Superb Mind Holding Ltd. , New Delhi V. ACIT Circle Int Tax 3(1)(2), New Delhi

ITA 1568/DEL/2022

• Counselvise Citation: [2024] 100 COUNSELVISE.COM (IT) 3538 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 7 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-03-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 04-01-2024
• Assessment Year: 2018-2019
• Appeal Filed On: 10-07-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Residential status; Double taxation relief; Share purchase agreement; Principle of natural justice; Deemed to accrue or arise in india; Advance ruling; Onus to prove; TDS; Set aside; Capital Gains
• Section: 90; 143(3); 5(2); 195; 144C; 13; 119; 22

Judgement Text

I.T.A.No.1568/Del/2022 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “D” NEW DELHI BEFORE SHRI G.S. PANNU, HON’BLE VICE PRESIDENT AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER आ .अ.स ं /.I.T.A No.1568/Del/2022 /Assessment Year: 2018-19 Superb Mind Holding Ltd., E-45, Bhagat Singh Market, New Delhi. PAN No. AAZCS2945Q ब म Vs. ACIT Circle Int. Tax 3(1)(2) E-2 Block, Civic Centre, New Delhi. अ Appellant /Respondent Assessee by Shri Salil Aggarwal, Sr. Adv. & Shri Shailesh Gupta, Adv. Revenue by Shri Kanv Bali, Sr. DR स ु नवाईक तारीख/ Date of hearing: 05.01.2024 उ ोषणाक तारीख/Pronouncement on 05.03.2024 आदेश /O R D E R PER C.N. PRASAD, J.M. This appeal is filed by the assessee against the assessment order dated 17.05.2022 u/s 143(3) r.w.s. 144C(13) for the AY 2018-19 pursuant to the directions of the DRP order dated 25.04.2022 passed u/s 144C(5) of the Act. The assessee in its appeal raised the following grounds: - I.T.A.No.1568/Del/2022 2 1. “That the Ld.AO/DRP has grossly erred both on facts and in law while making an addition of a sum of Rs.74,15,54,375/- on account of long term capital gain to be taxed under section 112 of the Act, which is wholly unwarranted and untenable in law. 2. That on the facts and circumstances of the case and in law, the Ld. AO/DRP has failed to appreciate the fact that the assessee-appellant had discharged its onus to prove that it is a resident of Mauritius with the Management & Economic substance in Mauritius and thus, the benefit of DTAA being available to the Assessee Company, as such, the transaction of alleged long term capital gain, is not liable to tax in India and thus, the amount of tax deducted by the buyer needs to be refunded to the Assessee Company. 3. That the Ld. AO/DRP has further erred in law and on facts by holding that the assessee company is a shell/conduit entity, overlooking the fact that the assessee company is being incorporated in Mauritius right from year 2007 and has been duly complying with the legal requirements in the country of residence and as such, the authorities are not justified in holding the assessee company to be a conduit or shell company on a mere subjective opinion, which is wholly arbitrary, unjustified and untenable in law. 4. That the Ld. AO/DRP has also failed to appreciate the following: (i) CBDT issued Circular No.789 dated April 13, 2000 which provided that a TRC issued by the Mauritius Revenue Authority would be regarded a sufficient evidence for accepting the residential status as well as beneficial ownership for the purpose of applying the India- Mauritius Tax Treaty to the non-resident entity. I.T.A.No.1568/Del/2022 3 (ii) The Finance Ministry issued a clarification vide press release dated 01.03.2013 stating that TRC produced by a resident of a contracting state will be accepted as evidence that he is resident of that state and the Indian Income Tax authorities will not go behind the TRC and question his residential status. (iii) Government of India vide its press release issued by Ministry of Finance dated 10 th May 2016, captioned as “Protocol for amendment of the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains between India and Mauritius” has clarified that capital gains on sale of investment made before 1 st April, 2017 have been grandfathered and will not be subject to capital gains taxation in India. The above have been arbitrarily rejected by both AO/DRP on misconceived and wholly extraneous and irrelevant considerations. 5. That the Ld. AO/DRP has further failed to appreciate the fact that all the decisions with regards to functioning of the assessee company were being taking in Mauritius only and even if the Dubai based company holds the entire shareholding of the assessee company, it does not mean that the assessee company is being run by the said company or Sh. Deepak Seth, being 100 percent owner in Dubai based company, also indirectly holds the entire beneficial holding of assessee company, and as such, the addition so made in unjust and unfair on the facts of the instant case. 6. That the Ld. AO/DRP has further grossly erred both in facts and on law by concluding that the assessee – appellant is a conduit of Sh. Deepak Seth since the assessee – appellant has made no other investment except the investment made in M/s Pearl Retail I.T.A.No.1568/Del/2022 4 Solutions Pvt. Ltd., while doing so, both Ld. AO/DRP have ignored the basic fact that the assessee – appellant being a registered Investment Company holding a valid Global Business License, Category I, has always been open to my fruitful and profitable investments and furthermore, even the impugned investment has been made in the year 2010 which has never been disputed by Revenue in the past assessment years. Thus, the aforesaid conclusion so drawn by Ld. AO/DRP is misplaced and misconceived in law and on facts. 7. That further the Ld. AO/DRP has made the impugned addition with preconceived notions and by recording perverse findings, as can be seen from the fact that Ld. AO in draft assessment order records that the assessee – appellant has not furnished its audited financial statements, whereas, both AO and DRP have made the same financial statements as the basis to justify the impugned addition, which shows the preconceived notions with which the impugned addition has been made. 8. That the Ld. AO/DRP has grossly erred in making the impugned addition with preconceived notions, recording perverse findings and also by arbitrarily brushing aside the detailed submissions/evidences/material placed on record, which were furnished in order to support the fact that the transaction in question is genuine. 9. That on the facts and circumstances of the case and in law, the Ld. AO failed to appreciate the fact that the scope of the impugned assessment proceedings was only for the purpose of “issue of refund claim” of the amount of tax deducted at source, as such, the addition so made on account of addition of alleged long term capital gain is without jurisdiction by Ld. AO and thus, is liable to be deleted. 10. That the Ld. AO/DRP has erred in law and on facts in making the addition in the hands of assessee, I.T.A.No.1568/Del/2022 5 without giving any fair and proper opportunity of being heard to the appellant and further, relying on case laws not applicable to the facts of the assessee – appellant and not taking into account the case laws/CBDT circular/press release etc. relied on by the assessee appellant. Thereby, violating the principles of natural justice.” 2. The effective ground in all these grounds of appeal of the assessee is whether the assessee is entitled to the benefit of Article 13(4) of DTAA between India and Mauritius treaty and consequently whether the long term capital gain on sale of shares is liable to tax in India. 