st April, 2017 of a company situated in one of the resident Contracting State can be taxed in that State. However, he submitted, amended provisions would not be applicable to the assessee because not only it is effective from assessment year 2018-19, but it applies to shares acquired on or after 1st April, 2017. He submitted, anticipating such future events, which has not yet happened, such as, signing of the MLI by Mauritius, the Assessing Officer has declined to apply the settled legal principles as laid down by Hon'ble Supreme Court in case of Azadi Bachao Andolan (supra). In this regard, he also relied upon the decision of the Coordinate Bench in case of HSBC Bank (Mauritius) Ltd. Vs. DCIT, [2018] 96 taxmann.com 544 (Mumbai). Without prejudice, he submitted, even assuming that India - Mauritius Tax Treaty is not ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcial substance has been transposed to derive benefit under the Tax Treaty. Thus, he submitted, the addition made by the Assessing Officer should be sustained. 8. We have considered rival submissions in the light of the decisions relied upon and perused the materials on record. As far as the factual aspect of the issue in dispute is concerned, it is a fact that the assessee is a resident of Mauritius and the Mauritian Tax Authorities have issued TRC in favour of the assessee. Thus, on the strength of the TRC, the assessee has claimed benefit under Article 13(4) of India - Mauritius Tax Treaty as it existed prior to its amendment. Whereas, the Assessing Officer has held that the assessee is not entitled to claim benefit under the India - Mauritius Tax Treaty. The reason for coming to such conclusion can, more or less, be summed up as under: * The assessee lacks commercial and economic substance. * It had no financial strength to invest in the shares of the Indian company and the entire fund was routed through the assessee by the holding company PayU Global B.V. Netherlands * The effective control and management of the assessee lies with the holding company at Netherlands. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n those mentioned in paragraphs (1), (2) and (3) of this article shall be taxable only in that State. 5. For the purposes of this article, the term "alienation" means the sale, exchange, transfer, or relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in force in the respective Contracting States, 10. On a reading of Article 13 of India - Mauritius Tax Treaty as a whole, it is very much clear that the capital gain derived by the assessee on sale of shares would be covered under Article 13(4) of the Tax Treaty. A reading of Article 13(4) would make it clear that the capital gain derived by the assessee would be taxable in Mauritius. Article 13 of India - Mauritius Tax Treaty was subsequently amended by a protocol and the amended Article 13 which was made effective from 01.04.2017 applicable to assessment year 2018-19 reads as under: "ARTICLE 13 CAPITAL GAINS 1. Gains from the alienation of immovable property, as defined in paragraph (2) of article 6, may be taxed in the Contracting State in which such property is situated. 2. Gains from the alienation of movable property forming part of the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefits under Article 27A of the Treaty. However, in the facts of the present appeal, since, the shares resulting in capital gain were acquired prior 01.04.2017, it will not be covered under Article 13(3A) and 13(3B) of the amended Article 13. In sum and substance, the present transaction of the assessee would be governed under preamended Article 13 of India - Mauritius Tax Treaty. That being the position, the assessee otherwise is entitled to avail the beneficial provision of Article 13(4) on the strength of TRC. 12. Having held so, it is necessary now to deal with the reasoning of the Assessing Officer in denying the Treaty benefits to the assessee. The primary objection of the Assessing Officer is to the effect that the assessee is a conduit company having no economic and commercial substance. Therefore, it being a mere case of treaty shopping, benefits under India - Mauritius Treaty cannot be given. Rather, the beneficial owner of capital gain being the holding company at Netherlands, the provisions of India - Netherlands Tax Treaty would apply. It is necessary to examine the validity of the aforesaid reasoning of the Assessing Officer. Undisputedly, the assessee was incorpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lding that the said circular is ultra vires the provisions of section 90 and section 119 of the Act. Interestingly, the aforesaid decision of the Hon'ble Delhi High Court was challenged by the Union of India before Hon'ble Supreme Court. While upholding the validity of the CBDT Circular No. 789, dated 13.04.2000, the Hon'ble Supreme Court specifically dealt with the concept of treaty shopping and observed as under: "134. There are many principles in fiscal economy which, though at the first blush might appear to be evil, are tolerated in a developing economy, in the interest of long-term development. Deficit financing, for example, is one; treaty shopping in our view, is another. Despite the sound and fury of the respondents over the so-called "abuse" of "treaty shopping", perhaps, it may have been intended at the time when the Indo-Mauritius DTAC was entered? into. Whether it should continue, and, if so, for how long, is a matter which is best left to the discretion of the executive as it is dependent upon several economic and political considerations. This Court cannot judge the legality of treaty shopping merely because one section of thought considers it improper. A holistic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 13 of India - Netherlands Tax Treaty, which deals with taxation of capital gain, it becomes clear that the subject transaction would have fallen under Article 13(4) of the Tax Treaty, which reads as under: "13(4) Gains derived by a resident of one of the States from the alienation of shares (other than shares quoted on an approved stock exchange) forming part of a substantial interest in the capital stock of a company which is a resident of the other State, the value of which shares is derived principally from immovable property situated in that other State other than property in which the business of the company was carried on, may be taxed in that other State. A substantial interest exists when the resident owns 25 per cent or more of the shares of the capital stock of a company." 16. A careful reading of Article 13(4) makes it clear that the source State has the authority to tax the capital gain, only if, the value of shares sold is derived principally from immovable property situated in the source State, other than, property in which the business of the company whose shares were sold was carried out. In case of JCIT Vs. Merrill Lynch Capital Market Espana SA SV (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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