TMI Blog2023 (8) TMI 1374X X X X Extracts X X X X X X X X Extracts X X X X ..... in the draft assessment order to conclude that the assessee is a shell/conduit company set up to obtain tax advantage under tax treaty, hence, it is a tax avoidance arrangement. After carefully going through the various reasonings of the Assessing Officer, we are of the view that they are not based on cogent evidence brought on record to establish that the assessee is a shell/conduit company and not the beneficial owner under the tax treaty. When the GAAR provisions are applicable to the assessment years under dispute, if the Assessing Officer was of the view that the capital gain derived from transfer of unlisted equity shares is an impermissible tax avoidance arrangement in terms of Section 95 r.w Section 96 of the Act, he should have proceeded in accordance with Section 144BA r.w Rule 10UB. However, there is nothing on record to suggest that the Assessing Officer has invoked the aforesaid provisions. Thus, in our view, the reasonings of the Assessing Officer to treat the assessee as shell/conduit company to deny the benefits under India Mauritius tax treaty is without any substance as they are not backed by credible evidence. Specific case of the assessee in the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nlisted equity shares of Northern Arc Capital Limited acquired by it during the F.Y. 2015-16 and 2016-17. The resultant capital gain both Short-Term (STCG) and Long-Term (LTCG) derived from sale of such unlisted equity shares were claimed exempt under Article 13 of India-Mauritius DTAA. While examining assessee s claim of exemption under Article 13 of India Mauritius DTAA, the Assessing Officer called for various details relating to the structure of the company, its directors, activities, funds, financial status etc. After verifying the details, the Assessing Officer was of the view that the assessee company lacks commercial substance as it doesn t have any principal business activity. He observed that all decisions relating to investment activities and other management decisions are taken outside Mauritius. Funds for investments were generated from outside Mauritius and the benefit arising from such investments are also transferred to the real investors on back to back basis. 5. Thus, the Assessing Officer held that the assessee has been interposed as an entity in Mauritius only for the purpose of deriving treaty benefits for the principal purpose of tax avoidance. Thus, he obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction of sub section (2A) to Section 90 of the Act, which overrides sub Section (2) of Section 90 by providing that GAAR shall apply even if such provision is not beneficial to tax payer. In support of such contention, he relied upon the decision of Co-ordinate Bench in the case of Skaps Industries India Pvt. Ltd. vs. ITO in ITA No. 478 and 479/Ahd/2018 dated 15.06.2018. He submitted, though Chapter XA is applicable to the assessment years under dispute however, such provisions cannot be pressed into operation for denial of tax benefit, where the case of a taxpayer falls within one of the exceptions set out in the corresponding rules. He submitted, Rule 10U(1)(d) of the Rules exempts applicability of Chapter XA of the Act to any income accruing or arising from transfer of investments made prior to 01.04.2017. He submitted, since the investments in shares giving rise to the capital gain were made prior to 01.04.2017, Chapter XA would not be applicable. In support of such contention, he relied upon the decision of Co-ordinate Bench in case of Reverse Age Health Service Pte. Ltd. vs. DCIT, [2023] SCC OnLine 115 (Delhi - Tribunal). He submitted, once the parliament has codified the ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss through without adequate substance the investment pooling vehicles in Mauritius are mere Intermediary holding company of the assessee without actual business operations or adequate substance in Mauritius 2. Not fulfilling the requirement of Management and Control for Category 1 Global Business entities as per Section 71(4) of the Financial Services Act 2007 as it reported in ITR that more than 10% beneficially owned by persons who are not Resident of Mauritius (reference invited to para 5.5) 3. NIL expenses for operational requirements for running a business/commercial venture in Mauritius e.g. employees, salary, rent, electricity, telephone charges, internet charges and other expenses of operations nature. [reference invited to para 8(u)] 4. The company do not pay any rent and it does not own any land or building is noted from their financial statements, this indicates that it does not have actual physical office premise in possession or rent. Only a contact address is provided that also belongs to Axis fudiciary Ltd in Mauritius. [reference invited to para 8(u)] 5. The assessee company do not have any employees apart from part time directors as wages an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred immediately out of the bank account and thus the bank account acted as mere pass through. Funds for the investment transferred from holding company and sale proceeds transferred back to holding companies. This indicates that there are back to back arrangements without actual commercial or business activity in Mauritius. [reference invited to para 8(m) and(n)] 12. Financial analysis indicates that only shares held where those of shares of unlisted equities in IFMR Holding Private Limited and Northern Arc Capital Limited whose share value primarily derive from India. Moreover Company's financial risk was transferred to holding company indicating that no risk is borne by the assessee company.[reference invited to para 8(t)]. 11. Whereas, Learned DRP has observed that the assessee is not entitled to claim benefit under Article 13(3B) in view of the LOB clause contained under Article 27A of the tax treaty. Keeping in perspective the aforesaid factual position, we proceed to decide the issue of assessee s entitlement under Article 13 of the tax treaty. In this context, we must observe that once the assessee is holder of a valid TRC issued by the component authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia-Singapore DTAA has a limitation of benefit clause which the petitioner satisfies RESPONDENT- REVENUE CANNOT GO BEHIND THE TRC 74. This Court is in agreement with the argument of learned senior counsel for the petitioner that the entire attempt of the respondent in seeking to question the TRC is wholly contrary to the Government of India's repeated assurances to foreign investors by way of CBDT Circulars as well as press releases and legislative amendments and decisions of the Courts in Union of India v. Azadi Bachao Andolan (supra) Vodafone International Holdings B.V. (supra), Commissioner of Income-tax (International Taxation)-3, Mumbai v. JSH (Mauritius) Ltd., (2017) 297 CTR 275 (Bom) and Sanofi Pasteur Holding SA (supra). 