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Valid Tax Residency Certificate (‘TRC’) is sufficient to provide the benefits of treaty between India – Mauritius

Facts of the Case:

  • The Assessee is a non-resident incorporated under the laws of Mauritius, having no Permanent Establishment in India and has been issued a valid TRC by Mauritian Tax Authorities.
  • The Assessee had purchased shares of Citrus Payments Solutions Pvt. Ltd., an Indian company on 13th September, 2016 which it sold to another Indian company PayU Payments Pvt. Ltd. on 28th March, 2017 which resulted into Short-Term Capital Gain (‘STCG’). The STCG was claimed as exempt by the Assessee under Article 13(4) of India – Mauritius Tax Treaty (‘the treaty’).
  • The Assessee had purchased the shares of the Indian company out of the loan received from its holding company which is a resident of Netherland

Contention of the Department:

  • The Assessing Officer (‘AO’) taxed STCG denying the benefits of the treaty.
  • The AO contended that the effective control and management of the Assessee lies with the holding company in Netherlands and the reason to introduce the Assessee was to obtain the tax advantage under the treaty and therefore the Assessee is a mere conduit entity.
  • The beneficial owner of the STCG is the holding company and therefore the treaty between India-Netherlands would be applicable instead of India – Mauritius.
  • The AO further noted that the Assessee does not carry out any commercial/business activity in Mauritius and has been incurring almost negligible expenses for operational requirements for running business/commercial venture.
  • The doctrine of substance over form has to be applied and accordingly the AO concluded that the beneficial provisions of India – Mauritius Tax Treaty would not be applicable to the STCG and thus, the AO by passing order under section 143(3) read with section 143C(13) of the Income-tax Act, 1961 brought to tax the STCG to the tune of Rs.4,77,44,375/- in the hands of the Assessee.
  • The Assessee raised the objections against the draft assessment order passed by the AO before learned Dispute Resolution Panel (‘DRP’). However, DRP rejected the objections and upheld the order of the AO.

Contention of the Assessee:

  • The Assessee is into investment activities since its inception and even during the year under consideration, the Assessee had proposed to make investments of Rs. 665 crores.
  • The Assessee is a Mauritius based company having a valid TRC issued by Mauritian Tax Authorities. Therefore, as per the Circular No. 789, dated 13.04.2000 issued by Central Board of Direct Taxes (CBDT), the Assessee is entitled to get the benefit of India – Mauritius Tax Treaty.
  • The Assessee further submitted that in case of Azadi Bachao Andolan, the Hon’ble Supreme Court has clearly held that the beneficial provisions of India – Mauritius Tax Treaty can be availed on the strength of TRC.
  • The shares have been acquired and sold before 01.04.2017 and therefore the amended Article 13(4) of the IndiaMauritius treaty, which states that the capital gain arising out of sale of shares acquired on or after 1st April, 2017 of a company situated in one of the residents Contracting State can be taxed in that State, shall not be applicable in the Assessee’s case.

Decision of the Hon’ble ITAT:

  • The Hon’ble ITAT held that it is not disputed that the Assessee had been carrying on investment activity in India as well as in other places, which is clearly evident from the Audited Financials of the Assessee and is not a fly by night operator.
  • The Hon’ble ITAT further held that wherever a certificate of residency is issued by the Mauritian Tax Authorities, such certificate shall constitute sufficient evidence for accepting the status of residence as well as the beneficial ownership for applying the provisions of India – Mauritius Tax Treaty.
  • Merely because the assessee availed loans from its holding company to invest in shares of Citrus India, cannot be a reason to treat the Assessee as a conduit entity.
  • Even otherwise, if the India-Mauritius treaty is not applicable and the India – Netherlands Tax Treaty is applicable, the amount will not be still taxable as Article 13(4) of India – Netherlands as the respective article of the treaty provides that gain derived from sale of shares of an Indian company can be taxed in India, if the value of such shares is derived principally from immovable property situated in India. The AO has not brought any material on record to establish that the value of shares of the Indian company is derived principally from immovable property situated in India
  • Thus, the Hon’ble ITAT concluded that even the transaction is seen from any angle, the short-term capital gain arising on sale of shares is not taxable in India.

SW Point of View:

Hon’ble ITAT by referring the case of Union of India & Another Vs. Azadi Bachao Andolan along with the CBDT Circular No. 789, dated 13.04.2000 held that wherever a certificate of residency is issued by the Mauritian Tax Authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as the beneficial ownership for applying the provisions of India – Mauritius Tax.

Aayush Singh, Direct Tax Associate, SW India

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