3. Briefly stated the facts are that the assessee filed its return of income on 24.08.2018 declaring nil income for the assessment year under consideration and claimed refund of Rs.8,04,79,300/-. The assessment was selected for scrutiny and in the course of assessment proceedings the Assessing Officer noticed that the assessee reported long term capital gain of Rs.74,15,54,375/- and claimed as exempt under Article 13(4) of India-Mauritius treaty. The assessee was required to submit various documents, replies to justify the claim made by it. The assessee vide letter dated 08.02.2021 submitted that assessee company is incorporated outside India and is a non- resident in India and during the year assessee has not carried out any business activity in India and hence, not required to prepare balance I.T.A.No.1568/Del/2022 6 sheet, profit and loss account and also Form 3CA and 3CD are not applicable to the assessee company. However, the assessee filed copy of ITR-6 along with computation of income. The assessee also explained that since assessee has not carried on any business activity in India during the year under consideration, no sale/purchase transaction have taken place. It is further submitted that in the year under consideration assessee company sold 2,45,000 shares held as investment in “M/s Pearl Retail Solutions Pvt. Ltd.” a company incorporated in India to “LEI Singapore Holdings Pte. Ltd.” a company incorporated in Singapore and a non-resident in India and, therefore, have reported long term capital gain on sale of shares. It was also submitted that since these shares were bought in the years 2010 & 2011 i.e. prior to 01.04.2017 the resultant capital gain thereon is not liable to tax in India in view of Article 13(4) of DTAA between India and Mauritius. Therefore, the assessee contended that assessee sought refund of tax deducted at source by LEI Singapore from the sale consideration of the shares. It was further stated that as per provisions of section 195 r.w.s. 112(1)(c)(iii) M/s LEI Singapore Holdings Pte Ltd. has withheld tax @10% + SC + EC. It was, however, submitted that as per provisions of Article 13(4) of India – Mauritius treaty the capital gain is not chargeable to tax in India since the I.T.A.No.1568/Del/2022 7 shares transferred were purchased in the years 2010 & 2011 i.e. before 01.04.2017. The Assessing Officer not convinced with the submissions of the assessee passed draft order u/s 144C of the Act dated 28.09.2021 proposing to tax the long term capital gain which was claimed as exempt by the assessee at 10% u/s 112 of the I.T. Act. In the draft assessment order the AO with the following observations brought to tax the long term capital gains at 10% + SC + EC: - “11.7 In a nut shell, following facts emerge: 1. The scheme of arrangement employed by the assessee is one of tax avoidance through treaty shopping mechanism. 2. The TRC is not sufficient to establish the tax residency if the substance establishes otherwise. 3. The assessee company is just a conduit and the real owner of the income is Mr. Deepak Seth, a resident of Dubai. 4. There is no commercial rationale of establishment of assessee company in Mauritius. 5. The control and management of the assessee company is also not present in Mauritius. In view of the aforesaid facts, the assessee company is not entitled to the treaty benefits of India-Mauritius DTAA. 12. Taxability of the consideration in the hands of the assessee company: I.T.A.No.1568/Del/2022 8 12.1 Taxability of income of a non-resident is ascertained as per source rules of Income-tax Act and the relevant provisions of the DTAA. In this case as stated in preceding paragraphs, the assessee is not entitled to any treaty benefits. Therefore, the chargeability of such consideration would be decided under the provisions of Income-tax Act only. As per Income-tax Act, a non-resident is chargeable to tax on income that is sourced in India. The source rules are given in section 5(2) of the Act, a foreign company or any other non-resident person is liable to tax on income which is received or is deemed to be received in India by or on behalf of such person, or income which accrues or arises or is deemed to accrue or arise to it in India. Section 9 of the Act, thereafter, specifies certain types of income that are deemed to accrue or arise in India in certain circumstances. These two sections embody the source rules of income taxation for non-residents in India. The source rule was further explained by the Apex Court in GVK Industries case (332 ITR 130) where in the Apex Court has held that the income of the recipient to be charged in the country where the source of payment is located, to clarify, where the payer is located. 12.2 For the sake of clarity, it may be mentioned here that in view of Explanation 4 and Explanation 5 to section 9(1)(i) of the Act, capital gain arising through or from the transfer of a capital asset situated in India would be deemed to accrue or arise in India in all cases irrespective of whether the capital asset is movable or immovable, tangible or intangible; the place of registration of the document of transfer etc. is in India or outside India; and the place of payment of the consideration for the transfer is within India or outside India, as long as such capital asset derives its value substantially from assets located in India. Therefore, capital gain arising on transfer of shares of PRS by the assessee to LEI Singapore Holding Pte. Ltd. is liable to tax in India.” I.T.A.No.1568/Del/2022 9 4. The DRP vide order dated 25.04.2022 passed u/s 144C(5) of the Act rejected the objections filed by the assessee observing as under: “2.8 The submissions have been examined along with materials available on record. There is no dispute that the assessee has a Tax Residence Certificate of Mauritius. To that extent, the contention that it is resident in Mauritius is in order. However, even in case where the company holds a TRC, the contention that it becomes automatically eligible for treaty benefits cannot be accepted, ft has been held by Hon’ble Supreme Court in Vodafone International Holdings Vs Union of India In Civil Appeal No.733 of 2012 as under- “TRC whether conclusive 98. LOB and look through provisions cannot be read into a tax treaty put the Question may arise as to whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at the substance of the transaction. DTAA and Circular No. 789 dated 13.4.2000, in our view, would not preclude the Income Tax Department from denying the tax treaty benefits, if it is established, on facts, that the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance. Tax Department, in such a situation, notwithstanding the fact that the Mauritian company is required to be treated as the beneficial owner of the shares under Circular No. 789 and the Treaty is entitled to took at the entire transaction of sale as a whole and if it is established that the Mauritian company has been interposed as a device, it is open to the Tax Department to discard the device and take into consideration the real transaction between the parties, and the transaction may be subjected to tax... I.T.A.No.1568/Del/2022 10 106.. .. Certainly, in our view, TRC certificate though can be accepted as a conclusive evidence for accepting status of residents as well as beneficial ownership for applying the tax treaty, it can be ignored if the treaty is abused for the fraudulent purpose of evasion of tax. ” 2.9 The AO is therefore not precluded from verifying the commercial substance of the transaction under consideration, notwithstanding the holding of a TRC. The tax treaty does not allow its improper use or such use which is not in accordance with the object and purpose of the relevant provisions of the treaty. This is affirmed by the following observations in Model OECD Commentary on Article 29 in the context of treaty abuse- “174. The provisions of paragraph 9 established that a contracting state may deny the benefits of a tax convention where it is reasonable to conclude, having considered all the relevant facts and circumstances, that one of the principal purposes of an arrangement or transaction was for the benefit under a tax treaty to be obtained. The provision is intended to ensure that tax conventions apply in accordance with the purpose for which they were entered into, i.e. to provide benefits in respect of bona fides exchanges of goods and services, and movements of capital and persons as opposed to arrangements whose principal objective is to secure a more favourable tax treatment. 175. The term "benefit” includes ail limitations (e.g. a tax reduction, exemption, deferral or refund) on taxation imposed on the state of source under Articles 6 through 22 of the Convention, the relief from double taxation provided by Article 23, and the protection afforded to residents and nationals of a contracting state under Article 24 or any other similar limitations.... It also includes limitations of the taxing rights of a Contracting State over a capital mm derived from the I.T.A.No.1568/Del/2022 11 alienation of movable property located in that State by a resident of the other State under Article 13....” 