The Delhi bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that capital gain from sale of equity shares not taxable as per Article 13 (4) of India – Mauritius Double Taxation Avoidance Agreement ( DTAA )
The assessee is 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, viz., 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
Mr. Nirbhay Mehta, representing the assessee submitted, the assessee is not only incorporated in Mauritius but also a resident of Mauritius, which is demonstrated from the Tax Residency Certificate ( TRC ) issued by Mauritius revenue authorities. He submitted, assessee’s registered office is situated in Mauritius and it maintains regular books of account and other statutory records in the registered office. It was submitted, the key policy decisions, such as, fund flow, investment activities, divestment of investments are taken collectively outside India by assessee’s board of directors, who are all non-residents including the resident directors in Mauritius.
Further also relied upon a decision of the Tribunal in case of MIH India (Mauritius) Ltd. vs. ACIT Thus, he submitted, in view of the binding judicial precedents, the departmental authorities could not have denied the Treaty benefits to the assessee by holding that the assessee cannot be treated as tax resident of Mauritius despite TRC, having been issued in favour of the assessee
Mr. Vizay B.Vasanta, representing the revenue submitted that the shareholders of the assessee company are not based in Mauritius, but are residents of other countries. He submitted, all decisions relating these activities are taken out of Mauritius, as the board meetings are mostly through video conferencing. He submitted, since, the shareholders are residents of countries, who have LOB clause incorporated in their respective Treaties in India, they have set up the assessee’s company in Mauritius as a conduit for the purpose of Treaty shopping.
It was submitted, the assessee does not have any second business activities in Mauritius and its investment activities in India after 01.04.2017 have reduced. Thus, he submitted, these facts suggest that the assessee has set up for availing Treaty benefits. Further submitted, the assessee’s income in Mauritius is not taxable and over the years, it has shown loss. Thus, he submitted, the assessee was a fiscally transparent entity. He submitted, since, the assessee was not liable to tax in Mauritius, it cannot be treated as a resident of Mauritius in view of Article 4(2) of the Treaty.
The bench observed that the capital gain derived from sale of such shares would not be covered under Article 13(3A) or 13(3B) of the Treaty. On the contrary, it will fall under Article 13(4) of India-Mauritius DTAA, hence, would be exempt from taxation, as the capital earned is taxable only in the country of residence of the assessee. No doubt, the assessee has offered the capital gain under Article 13(3B) of the Treaty in its revised return. However, the two member bench of the tribunal comprising Kul Bharat ( Judicial member) and Dr. B.R.R Kumar ( Accountant member) concluded that will not preclude the assessee from claiming benefit under Article 13(4) of the Treaty when the capital gain clearly falls within the ambit of Article 13(4) of the Treaty. ITAT allowed the assessee’s additional ground and held that the capital gain derived by the assessee from the sale of equity shares is not taxable in terms of Article 13(4) of the India-Mauritius DTAA.
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