75. In fact with the increased expansion of international trade and commerce after the Second World War, the taxation of cross border transactions has been a critical challenge for both Parliament and the Courts. 76. It is a fundamental rule of international taxation that every nation has a sovereign right to impose tax on the global income of its residents and on income that accrues or arises within its territorial limits. These twin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sident in Singapore if the management and control of its business is exercised in Singapore. 83. The petitioner has a valid TRC dated 3rd February, 2015 from the IRAS Singapore evidencing that it is a tax resident of Singapore and thereby is eligible to claim tax treaty benefits between India and Singapore. 84. As early as March 30, 1994, CBDT issued Circular No. 682 in which it was emphasised that any resident of Mauritius deriving income from allenation of shares of an Indian company would be liable to capital gains tax only in Mauritius as per Mauritius tax law and would not have any capital gains tax liability in India. This circular was a clear enunciation of the provisions contained in the DTAA, which would have overriding effect over the provisions of Sections 4 and 5 of the Act by virtue of Section 90 of the Act. 85. The CBDT vide Circular No. 789 dated 13th April 2000 once again clarified that the TRC shall serve as sufficient evidence of the taxprayer's residence and beneficial ownership for applying the DTAA. 86. The Supreme Court, in the case of Union of India v. Azadi Bachao Andolan (supra), upheld the validity and efficacy of the Circular N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Indian company would be liable to capita! gains tax only in Mauritius as per Mauritius tax law and would not have any capital gains tax liability in India. This circular was a dear enunciation of the provisions contained in the DTAC, which would have overriding effect over the provisions of sections 4 and 5 of the Income-tax Act, 1961 by virtue of section 90(1) of the Act. If, in the teeth of this clarification, the assessing officers chose to ignore the guidelines and spent their time, talent and energy on inconsequential matters, we think that the CBDT was justified in issuing appropriate' directions vide circular no. 789, under its powers under section 119, to set things on course by eliminating avoidable wastage of time, talent and energy of the assessing officers discharging the onerous public duty of collection of revenue. The circular no. 789 does not in any way crib, cabin or confine the powers of the assessing officer with regard to any particular assessment. It merely formulates broad guidelines to be applied in the matter of assessment of assessees covered by the provisions of the DTAC..... *************** 122. Many developed countries tolerate or encou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision leave us in no doubt that the principle enunciated in the above case has not affected the freedom of the citizen to act in a manner according to his requirements, his wishes in the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity. (p. 850) This accords with our own view of the matter. xxx xxx xxx xxx 146. We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non-est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as, perceived by the respondents. 87. It is a settled position of law that the Circulars issued by CBDT are binding on the tax authorities. The Supreme Court of India in UCO Bank v. CIT, 237 ITR 889 (SC) has categorically held that Circulars issued by the CBDT are binding on the revenue authorities. Moreover, the respondent's reliance on the judgment in Tata Teleservices Ltd. (supra) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated that TRC shall be treated as a sufficient condition for claiming relief under the DTAA. It is pertinent to mention that Press Release dated 1st March, 2013 was not Mauritius specific and it clarified beyond doubt that the TRC produced by a resident of a contracting state would be accepted as evidence of tax residency, and the Income Tax authorities in India will not go behind the TRC and question the resident status of the assessee. Moreover, the proposed sub-Section 5 of Section 90 was not inserted in the Act. 12. Thus applying the ratio laid down in the aforesaid decision, once the assessee holds a valid TRC, the departmental authorities cannot question assessee s residential status and entitlement to treaty benefits. Though, the Assessing Officer has made various allegations in the draft assessment order to conclude that the assessee is a shell/conduit company set up to obtain tax advantage under tax treaty, hence, it is a tax avoidance arrangement. However, after carefully going through the various reasonings of the Assessing Officer, we are of the view that they are not based on cogent evidence brought on record to establish that the assessee is a shell/conduit comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence, the entire capital gain would be exempt from taxation. Thus, in our view, applicability of Article 27A to the subject transaction is a misnomer. Therefore, reasoning of Learned DRP in upholding the decision of the Assessing Officer is unacceptable. Thus, in our view, once it is factually found that the unlisted equity shares, on sale of which the assessee derived the capital gain, were acquired before 01.04.2017, then the assessee is entitled to claim exemption under Article 13(4) of the Tax Treaty. 14. However, at this stage, we must observe, in the written submissions filed before us, Learned Counsel for the assessee has submitted that in assessment year 2019-20, assessee has derived Short Term Capital Gain of Rs. 3,60,34,782/- on sale of 2,76,644/- equity shares and claimed benefit under Article 13(3B) of the Tax Treaty. The Assessing Officer is directed to factually verify this aspect and in case he finds that the shares were acquired after 01.04.2017 and sold prior to 31st March 2019, then, benefit under Article 13(3B) of the tax treaty can be given to that extent. We order accordingly. 15. Before parting, we must observe, before us, Learned Counsel for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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