177. The terms “arrangement or transaction” should be interpreted broadly and include any agreement understanding scheme, transaction or series of transactions, whether or not they are legally enforceable, in particular they include the creation, assignment, acquisition or transfer of the income itself,. or of the property or right in respect of which is the income accrues. These Terms also encompass arrangements concerning the establishment, acquisition or maintenance of a person who derives the income, including the qualification of that person as a resident of one of the Contracting States, and include steps that persons may take themselves in order to establish residence.... One transaction alone may result in a benefit or it may operate in conjunction with a more elaborate series of transactions that together result in the benefit. In both cases the provisions of paragraph 9 may apply. 178.. .. Where, however, an arrangement can only be reasonably explained by a benefit that arises under a treaty, Lit may be concluded that one of the principal purposes of that arrangement was to obtain the benefit. (Emphasis supplied)” 2.10 Hence, the assessee’s contention that once the TRG has been furnished by it and that shares were acquired prior to 01.04.2017 will be grandfathered as per the amended India- Mauritius DTAA, no adverse inference can be drawn in respect of the transactions undertaken by it is dismissed. 2.11 The AO has brought out that barring the single investment made in 2010 by way of purchase of shares of M/s Pearl Retail Solutions Private Limited, the company has made no investments in the succeeding years. Though the stated object of the company is to look out for investment opportunities, no investment I.T.A.No.1568/Del/2022 12 was done by the company in India except for the investment in a controlled company / entity. The fact that the assessee holds the Global Business License, Category 1 or that its books of accounts are maintained at its registered office in Mauritius are not relevant to the issue at hand because those requirements are as per the Mauritian regulations and do not in any manner preclude the examination of the transactions on their own merits. It is seen from the following financial statement for the year ended 31.03.2018 that the assessee company had negligible business operations and no real and continuous business activities carried out in Mauritius – I.T.A.No.1568/Del/2022 13 2.12 Despite the primary activity of the company stated to be investment activity had providing of consultancy services, it is seen that no other investment activity in any uncontrolled / third party companies / entities was undertaken after purchase of the shares of M/s Pearl Retail Solutions Private Limited in 2010 until its sale in 2017. There is also no continuous business of providing consultancy activity during these years barring the amount of USD 3,69,000 in 2018 as compared to nil consultancy services in the preceding financial year. This indicates that the company has not undertaken any significant active and continuous business activity after the share investment in 2010. The fact that the company has no employees also evidences negligible or nil business operations and no real and continuous business activities. Such characteristic defines it to be a shell entity which has been interposed in Mauritius for the purpose of availing of no tax benefit under the India- Mauritius DTAA. It is instructive to refer to the UN Model Commentary on ‘use of base companies’ in this regard- “iii) the use of base companies 90. Base company situated in low tax jurisdictions may be used for the purposes of diverting income to a country that that income will be subjected to I.T.A.No.1568/Del/2022 14 taxes that are substantially lower than those that would have been payable if the income had been derived directly by the shareholders of that company. 91. Various approaches have been used to deal with such arrangements. For example, a company that is a mere shell with no employees and no substantial economic activity could, in some countries, be disregarded for tax purposes pursuant to general anti-abuse rules or judicial doctrines....” (Emphasis supplied)” 2.13 Similarly, it has been held by Hon'ble ITAT, Mumbai in DC IT vs. Leena Power Tech Engineers Private ltd. (ITA 1330/Mum/20) as follows- “A shell entity, by itself, is not an illegal entity, but it is their act of abatement of, and being part of, financial manoeuvring to legitimise illicit monies and evade taxes, that takes it actions beyond what is legally permissible. These entities have every semblance of a genuine business- its legal ownership by persons in existence, statutory documentation as necessary for a legitimate business and a documentation trail as a legitimate transaction would normally follow. The only thing which sets i apart from a genuine business entity is lack of genuineness in its actual operations The operations carried out by these entities, are only to facilitate financial manoeuvring for the benefit of its clients, or, with that predominant underlying objective, to give the colour of genuineness to these entities.” (Emphasis added) 2.14 Even under Mauritian regulations, the two resident directors are required to be sufficient caliber to exercise independence of mind and judgment in the present case, the materials on record indicate that it is Mr. Deepak Seth and not the said resident Directors who controlled the decisions of the assessee company at all times. As seen from the Board resolution dated 21.06.2010, Mr. Deepak Seth was fully authorized to I.T.A.No.1568/Del/2022 15 finalize the purchase consideration of 204,200 equity shares in M/s Pearl Retail Solutions Private Limited of which he was also the Director, besides separate authorizations for signing share transfer deeds and other relevant documents along with his son Mr. Pulkit Seth. The AO brought on record that Mr. Pulkit Seth was so authorized by the assesses company even though he was neither a director nor a key managerial person of the assessee company. The contention of the assessee that such authorization was given as he was the son of Mr. Deepak Seth only proves that Mr. Deepak Seth is the beneficial owner who ultimately owns/exercises ultimate effective control over the assessee company and M/s Pearl Retail Solutions Private Limited. 2.15 Further, no expense relating to remuneration to any of the eight Directors including the resident directors has been incurred. There is also no evidence to substantiate the actual conduct of full board meetings in which key decisions can be seen to have been discussed and taken in regard to the purchase of shares of M/s Pearl Retail Solutions Private Limited and sale of the same as well as other investment opportunities and consultancy activities. Given the above, the assessee’s contention that all decisions of the company with respect to its business, investments etc., are undertaken by the Board of the company through duly constituted board meetings is devoid of merit. 2.16 The Panel also takes note of the finding of the AO that the assessee company is wholly owned by UAE entity JSM Trading FZE, which in turn is wholly controlled by Mr. Deepak Seth who is also the director of the unlisted Indian company M/s Pearl Retail Solutions Private Limited. Under paragraph 4 of Article 13 of India-UAE DTAA, "Gains from the 'alienation of shares (other than those mentioned in paragraph 3 thereof) in a company which is a resident of a Contracting State may be taxed in that State.” In the present case, capital gain on account of alienation of shares in M/s Pearl Retail Solutions Private Limited I.T.A.No.1568/Del/2022 16 would have been taxable in the hands of JSM Trading FZE in India under the India-UAE DTAA. It is evident that the assessee company has been interposed as a conduit entity in this arrangement in Mauritius to take advantage of the provisions of Article 13 of the India- Mauritius DTAA which provides for exemption from tax in India on such capital gain. The arrangement therefore falls within the scope and meaning of treaty shopping as seen from the following definition of ‘treaty shopping’ in UN Model Commentary on Article 1- “64. “Treaty shopping" is a form of improper [use of tax treaties that refers to arrangements through which persons who are not entitled to the benefits of a tax, treaty use Other persons who are entitled to such benefits in order to indirectly access these benefits. For example, a company that is a resident of the treaty country would act as a conduit for channeling income that would economically accrue to a person that is not a resident of that country so as to improperly access the benefits provided by a tax treaty..... 