AO cannot Question Tax Residency of Entity Holding Valid TRC as per India-Mauritius DTAA: ITAT [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that the Assessing Officer (AO) could not question the tax residency of entity holding the valid Tax Residency Certificate (TRC) as per the India-Mauritius Double Taxation Avoidance Agreement (DTAA).

The assessee, Sarva Capital LLC was 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, Sewa Gruh Rin Ltd. and Veritas Finance Pvt. Ltd. and derived income under the head ‘long-term capital gain’.

In the original return of income filed for the impugned assessment year on 13.03.2020, though, the assessee offered the income derived from sale of equity shares as capital gain, however, claimed it as exempt in terms of Article 13(4) of the India-Mauritius DTAA.

Subsequently, on 13.03.2022, the assessee filed a revised return of income offering the long-term capital gain derived from sale of equity share of Veritas Finance Pvt. Ltd. under Article 13(3B) of India-Mauritius DTAA. In the course of assessment proceedings, the Assessing Officer proceeded to examine the assessee's claim of benefit in terms of Article 13(3B)/Article 13(4) of India-Mauritius DTAA. While doing so, he ultimately concluded that the assessee was not entitled for Treaty benefits.

The Assessing Officer brought to tax the entire long-term capital gain under the provisions of domestic law and accordingly, completed the assessment

Hiren Mehta, on behalf of the assessee submitted that the assessee was not only incorporated in Mauritius but also a resident of Mauritius, which was demonstrated from the Tax Residency Certificate (TRC) issued by Mauritius revenue authorities.

Once, the Mauritius Revenue authorities had issued TRC to the assessee, the residential status of the assessee could not be doubted by the departmental authorities in view of CBDT Circular No. 789 dated 13.04.2000 and Circular No. 684 dated 30.03.1994.

He further relied upon the decision in Blackstone Capital Partners FDI Three Pte Ltd. vs. ACIT which held that the tax authorities could not go behind TRC, as the TRC issued by the

competent authority of another country was sufficient evidence to claim Treaty eligibility, residential status and legal ownership.

Vizay B. Vasant, who appeared on behalf of the revenue submitted that the shareholders of the assessee company were not based in Mauritius, but were residents of other countries the assessee was fiscally transparent entity. He submitted, that the assessee was not liable to tax in Mauritius, it could not be treated as a resident of Mauritius in view of Article 4(2) of the Treaty. Thus, he submitted that the long-term capital gain had been rightly brought to tax by applying the provisions of domestic law.

The two-member Bench of G.S. Pannu, (President) and Saktijit Dey, (Vice-President) allowed the appeal filed by the assessee holding that it had been a well settled that once the tax resident of Mauritius was holding a valid TRC, the Assessing Officer in India could not go behind the TRC to question the residency of the entity.

To Read the full text of the Order CLICK HERE

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