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INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH)
SHRI G.S. PANNU, VP, SHRI ANUBHAV SHARMA, JM
India Property (Mauritius) Company-II – Appellant
Versus
ACIT – Respondent
ITA No.1020/DEL/2023
For the Appellants/Petitioners: Sh. Ajay Vohra, Sr. Adv., Sh. Divyanshu Aggarwal, Adv.
For the Respondents: Sh. Vizay B. Vassanta, CIT(DR), Sh. Vivek Vardhan, Sr. DR
The Income Tax Appellate Tribunal ruled that the treaty benefits for long-term capital gains cannot be denied without evidence substantiating a lack of operational substance.
Headnote:(A) Income Tax Act, 1961 - Sections 143(3), 144C(13), 90(2) - India-Mauritius Tax Treaty - Long term capital gains claimed exempt - Assessment of long term capital gains as taxable denied by the Assessing Officer on grounds of lack of substance - The court found that the appellant was a genuine investment fund incorporated in Mauritius, fulfilling the criteria for tax residency and exempt status under the treaty. The denial of treaty benefits was not justified. (Paras 2, 3, 11.1, and 11.4)
(B) The principle of substance over form applied - The Revenue is entitled to look beyond the TRC if the business operations lack substance - However, in this case, the appellant demonstrated sufficient commercial rationale for its operations. (Paras 5, 11.2) (
Facts of the case:
The appellant, a foreign entity, claimed exemption on substantial capital gains arising from share transfers based on the IN-Mauritius Treaty. The assessment year in question was 2018-19.) (
Findings of Court:
The tribunal ruled that the AO failed to establish the appellant as a mere conduit for tax avoidance; rather, it was conducting legitimate investment activities.) (
Issues: The primary issue was whether the appellant qualified for treaty benefits based on its operational substance.) (
Ratio Decidendi: The court emphasized the necessity of examining the real substance of business operations in determining tax residency and entitlement to treaty benefits.) (
Result: Appeal is allowed, assessment order set aside.)
| Table of Content |
|---|
| 1. the appellant claims exemption on capital gains under india-mauritius treaty. (Para 2) |
| 2. the appellant's operational substance is questioned by the ao, leading to the denial of treaty benefits. (Para 4 , 5 , 6 , 7) |
| 3. the tribunal evaluates the legitimacy of the appellant's claims and operations. (Para 8 , 11) |
| 4. the decision concludes with the appeal being allowed and the assessment order set aside. (Para 12 , 13) |
ORDER
PER ANUBHAV SHARMA, JM:
The assessee has come up in appeal assailing the assessment order dated 10.02.2023 passed under Section 143 (3) read with Section 144C (13) of the income-tax Act, 1961(hereinafter referred as the “Act”), passed by the Assistant Commissioner of Income-tax, Circle Int. Tax. 2(1)(1), New Delhi (hereinafter referred in short as “Ld. AO”) pertaining to the assessment year 2018-19, in pursuance to directions dated 19.01.2023 of learned Dispute Resolution Panel-1, New Delhi (DRP).
2. The facts are that the Appellant is a company incorporated in Mauritius and is engaged in the business of investment activities. The assessee company claimed to be holding valid tax residency certificate (‘TRC’) and Global Business License-I (‘GBL- I License’) issued by the Financial Services Commission, Mauritius. During the year under consideration, the Appellant transferred shares of Indian Companies and thereby earned long term capital gains amounting to INR 1,52,61,71,940 on such transfers. In view of the provisions of section 90(2) of the Act, the Appellant claimed the aforementioned capital gains as exempt as per Article 13(4) of the India- Mauritius Tax. Treaty (‘IM Treaty’ or Treaty'). Accordingly, the return of income (‘ROI’), was filed on 30 October 2018, declaring NIL income and thereby refund of taxes deducted amounting to INR 40,01,520 was claimed in the ROI. Subsequently, the case was selected for scrutiny and in pursuance to the directions of the Hon’ble DRP, the Learned Assessing Officer (‘Ld.AO’), denied the Treaty benefits and passed the final assessment order dated 10/02/2023, assessing the total income at INR 1,52,61,71,940 and raising a tax demand of INR 25,76,86,310 (including interest under section 234A and 234B of the Act).
3. Further, it will be convenient to understand the case of the Revenue as made by the AO and approved by the learned DRP, by reproducing the findings recorded by the DRP while deciding objection no. 1:
“Objection No. 1
The assessee M/S India Property Mauritius Company II, has disclosed long term Capital Gains of Rs. 152,61,71,940/- and claimed the same as exempt under India- Mauritius DTAA in accordance with Article 13(4) of the DTAA
The assessee is a foreign company incorporated in Republic of Mauritius and is a fax resident therein. The assessee has sold shares of M/S ASF Insignia SEZ Pvt Limited, M/S Grand Canyon SEZ Pvt Limited, Kings Canyon SEZ Pvt Limited and Citadel Homes Pvt Limited in FY 2017-13, As stated by the assessee, these shares were bought during FY 2007-08 and 2010-11, By claiming the benefits of Article 13(4) of the DTAA between India and Mauritius, the assessee has claimed the resultant Long Term Capital Gains not liable for taxation
The Assessing Officer has, through the draft assessment order (DAO) examined the fund flow, structure, business operation and other aspects of the company and has held that on the principle of doctrine of substance over firm, principal purpose test has proposed the taxability of capital gains as per source rule of the Income Tax Act read with the relevant provision DTAA and that the assessee is not eligible for treaty benefit under clause 13(4) of the India-Mauritius Treaty. In order to reach this conclusion, the assessing officer in the DAO has discussed the fund flows where it is shown on that the sale consideration of equities on receipt on 12,05.2017 is immediately transferred to JP MORGAN BU on 22.05,2017. The acquisition of shares was also done through other JP MORGAN group companies during the financial