65. A treaty shopping arrangement may take the form of a “direct conduit” or that of a “stepping stone conduit", as illustrated below. 66. Company X, a resident of stately, receives dividends, interest or royalties from companywide, a resident of state B. Company X claims that under the tax treaty between States A and B, it is entitled to full or partial exemption from the domestic withholding taxes provided for under the tax legislation of State B. Company X is wholly- owned by a resident of third State C who is not entitled to the benefits of the treaty between States A and B. Company X was created for the purpose of obtaining the benefits of the treaty between States A and B and it is for that purpose that the assets and rights giving rise to the dividends, interest or royalties have been transferred to it. The income is exempt from tax in State A, e.g. in the case of dividends, by virtue of I.T.A.No.1568/Del/2022 17 a participation exemption provided for under the domestic laws of State A or under the treaty between States A and B. In that case, Company X constitutes a direct conduit of its shareholder who is a resident of State C.” 2.17 The illustration above is seen to be squarely applicable to the present case. Under these circumstances the conclusion drawn by the AO that the company lacks commercial substance and is a shell / conduit company is not interfered with. It is settled law that where there is evidence brought out regarding use of the treaty for tax evasion, as laid out in the Preamble which details the object and purpose of the tax convention, treaty benefit will no longer be available. This is affirmed by UN Model Commentary on Article 1 as under- “22....A guiding principle is that the benefits of a double taxation convention should not be available where main purpose for entering into certain transactions or arrangements was to secure a more favourable tax position and obtaining that more favourable treatment in these circumstances would be contrary to the object and purpose of the relevant provisions. That principle applies independently from the provisions of article 29, paragraph 9, which merely confirm it.” 2.18 In view of the above discussion, the conclusions drawn by the AO as detailed in Para 2.5 above are upheld. The objections in Grounds 1 and 4 are dismissed. 3. The objections of the assessee are decided as above. The Assessing Officer is directed to incorporate the findings of the DRP in respect of various objections suitably in the final order. The AO shall also place a copy of the DRP Directions as Annexure to the final order.” 5. The Ld. Counsel for the assessee submitted that the assessee company is a resident of Mauritius and is holding a valid TRC (page 71 I.T.A.No.1568/Del/2022 18 of PB-I) and was incorporated in Mauritius on 26.11.2007 and is being assessed to tax in Mauritius since its inception. It is submitted that the assessee company made investments in Indian Company namely M/s Pearl Retail Solutions Pvt. Ltd. in 2,04,199 shares in AY 2011-12 and 1,10,800 shares in AY 2012-13 (page 146 of PB-I). During the impugned assessment year assessee company (being resident of Mauritius) has sold its part shareholding of 2,45,000 shares of ‘M/s Pearl Retail Solutions Pvt. Ltd’ (‘PRS’) for a consideration of Rs.74,15,54,375/- (a company incorporated in India) held as investment in the books of assessee company to ‘LEI Singapore Holdings Pte Ltd’ (an independent company incorporated in Singapore) and hence have reported Long term capital gain which is exempt from tax in view of Article 13(4) of DTAA between India and Mauritius. It is further submitted that since the Singapore based company deducted TDS on the said sale of shares, as such, Return of Income was filed by the assessee company to claim refund of the same. It is submitted that Learned DRP/AO has denied the benefit of Article 13(4) DTAA and have brought to tax the aforesaid long term capital gain in India. 5.1 Ld. Counsel for the assessee submitted that, in doing so, the learned DRP/AO have roped in the concept of “beneficial I.T.A.No.1568/Del/2022 19 ownership”, which is completely absent in Article 13 of India - Mauritius DTAA and further, though have accepted that Assessee is a resident of Mauritius but have concluded that the assessee has done “treaty shopping/ abuse” in order to avoid taxes in India. It is submitted that the aforesaid findings so recorded by learned AO at page 39 to 40 of its final assessment order, is misconceived in law, as admittedly, the assessee is a resident of Mauritius and is holding valid TRC, as such, is entitled to apply the provisions of DTAA between India and Mauritius i.e. Article 13(4) of the said treaty, wherein, tax on capital asset needs to be borne in the resident state, which is admittedly, Mauritius in the instant case. Thus, it is submitted that going by the provisions of section 90 of the Income Tax Act, which provided a choice to assessee to adopt the Act or DTAA whichever is more beneficial, the assessee sought the benefit of India - Mauritius DTAA. Heavy reliance, is placed on the Protocol issued by Ministry of Finance dated 10.05.2016 and 29.08.2016, wherein, the “investments made prior to 01.04.2017 have been grandfathered” and even the amendments in India - Mauritius DTAA provides said protection has been made available to the assessee - appellant. It is submitted in brief as under: - “i) The press release issued by Ministry of Finance dated 10th May 2016 and 29.08.2016 copy enclosed at I.T.A.No.1568/Del/2022 20 pg 285 of PB - I, captioned as “Protocol for amendment of the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains between India and Mauritius” wherein it was clarified that capital gains on sale of investment made before 1 April 2017 have been grandfathered and will not be subject to capital gains taxation in India even if, allegation is of treaty abuse or round tripping. ii) Relevant Articles of India - Mauritius DTAA, pre - amendment, wherein, it is evident on perusal of Article 13(4) that the capital gain has to be taxed only in the resident state i.e. Mauritius (pages 1 to 3 of PB - II). iii) Relevant Articles of India - Mauritius DTAA, post amendment, wherein, on reading Article 13(3A), it becomes clear that the said amendment is only applicable for investments made after 01.04.2017, whereas, in the case of assessee - appellant investments were made much prior to 01.04.2017. Thus, still provision of Article 13(4) will apply and the capital gain has to be taxed only in resident state i.e. Mauritius (pages 4 to 8 of PB - II). iv) CBDT issued Circular No, 682 dated March 30, 1994 (Pg 282 of PB - I). v) CBDT issued Circular No. 789 dated April 13, 2000 (Pg 283 of PB - I). vi) The Finance Ministry issued a clarification press release dated 01-03-2013” (Pg 284 of PB -1). 5.2 Ld. Counsel further placed reliance on following case laws, wherein, the aforesaid Protocol, amendments and Circulars have been discussed and followed and it has been held that TRC issued by foreign country cannot be discarded by Revenue Authorities and also, there is no concept of beneficial ownership in DTAA I.T.A.No.1568/Del/2022 21 between India and Mauritius with regards to issue of capital gain on sale of shares and furthermore, the Revenue Authorities cannot tax investments made before 01.04.2017, as the same have been grandfathered and will thus, not be liable to capital gain tax in India: “(a) Bid Services Division (Mauritius) Ltd. vs AAR reported in 453 ITR 461(separately filed in the Hon’ble Bench) directly covers the case of the assessee - appellant as para 49 to 52 discusses the Protocol and grandfathering of investments prior to 01.04.2017. The judgment of Hon’ble Bombay High Court in the case of Bid Services Division (Mauritius) Ltd. vs AAR reported in 453 ITR 461 is directly applicable to the facts of the assessee - appellant, which deals with the “Protocol” and holds that in view of grandfathering clause, investments made prior to 01.04.2017 cannot be taxed in India. (c) MIH India (Mauritius) Ltd. vs ACIT (ITAT Delhi) in ITA No. 1023/Del/2022 (kindly see pages 9 to 30 of PB - II, Relevant Page 22 of PB - II Para 11). (d) Union of India vs. Azadi Bachao Andolan and Another (263 ITR 706), (e) Vodafone International holdings B.V Vs Union of India & Anr 341 ITR 1 [2012]” 5.3 In view of the aforesaid submissions and case laws, Ld. Counsel submitted that the assessee is a resident of Mauritius and entitled to the benefit given under India-Mauritius Tax treaty and more so, the investments so made by assessee – appellant are clearly grandfathered/ protected by Government of India Press Release dated 29.08.2016 and also by the amendments in India - Mauritius I.T.A.No.1568/Del/2022 22 DTAA. As such, the sale of the said investment in the impugned assessment year is not taxable in India. Heavy reliance is placed on the judgment of Hon’ble High Court of Bombay in the case of Bid Services Division (Mauritius) Ltd. vs AAR reported in 453 ITR 461. In view of the above, it is submitted that the benefit of DTAA being available to the Assessee Company, the transaction is not liable to taxed in India and the amount of tax deducted by the buyer, be refunded to the Assessee Company and the appeal of the assessee company be allowed. 