TMI Blog2024 (2) TMI 393X X X X Extracts X X X X X X X X Extracts X X X X ..... TAA. 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 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. 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) or 13(3B) of the Treaty. On the contrary, it wil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edings, and without considering the submission and material/ evidence filed on record. 4. That on the facts and circumstances of the case and in law, the Ld. AO erred in: a. taxing capital gains of Rs. 163,26,34,468 on sale of shares of Suryoday Small Finance Bank, Disha Medical Services, Rural Shores Business Services, Veritas under section 112 of the Act, as against under Article 13(4) of the India-Mauritius DTAA. b. Taxing interest income of Rs. 30,00,000/- as per provisions of the Act as against under Article 11 of the India-Mauritius DTAA. by following the directions of DRP. 5. That on the facts and circumstances of the case and in law, the Ld. AO erred in not extending beneficial tax treatment under the India-Mauritius DTAA to the Appellant, by following the directions of DRP, which is contrary to the binding Circular No. 789 dated April 13, 2000 issued by the CBDT and the decision of Hon'ble Supreme Court in case of Azadi Bachao Andolan (263 ITR 706) and past accepted stand of the Department in assessment orders passed u/s 143(3) of the Act for AY 2016-17 and AY 2017-18. 5.1 That while denying the treaty benefits to the Appellant, the Ld. AO by f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ongterm 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. 5. As could be seen, grounds Nos. 4 5 of the main grounds as 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. 6. Briefly, the facts relating to the issue are, the assessee is a 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 assessee has incurred substantial operational expenditure in past years, which proves that neither it is a sham entity nor a conduit com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he conditions of 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. 11. Strongly relying upon the observations of the Assessing Officer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned DRP has agreed with the views expressed by the Assessing Officer. 15. Keeping in view the aforesaid observations of the departmental authorities, let us examine the issue at hand. 16. First and foremost, the residential status of the assessee needs 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 nonacceptance 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 clearly stating that once, the TRC has been issued by the competent authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected Revenue s contention that avoidance of double taxation can arise only when tax is actually paid in one of the contracting States. 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. 17. In so far as the allegation of the Assessing Officer that the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 20. Undoubtedly, the assessee has acquired CCPS prior to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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