The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that the capital gain derived by the sale of equity shares is not taxable in terms of Article 13(4) of 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.
This issue had also been addressed by the Supreme Court in the case of Azadi Bachao Andolan. While dealing with this particular issue, the Supreme Court interpreted the expression “liable to taxation” as used in Article 4 of India-Mauritius DTAA as well as the domestic law of Mauritius and held that merely because tax exemption under certain specified head of income including capital gain from sale of shares had been granted under the domestic tax laws of Mauritius, it could not lead to the conclusion that the entities availing such exemption were not liable to taxation.
The Assessing Officer held that the assessee had been set up as a scheme of arrangement for tax avoidance through Treaty shopping, in our view, such allegation of the Assessing Officer was thoroughly misconceived and not borne out from any material/evidence brought on record. Further, the allegation of the Assessing Officer to the effect that the assessee was a conduit company was also not borne out from any cogent evidence or material brought on record by the Assessing Officer.
The Assessing Officer was of the opinion that the assessee, being a fiscally transparent entity having no liability to tax in Mauritius due to exemption in capital gain income under the domestic laws of Mauritius, could not claim benefits of avoidance of double taxation.
Vizay B. Vasant, appeared on behalf of the revenue, and Hiren Mehta appeared on behalf of the assessee.
The two-member Bench of G.S. Pannu, (President) and Saktijit Dey, (Vice-President) allowed the appeal filed by the assessee holding that the allegation of the Assessing Officer regarding absence of commercial rationale or substance behind setting up of the assessee company, was also in the realm of imagination, rather than based on any concrete evidence.
Moreover, the departmental authorities had miserably failed to establish the fact of the assessee, being a conduit company with reference to Article 27A of India-Mauritius DTAA,
holding that the assessee, having been granted a valid TRC, had to be treated as tax resident of Mauritius and would be eligible to avail benefit under India-Mauritius DTAA.
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