6. On the other hand, the Ld. DR strongly supported the orders of the authorities below. 7. Heard rival submissions, perused the orders of the authorities below and the decision relied on. 8. We observed that in the case of Bid Services Division (Mauritius) Ltd. Vs. Authority for Advance Ruling (Income Tax) [453 ITR 461] & [148 taxmann.com 215] the Hon’ble Bombay High Court considered an identical situation i.e. whether the investments made by the assessee a non-resident which is holding the valid TRC and assessed to tax in Mauritius, whether the investments made prior to 01.04.2017 are liable for capital gain tax in India. The Hon’ble High I.T.A.No.1568/Del/2022 23 Court considering the circulars of CBDT and also the decision of the Hon’ble Supreme Court in the case of Vodafone International Holding B.V. Vs. Union of India and the decision in the case of Union of India & another Vs. Azadi Bachao Andolan & Another it has been held as under: - “12. On 10 th February, 2012, Petitioner filed an application under section 245Q(1) before Respondent no.1 to determine the correctness of its belief that the capital gains that arose in the hands of the Petitioner by virtue of the sale of shares held by it in MIAL having regard to the provisions of the India-Mauritius DTAA would not be taxable in India. The Petitioner raised the following question for determination before Respondent: “Whether on the facts and circumstances of the case, the gains arising from the transaction from sale of shares, to be effected pursuant to the share purchase agreement dated 1 st March, 2011, held by the Petitioner in Mumbai International Airport Pvt. Ltd. would be liable to tax in India having regard to the provisions of Art. 13(4) of the India-Mauritius Double Taxation Avoidance Agreement?” 13. ................. 14. .................. 15. ................. 16. .................. 17. ................. 18. ................. 19. ................. 20. The matter was finally heard on 22 nd August 2019 before Respondent no.1, whereas, the Petitioner reiterated the submissions made by the Petitioner regarding the non-taxability of the gain arising from the transaction of sale of the shares, effected pursuant to I.T.A.No.1568/Del/2022 24 the SPA dated 1 st March, 2011 held by the Petitioner in MIAL having regard to the provisions of Article 13(4) of the Mauritius DTAA. 21. ...................... 22. ..................... 23. Mr. Pardiwala has also drawn the attention of this Court to the provisions of Section 90(2) of the Act as well as Article 13(4) of the Mauritius DTAA to emphasize that the gains arising from the transaction of sale of shares effected pursuant to the Share Purchase Agreement dated 1 st March 2011 held by the Petitioner in MIAL would not be liable to tax in India. Learned Senior Counsel would submit that since Petitioner is incorporated in Mauritius, it is liable to tax in Mauritius. He submits that, besides, Petitioner held Category 1 Global Business License and also a valid TRC issued by the Mauritian Authorities establishing the fact that it was a tax resident of Mauritius and would be entitled to the beneficial provisions of the Mauritius DTAA. 24. Ld. Sr. Counsel has also drawn the attention of this Court to Circular No.682 dated 30 th March 1994 issued by the Central Board of Direct Taxes (“CBDT”) which mentions that capital gains arising to a resident of Mauritius on transfer of shares in an Indian company would be liable to tax only in Mauritius. 25. Learned Senior Counsel has further placed reliance upon Circular No.789 dated 13th April 2000 issued by the CBDT which clarifies that companies which are resident in Mauritius would not be taxable in India on income from capital gains arising in India on the sale of shares as per Article 13(4) of the Mauritius DTAA. He further submits that the said circular also clarifies that wherever a certificate of residence is issued by the Mauritian authorities such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the double taxation avoidance convention. Learned Senior Counsel has also relied upon Press Release dated 1st March, 2013 with respect to the TRC. Learned Senior Counsel I.T.A.No.1568/Del/2022 25 relies upon the decision of Union of India & Anr. v. Azadi Bachao Andolan and Anr.2 in support of his contentions. Learned Senior Counsel also refer to the decision in the case of Vodafone International Holding B.V. v. Union oflndias relied upon by the Revenue as well as the Authority and would submit that the decision of Vodafone International Holding B.V. v. Union of India (supra) would in fact support the case of the Petitioner. Learned Senior Counsel would submit that Vodafone International Holding B.V. v. Union of India (supra) read as a whole leads to a conclusion that the Ruling is completely contrary to the principles affirmed therein. He would submit that the allegation of interposing Petitioner for tax evasion has only been raised at the time of sale of the shares and not earlier. With respect to the observations that incorporation of Petitioner lacked economic /commercial rationale, learned Senior Counsel drew the attention of this Court to paragraph 4.3 of the written submissions and to the decision in the case of Vodafone International Holding B.V. v. Union of India (supra). Mr. Pardiwala would submit that nowhere the impugned Ruling establishes tax evasion. No material has been brought on record to demonstrate the same. Learned Senior Counsel would submit that only paragraph 98 of the decision in the case of Vodafone International Holding B.V. v. Union of India (supra) has been quoted by the Authority whereas paragraph 97 of the said decision has been conveniently omitted. Learned Senior Counsel takes us to the said paragraph to make his point that paragraph 97 upholds Circular 789 on residence and beneficial ownership in the absence of Limitation of Benefits (LOB) clause, which is admittedly not applicable in the present case as Article 27A to the Mauritius DTAA was inserted with effect from 1st July 2017 whereas the sale transaction pertains to Financial Year 2011-2012. Learned Senior Counsel would therefore submit that the Treaty benefit should have been given to Petitioner. Learned Senior Counsel also refers to Press Release dated 29th August, 2016 by the CBDT and submits that investments made before 1st April, 2017 have been grandfathered and will not be subject to capital gains taxation in India. I.T.A.No.1568/Del/2022 26 26. Learned Senior Counsel would submit that surprisingly, Respondent no. 1-Authority did not accept the contentions raised on behalf of the Petitioner regarding the non-taxability of the gain arising from the transaction of sale of shares to be effected pursuant to the SPA dated 1st March, 2011 held by the Petitioner in MIAL, by virtue of Article 13(4) of the Mauritius DTAA and passed ruling dated 10th February, 2020 rejecting the contentions raised by the Petitioner holding that the Petitioner is not entitled to the benefits under Article 13(4) of the Mauritius DTAA. 27. Aggrieved by the aforesaid Ruling, Petitioner has filed this Petition for the following principal reliefs: (a) That this Hon’ble Court may please to issue a Writ of Certiorari or a writ in the nature of Certiorari or any other appropriate writ, order or direction, calling for the records of the Petitioner’s case and after going into the legality and propriety thereof, to quash and set aside the impugned ruling dated 10th February 2020; (b) That this Hon’ble Court may please to issue a Writ of Mandamus or a writ in the nature of