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TMI Blog2023 (8) TMI 1374X X X X Extracts X X X X X X X X Extracts X X X X ..... xcept, variation in figure. 4. Briefly the facts are, the assessee is a non-resident corporate entity incorporated in Mauritius and is a tax resident of Mauritius. It is a wholly owned subsidiary of another Mauritius entity i.e. Leapfrog Financial Holdings Ltd. As stated by Assessing Officer, the assessee is an investment holding company and holds a Category 1 Global Business License issued by the Mauritius Financial Services Commission. During the assessment year under dispute, the assessee transferred/sold unlisted 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as the assessee has never claimed any benefit under Article 13(3B) of the Treaty. He submitted, all along the assessee has claimed exemption under Article 13(4) of India Mauritius DTAA, which is outside the purview of Article 27A. 8. Without prejudice to the aforesaid submissions, Learned Counsel submitted, after codification of General Anti Avoidance Rules (GAAR) under Chapter XA of the Act. The choice of the tax payer to seek treaty benefit, in case it is more beneficial, has been limited by introduction 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares sold in these assessment years were acquired by the assessee in F.Ys. 2015-16 & 2016-17. Undisputedly, the assessee has claimed exemption of capital gain under Article 13(4) of the Tax Treaty. The Assessing Officer has declined assessee's claim broadly on the following reasons: 1. The group company's ultimate holding company is in Bermuda and beneficially owned by Mr. Gary Wayne Herbert who is claimed to be citizen of South Africa Further the structure of assessee company is transparent/pass 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 othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r respective Board of Directors in Mauritius but with ultimate holding company in Bermuda and beneficially owned by Mr. Gary Wayne Herbert of South Africa who was beneficial owner of entire group structure and applicant companies were only a 'see through entity'. [reference invited to para 8(v)(w) and (x)] 11. Bank account analysis indicates only during the sales of the shares there is banking activity and before that bank account was dormant. Generally funds are transferred 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent proceedings. Consequently, the petitioner is a bona fide entity and not a shell/conduit entity as it complies with the LOB clause to the India Singapore DTAA as the expenditure has been incurred in Singapore and the same has been certified by an independent chartered accountant and accepted by the authorities in Singapore i.e. Income Tax authorities, Monetary Authority of Singapore. Accordingly, the allegation of treaty shopping is irrelevant in the present case as the India-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 Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DTAA, a Company has been inter-alia defined as "anybody corporate or any entity which is treated as a company or body corporate under the taxation laws in force in the respective Contracting States". 82. Article 4 of the India-Singapore DTAA states that the term "resident of a Contracting State" means any person who is a resident of a Contracting State in accordance with the taxation laws of that State. As per Singapore tax laws, a company is resident 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 overridin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f tax benefits to such FIIS. Thereafter, to further clarify the situation, the CBDT issued a Circular No. 789 dated 13.4.2000. Since this is the crucial Circular, it would be worthwhile reproducing its full text. The Circular reads as under.... ****** 49. As early as on March 30, 1994, the CBDT had issued circular no. 682 in which it had been emphasised that any resident of Mauritius deriving income from alienation of shares of an 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue losses are significant compared to the other tax and non-tax benefits from the treaty, or the treaty shopping leads to other tax abuses....... XXX 134. We may also refer to the judgment of Gujarat High Court in Banyan & Berry v. CIT (1996) 222 ITR 831/84 Taxman 515 where referring to McDowell & Co. Ltd.'s case (supra), the Court observed: "... The facts and circumstances which lead to McDowell's decision 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 nationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide Press release clarified, "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". 91. Consequently, the Government of India vide Press Release dated 1st March, 2013 once again reiterated 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te would apply to such capital gain, if arises within period beginning on 1st April, 2017 and ending on 31st march, 2019. Whereas, the specific case of the assessee in the present appeals is, the shares were acquired prior to 01.04.2017, hence, neither Article 13(3A) nor Article 13(3B) would apply. On the contrary, the assessee would be covered under Article 13(4) of the tax treaty. 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 Arti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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