Non-resident Taxpayer Being Beneficial Owner Of Capital Gain Derived From Sale Of Shares, Is Entitled To Treaty Benefit On Such Gain

While deciding the issue as to whether the Assessee in the present matter was a valid tax resident of Mauritius and consequently, eligible for benefit under the India-Mauritius Double Taxation Avoidance Agreement (DTAA), the ITAT Bench at New Delhi expressed dismay at how the Assessing Officer (AO) could ‘point an accusing finger’ at and question the validity of scrutiny conducted & approvals granted by various authorities and agencies of the Government of India. (Para 18)

A Division Bench of Mr. GS Pannu (President) and Mr. Saktijit Dey (Vice President) dispelled observations of the AO that Assessee-company had engaged in ‘treaty-shopping’ with intent to evade payment of taxes.

Citing the judgment of the Supreme Court of India in UOI Vs. Azadi Bachao Andolan, the Bench observed that many developing nations permitted some amount of treaty-shopping in order to attract more Foreign Direct Investment (FDI), before quashing the order passed by the AO. (Para 20)

The Appellant-Assessee was represented by Ms. Kanchun Kaushal, Chartered Accountant, whereas the Respondent-Revenue was represented by Mr. Vizay B Vasanta, Commissioner of Income Tax (Departmental Representative).  

Briefly, the Assessee-company is a tax resident of Mauritius and is a non-resident corporate entity in India. It operates as an investment-holding company. The Assessee’s holding company is M/s SAIF II Mauritius Company, which holds 51% in the Assessee-company. The remaining 49% share in the Assessee-company is held by one M/s SAIF III Mauritius Company Limited.  On scrutiny assessment, the AO noted that two directors in the Assessee-company are residents of Mauritius while two other directors are residents of Hong Kong. In the relevant period, the Assessee received dividend income of about Rs 47.64 Crores on equity shares & also received Long Term Capital Gain (LTCG) of about Rs 465.99 Crores from partial disposal of such shares. The AO noticed that the Assessee claimed Dividend income as exempt under Section 10(34) of the Income Tax Act 1961, in returns filed for such period. Further, the LTCG was claimed as exempted under relevant provisions of the India-Mauritius DTAA.

The AO observed that the Assessee held investments in only one company throughout its existence; that the Assessee did not book any income for three straight Assessment Years; that no operating expenses were incurred in these Assessment Years; that the Assessee had no employees & incurred no salary expenses; that the Dividend income earned was used to repay amounts owed to related parties; that the Assessee paid no taxes in Mauritius; that the persons holding key managerial positions in the Assessee-company and in the Assessee’s parent company, were the same persons. Hence the AO concluded that the Assessee had no commercial substance and simply operated as a conduit under a scheme of arrangement to avoid payment of tax by ‘treaty-shopping’, and whose real owners were holding companies based in the Cayman Islands. It was also observed that Tax Residency Certificate is insufficient to establish tax residency, where substance indicates otherwise. The AO held that the Assessee could not be treated as a Mauritian resident & in which case, was ineligible for any benefit under the India-Mauritius DTAA.

On hearing the contentions of both sides, the Bench observed – “…The Category 1 GBL has been issued in favour of the assessee by Financial Services Commission, Mauritius on 16th January, 2009. Further, from the date of its incorporation, the Mauritius Revenue Authorities have issued TRCs in favour of the assessee. Even, in the impugned assessment year, the assessee holds a valid TRC. These facts are not disputed by the Assessing Officer…” (Para 15)

The Bench also observed that various agencies of the Government of India scrutinised the share holding pattern and structure of the Assessee-company and its holding companies. The Bench noted – “…While conducting the due diligence all necessary and relevant documents were examined, which clearly disclose the share holding pattern and structure of not only the assessee, but also assessee’s holding companies and as also the holding company of SAIF II and SAIF III based in Cayman Island. After thoroughly conducting the due diligence, acquisition of shares by SAIF II was approved and Government of India issued a Press Release disclosing the FDI in relation to 13 entities, including assessee….”. (Para 16)

Regarding the sale by the Assessee-company of shares held by it in the NSE, the Bench observed – “…the regulatory authorities carried out the necessary verification as per the laid out procedure and approved the sale. Thus, as could be seen from the aforesaid facts, not only the acquisition of shares by the assessee, but even sale of shares was approved after thorough inquiry by various regulatory authorities in India…” (Para 17)

Therefore, the Bench expressed dismay on as to how the AO could question the due diligence done by various agencies and authorities within the Government of India. The Bench observed – “…it has to be assumed that while granting approval the regulatory authorities have gone into the share-holding and financial structure of the assessee and its parent companies and all other relevant factors. Thus, when the assessee holds a valid TRC all and Category 1 GBL and, moreover, the entire process relating to acquisition of shares of NSE and its sale went through a process of scrutiny and approval by various Government Authorities and Agency, doubt entertained by the Assessing Officer regarding residential and commercial status of the assessee company is quite surprising…”.

Citing the judgment of the Supreme Court in UOI Vs. Azadi Bachao Andolan the Bench reiterated that “liable to taxation” and “actual payment of tax” are two different aspects. (Para 20)

Thus, the Bench held that the Assessee-company was a tax resident of Mauritius and a beneficial owner of the proceeds from sale of shares and so was entitled to benefit under the India-Mauritus DTAA.

Cause Title: SAIF-II SE Investments Mauritius Ltd Vs ACIT, Circle-International Taxation [ITA No.1812/Del/2022 /2023-Enterslice-1-ITAT-Del]

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