Mandamus or any other appropriate writ, order or direction, directing the Respondent no. 1 to rule that the gain arising on the sale of shares of MIAL to GAHPL would not be chargeable to tax in India having regard to the provisions of Article 13(4) of the Mauritius DTAA. 28. Mr. Suresh Kumar, learned standing Counsel for the Respondents supports the impugned Ruling and submits that the transaction by the Petitioner is sham and bogus. He would submit that entire structure of incorporation of Petitioner and Petitioner’s introduction is a device to avoid taxation. Learned Counsel refers to the Affidavit-in-reply dated 5th May 2022 filed on behalf of the Respondents in support of his contentions. Mr. Suresh Kumar reads through the impugned decision and submits that interposing an entity for taking benefit of a tax treaty, even from the beginning, is not I.T.A.No.1568/Del/2022 27 permitted. Learned Counsel refers to paragraph 59 ©f the impugned decision and submits that the Petitioner is a shell and a sham. It has no employees, no assets. He would submit that it is a device only interposed for taking tax benefit under the Mauritius DTAA and to evade taxes in India. Learned Counsel refers to paragraph 67 of the impugned Ruling. Learned Counsel also draws the attention of the Court to paragraphs 66 and 67 of the judgment in the case of Vodafone International Holding B.V. v. Union of India (supra). He would submit that in jurisdiction under Article 226 this Court cannot review the view taken by an authority. Learned Standing Counsel, therefore, submits that the Petition ought to be dismissed. 29. We have heard Mr. Pardiwalla, learned Senior Counsel for the Petitioner and Mr. Suresh Kumar, learned standing Counsel for the Respondents and with their able assistance we have perused the papers and proceedings and have considered the rival contentions. 30. ........................... 31. In short, the Authority has observed that the Petitioner was incorporated in Mauritius on 23rd August 2005 i.e. two weeks before submission of technical and financial bid by the GVK-SA Consortium. That when the expression of interest was filed by the Consortium on 20th July 2004, the Petitioner was not even in existence. That, right from the issue of ITREOI, filing of expression of interest, short listing of pre-qualified bidders by AAI, issue of RFP to pre-qualified bidder, Airport visits, site inspection and discussions with government agencies etc., Bidvest i.e. the ultimate holding company, was involved as member of the Consortium and not the Petitioner. That, it is only at Stage 2 of the bidding process that the Petitioner was substituted in place of Bidvest. That, no prior approval of AAI was obtained by the Consortium at any stage before filing of technical and financial bid which was the requirement as per paragraph 6.4 of the RFP and paragraph 6.1 of ITREOI. The evaluated entities at prequalified bidding stage were GVK, ACSA and Bidvest. That, it is GVK as well as Bidvest holding company and I.T.A.No.1568/Del/2022 28 not Petitioner who have the financial muscle and management capabilities to undertake the project and ACSA had the necessary technical expertise and experience in the field of operation and maintenance of the airport. That, the two business groups and ACSA had the complete competency required to bid for the project. On the basis of their financial and management capabilities and experience in airport management and on the basis that they were the evaluated entities, the Consortium was declared as successful bidder by the AAI on 4th February 2006. However, just ten days prior to filing of technical and financial bid, the Petitioner was brought into the Consortium. That the Mumbai International Airport Private Limited (MIAL) and the JV company was incorporated on 2nd June 2006. That the GVK group was committed to provide 37% equity through GAHPL and Bidvest provided 27% equity funding required to be invested by BSDM and ACSA was committed to funding 10% through AGL. That, despite this, the Bidvest group changed its routing of funds through the Petitioner through Mauritius, the Petitioner company being a shell company without any tangible assets, employees, office space etc. being incorporated a few days before the bidding. It has no management experts or financial advisers on its pay roll or on hire. That, as per the Indo-South Africa DTAA, the capital gains on share sale is taxable in India and if the Petitioner was not interposed, the Bidvest group would have to pay capital gains tax in India on the share sale transaction. By incorporating the Mauritian entity, the benefit of the Indo-Mauritius DTAA is sought under Article 13(4) as capital gain is not taxable in India under the same. Also, there is no capital gain tax in Mauritius. That, the Petitioner has been noting and endorsing decisions of the holding company in the Board meetings without any contribution or discussion about the decision making process, and therefore, not in a position to create any value for the joint venture. There is neither any economic rationale and substance for the treaty entitlement. That, it is clearly a case of treaty shopping and Petitioner has been incorporated I.T.A.No.1568/Del/2022 29 and introduced in the Consortium for obtaining tax benefits. 32. It emerges that the entire plank of the Advance Ruling Authority’s decision to deny benefit of Article 13(4) of the Mauritius DTAA in regards to the gains arising to Petitioner from the transaction of sale of shares is that Petitioner is an entity incorporated only two weeks before the technical and financial bid by GVK-SA consortium having neither financial nor management capabilities of its own and is therefore interposed only as a device to avoid tax. 33. Although settled law suggests that scrutiny in writ jurisdiction of orders passed by Advance Ruling Authorities is minimal, however the same can be interfered with if the Ruling is without considering the entire material on record or the submissions made on behalf of the parties or the Ruling suffers from a fundamental error or is absurd or perverse. 34. Mr. Pardiwala, learned Senior Counsel had relied upon Article 13 of the Mauritius DTAA to submit that in view of Circular 789 income from capital gains arising in India on sale of shares would not be taxable in India in view of Article 13(4) of the Mauritius DTAA. For ease of reference the said Article 13 is quoted as under: ARTICLE 13 CAPITAL GAINS 1. Gains from the alienation of immovable property, as defined in paragraph (2) of Article 6, may be taxed in the Contracting State in which such property is situated. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State I.T.A.No.1568/Del/2022 30 in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State. 3. Notwithstanding the provisions of paragraph (2) of this article, gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated. 3A. Gains from the alienation of shares acquired on or after 1 st April 2017 in a company which is resident of a Contracting State may be taxed in that State. 3B. However, the tax rate on the gains referred to in paragraph 3A of this Article and arising during the period beginning on 1 st April, 2017 and ending on 31 st March, 2019 shall not exceed 50% of the tax rate applicable on such gains in the State of residence of the company whose shares are being alienated; 4. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 3A shall be taxable only in the Contracting State of which the alienator is a resident. 5. For the purposes of this article, the term "alienation" means the sale, exchange, transfer, or relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under I.T.A.No.1568/Del/2022 31 any law in force in the respective Contracting States. 35. We note from Article 13 with respect to capital gains that gains derived by a resident of a contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of the Article shall be taxable only in that State i.e. in the present case in Mauritius and not in India. 36. The Petitioner has placed reliance upon Circular No.682 dated 30th March 1994 issued by the CBDT which mentions that capital gains arising to a resident of Mauritius on the transfer of shares in an Indian Company would be liable to tax only in Mauritius. The relevant extract of Circular No.682 is reproduced below: “1605B. Clarification regarding agreement for avoidance of double taxation with Mauritius 1. ...... 2. ...... 