Capital Gain From Sales Of Shares Under Revised Return Will Not Preclude Non-resident From Claiming Treaty Benefit

While allowing exemption to the Assessee (Mauritius-based investment company) on disposal of shares that arose from conversion of cumulative convertible preference shares, wherein the shares were issued before Apr 01, 2017 but conversion took place later, the New Delhi ITAT reiterated that Tax Residency Certificate is a sufficient piece of evidence to claim not only the tax residency and legal ownership but also eligibility to treaty benefits.

The Division Bench comprising of G.S. Pannu (President) and Saktijit Dey (Vice-President) observed 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”.

Referring to the decision of the Apex Court in Union of India vs. Azadi Bachao Andolan [132 Taxman 373 (SC)], the Bench clarified that ‘liable to taxation’ and ‘actual payment of tax’ are two different aspects and merely because tax exemption is granted under the domestic tax laws of Mauritius, it cannot lead to the conclusion that the entities availing such exemption are not liable to tax.

Advocate Nirbhay Mehta appeared for the Appellant, whereas CIT Vizay B. Vasanta appeared for the Respondent.

Briefly, the Assessee-Company, a tax resident of Mauritius, was incorporated in India for making investments in the field of education, healthcare & microfinance institutions. During relevant year, the Assessee had made investment in equity shares of two Indian companies, and claimed long-term capital gain earned on such investment as exempt income under Article 13(4) of the India-Mauritius DTAA. Subsequently, the Assessee filed revised return to offer the capital gain from sale of share of one Indian entity under Article 13(3B) of India-Mauritius DTAA. The AO however, dislodged the validity of Tax residency certificate and denied the benefit of DTAA observing that Assessee is a conduit company and not the beneficial owner of income.

After considering the submission, the ITAT stated that the AO had committed a fundamental error in denying treaty benefits, observing that once Tax residency certificate stands issued by the competent authority of the other country, it will demonstrate the tax residency of the entity and its entitlement to avail benefits under respective treaty.

Simply because the Assessee is not liable to tax under Article 4 of the India-Mauritius DTAA, is not an impediment in claiming benefit of said DTAA, added the Coram.

The ITAT further elaborated that the sale of shares of the Indian entity by the Assessee would be taxable in the country of residence only and not in India.

Noting that Article 13(3A) of the India Mauritius DTAA covers ‘profit from alienation of shares’ and the word ‘shares’ being used in a broader sense will take within its ambit all shares, including preference shares, the ITAT made it clear that shares acquired prior to Apr 01, 2017 would fall within Article 13(4) of the DTAA and hence, exempted from taxation.

The Coram also clarified that revised return filed by assessee would not preclude Assessee from claiming treaty benefit.

Cause Title: Sarva Capital LLC Vs. ACIT [ITA No. 2289/Del/2022 / 2023-Enterslice-3-ITAT-Del]

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