3. Paragraph 4 deals with the taxation of Capital gains arising from the alienation of any property other than those mentioned in the proceedings paragraphs and gives the right of taxation of capitals gains only to that State of which the person deriving the capital gains as a resident. In terms of paragraph 4, capital gains derived by residents of Mauritius by alienation of shares of companies shall be taxable only in Mauritius according to Mauritius Tax Law. Therefore, any resident of Mauritius deriving income from alienation of shares of Indian Companies will be liable to capital gains tax only in Mauritius as per Mauritius tax law and will not have any capital gains tax liability in India. 4. Paragraph 5 defines ‘alienation’ to mean the sale, exchange, transfer or relinquishment of the property or the extinguishment of any rights in it or its compulsory acquisition under any law in force in India or in Mauritius. I.T.A.No.1568/Del/2022 32 Circular : No.682, dated ”30-3-1994” 37. It is clear from the aforesaid that capital gains derived by a resident of Mauritius by alienation of shares of companies shall be taxable in Mauritius only and will not have any capital gains tax liability in India. 38. Further, reliance was placed upon another Circular No.789 dated 13th April 2000 issued by the CBDT which clarified that companies which are resident in Mauritius would not be taxable in India on income from capital gains arising in India on sale of shares as per paragraph 4 of Article 13 of Mauritius DTAA. An extract of Circular No.789 is reproduced below: “734. Clarification regarding taxation of income from dividends and capital gains under the Indo- Mauritius Double Tax Avoidance Convention (DTAC) 1. The provisions of the Indo-Mauritius DTAC of 1983 apply to ‘residents’ of both India and Mauritius. Article 4 of the DTAC defines a resident of one State to mean “any person who, under the laws of that State is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.” Foreign Institutional Investors and other investment funds, etc., which are operating from Mauritius are invariably incorporated in that country. These entities are ‘liable to tax’ under the Mauritius Tax law and are, therefore, to be considered as residents of Mauritius in accordance with the DTAC. 2. Prior to 1-6-1997, dividends distributed by domestic companies were taxable in the hands of the shareholder and tax was deductible at source under the Income-tax Act, 1961. Under the DTAC, tax was deductible at source on the gross dividend paid out at the rate of 5% or 15% depending upon the extent of shareholding of the Mauritius resident. Under I.T.A.No.1568/Del/2022 33 the Income-tax Act, 1961, tax was deductible at source at the rate specified under section 115A, etc. Doubts have been raised regarding the taxation of dividends in the hands of investors from Mauritius. It is hereby clarified that wherever a Certificate of Residence is issued by the Mauritian Authorities, such Certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly. 3. The test of residence mentioned above would also apply in respect of income from capital gains on sale of shares. Accordingly, FIIS, etc, which are resident in Mauritius would not be taxable in India on income from capital gains arising in India on sale of shares as per paragraph 4 of Article 13. Circular : No.789, dated “13-4-2000” 39. Circular No.789 of 2000 dated 13th April 2000 clearly suggests that certificate of residence issued by Mauritian Authorities will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for the purposes of the Mauritius DTAA and that capital gains arising from sale of shares would not be taxable in India. It is not in dispute that Circular No.789 dated 13th April 2000 continued to be in force between India and Mauritius at the relevant time. 40. A press release dated 1st March 2013 from the Finance Ministry which is quoted as under also unequivocally declares that the TRC produced by resident of a contracting State will be accepted as evidence that he is a resident of that contracting State and the Income Tax Authorities will not go behind the TRC and question his residence status. “FINANCE MINISTRY'S CLARIFICATION ON TAX RESIDENCY CERTIFICATE (TRC) PRESS RELEASE, DATED 1-3-2013 I.T.A.No.1568/Del/2022 34 Concern has been expressed regarding the clause in the Finance Bill that amends Section 90 of the Income-tax Act that deals with Double Taxation Avoidance Agreements. Sub-section (4) of section 90 was introduced last year by Finance Act, 2012. That subsection requires an assessee to produce a Tax Residency Certificate (TRC) in order to claim the benefit under DTAA. DTAAs recognize different kinds of income. The DTAAs stipulate that a resident of a contracting state will be entitled to the benefits of the DTAA. In the explanatory memorandum to the Finance Act, 2012, it was stated that the Tax Residency Certificate containing prescribed particulars is a necessary but not sufficient condition for availing benefits of the DTAA. The same words are proposed to be introduced in the Income-tax Act as sub-section (5) of section 90. Hence, it will be clear that nothing new has been done this year which was not there already last year. However, it has been pointed out that the language of the proposed sub-section (5) of section 90 could mean that the Tax Residency Certificate produced by a resident of a contracting state could be questioned by the Income Tax Authorities in India. The government wishes to make it clear that that is not the intention of the proposed subsection (5) of section 90. The Tax Residency Certificate produced by a resident of a contracting state will be accepted as evidence that he is a resident of that contracting state and the Income Tax Authorities in India will not go behind the TRC and question his resident status. In the case of Mauritius, circular no. 789, dated 13-4-2000 continues to be in force, pending ongoing discussions between India and Mauritius. I.T.A.No.1568/Del/2022 35 However, since a concern has been expressed about the language of sub-section (5) of section 90, this concern will be addressed suitably when the Finance Bill is taken up for consideration.” (emphasis supplied) 41. As can be seen, the transaction of sale by Petitioner is of the period of 2011 and the press release is of 1st March 2013. That being the position, we are unable to comprehend the logic of the findings of the Advance Ruling Authority impugned in this Petition. 42. It is also not in dispute that the decision of Apex Court in Azadi Bachao Andolan (supra) has not only upheld Circular No.682 of 1994 but also Circular No.789 of 2000. Paragraphs 49 and 50 of the said decision is usefully quoted as under: “49. As early as on March 30, 1994, the CBDT had issued circular no.682 in which it had been emphasized that any resident of Mauritius deriving income from alienation of shares of an Indian company would be liable to capital gains tax only in Mauritius as per Mauritius tax law and would not have any capital gains tax liability in India. This circular was a clear enunciation of the provisions contained in the DTAC, which would have overriding effect over the provisions of sections 4 and 5 of the Income- tax Act, 1961 by virtue of section 90(1) of the Act. If, in the teeth of this clarification, the assessing officers chose to ignore the guidelines and spent their time, talent and energy on inconsequential matters, we think that the CBDT was justified in issuing 'appropriate' directions vide circular no.789, under its powers under section 119, to set things on course by eliminating avoidable wastage of time, talent and energy of the assessing officers discharging the onerous public duty of collection of revenue. The circular no.789 does not in any way crib, cabin or confine the powers of the I.T.A.No.1568/Del/2022 36 assessing officer with regard to any particular assessment. It merely formulates broad guidelines to be applied in the matter of assessment of assessees covered by the provisions of the DTAC. 50. We do not think the circular in any way takes away or curtails the jurisdiction of the assessing officer to assess the income of the assessee before him. In our view, therefore, it is erroneous to say that the impugned circular No.789 dated 13.4.2000 is ultra virus the provisions of section 119 of the Act. In our judgment, the powers conferred upon the CBDT by sub-sections (1) and (2) of section 119 are wide enough to accommodate such a circular.” 43. Paragraphs 97 and 98 of the decision in the case of Vodafone International Holding B.V. v. Union of India (supra) which also clearly uphold Circular No.789 and the conclusivity of the TRC are also usefully quoted as under: “97 We are, therefore, of the view that in the absence of LOB Clause and the presence of Circular No.789 of 2000 and TRC certificate, on the residence and beneficial interest/ownership, tax department cannot at the time of sale/disinvestment/exit from such FDI, deny benefits to such Mauritius companies of the Treaty by stating that FDI was only routed through a Mauritius company, by a company/principal resident in a third country; or the Mauritius company had received all its funds from a foreign principal / company; or the Mauritius subsidiary is controlled / managed by the Foreign Principal; or the Mauritius company had no assets or business other than holding the investment/shares in the Indian company; or the Foreign Principal/100% shareholder of Mauritius company had played a dominant role in deciding the time and price of the I.T.A.No.1568/Del/2022 37 disinvestment/sale/transfer; or the sale proceeds received by the Mauritius company had ultimately been paid over by it to the Foreign Principal/ its 100% shareholder either by way of Special Dividend or by way of repayment of loans received; or the real owner/beneficial owner of the shares was the foreign Principal Company. Setting up of a WOS Mauritius subsidiary/SPV by Principals/genuine substantial long term FDI in India from/ through Mauritius, pursuant to the DTAA and Circular No. 789 can never be considered to be set up for tax evasion. 98. LOB and look through provisions cannot be read into a tax treaty but the question may arise as to whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at the substance of the transaction. DTAA and Circular No. 789 dated 13.4.2000, in our view, would not preclude the Income Tax Department from denying the tax treaty benefits, if it is established, on facts, that the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance. Tax Department, in such a situation, notwithstanding the fact that the Mauritian company is required to be treated as the beneficial owner of the shares under Circular No. 789 and the Treaty is entitled to look at the entire transaction of sale as a whole and if it is established that the Mauritian company has been interposed as a device, it is open to the Tax Department to discard the device and take into consideration the real transaction between the parties, and the transaction may be subjected to tax. In other words, TRC does not prevent enquiry into a tax fraud, for example, where an OCB is used by an Indian resident for round- tripping I.T.A.No.1568/Del/2022 38 or any other illegal activities, nothing prevents the Revenue from looking into special agreements, contracts or arrangements made or effected by Indian resident or the role of the OCB in the entire transaction.” 44. Although paragraph 98 of the Vodafone International Holding B.V. v. Union of India (supra) has been quoted in the impugned ruling, however, paragraph 97 which is also relevant, appears to have been missed out by the authority. 45. No doubt mere holding of a TRC cannot prevent an enquiry if it can be established that the interposed entity was a device to avoid tax. However, the decisions of the Apex Court cited above have clearly upheld the conclusivity of the TRC absent fraud or illegal activities. Nowhere in the impugned ruling the existence of TRC has been denied. In fact in paragraph 2 of the impugned Ruling, the Authority has itself set out the existence of a valid TRC in the name of the Petitioner. Further, except bald allegations, no material has been placed on record to demonstrate or establish that Petitioner was a device to avoid tax or that there was fraud or any illegal activity. There is hardly any discussion in the impugned Ruling on the applicability of the said Circulars No. 682, 789 or the Press Releases by the CBDT / Ministry of Finance discussed above. 46. From the facts on record it cannot be said that the Indian Authorities were not aware of the change or the introduction of the Petitioner as part of the Consortium. Parties arrange their affairs in a manner as to make their businesses viable and profitable and it is part of that exercise that the Petitioner appears have been introduced into the Consortium with full knowledge of all the authorities concerned. The entire structure as well as the transaction of sale was in the full knowledge of the Indian Authorities including the tax authorities. 47. Reference has been made to Article 27A of the Mauritius DTAA on LOB which was inserted by I.T.A.No.1568/Del/2022 39 Notification dated 10th August, 2016 by amending the said DTAA pursuant to which shell/conduit companies claiming residence of a contracting State shall not be entitled to the benefits of the convention. The said Article is usefully quoted as under:- “ARTICLE 27A LIMITATION OF BENEFITS 1. A resident of a Contracting State shall not be entitled to the benefits of Article 13(3B) of this Convention if its affairs were arranged with the primary purpose to take advantage of the benefits in Article 13(3B) of this Convention. 2. A shell/conduit company that claims it is a resident of a Contracting State shall not be entitled to the benefits of Article 13(3B) of this Convention. A shell/conduit company is any legal entity falling within the definition of resident with negligible or nil business operations or with no real and continuous business activities carried out in that Contracting State. 3. A resident of a Contracting State is deemed to be a shell/ conduit company if its expenditure on operations in that Contracting State is less than Mauritian Rs.1,500,000 or Indian Rs. 2,700,000 in the respective Contracting State as the case may be, in the immediately preceding period of 12 months from the date the gains arise. 4. A resident of a Contracting State is deemed not to be a shell/conduit company if: (a) it is listed on a recognized stock exchange of the Contracting State; or (b) its expenditure on operations in that Contracting State is equal to or more I.T.A.No.1568/Del/2022 40 than Mauritian Rs.1,500,000 or Indian Rs.2,700,000 in the respective Contracting State as the case may be, in the immediately preceding period of 12 months from the date the gains arise. Explanation : The cases of legal entities not having bona fide business activities shall be covered by Article 27A(1) of the Convention. 48. It is observed that this Article disentitles benefits of Article 13(3B) if the affairs were arranged for the primary purpose to take advantage of the benefits of Article 13(3B). The Article has been inserted with effect from 1st April 2017. According to this Article, with effect from 1st April 2017, a shell or a conduit company that claims to be a resident of a contracting State shall not be entitled to benefits of Article 13(3B). 49. The Petitioner has also made reference to Press Release dated 29th August 2016 issued by the CBDT post amendment to Mauritius DTAA which was effective from 1st April 2017. The said Press Release is quoted as under:- “Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes PRESS RELEASE New Delhi, 29 th August, 2016. Subject: Notification of Protocol for amendment of the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains, and for the encouragement of mutual trade and investment between India and Mauritius - regarding The Protocol for amendment of the Convention for the avoidance of double I.T.A.No.1568/Del/2022 41 taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains between India and Mauritius was signed by both countries on 10 th May, 2016. After completion of internal procedures by both countries, the Protocol entered into force in India on 19 th July, 2016 and has been notified in the Official Gazette on 11 th August, 2016. The Protocol provides for source-based taxation of capital gains arising from alienation of shares acquired on or after 1 st April, 2017 in a company resident in India with effect from financial year 2017-18. Simultaneously, investments made before 1 st April, 2017 have been grandfathered and will not be subject to capital gains taxation in India. Where such capital gains arise during the transition period from 1 st April, 2017 to 31 st March, 2019, the tax rate will be limited to 50% of the domestic tax rate of India. Taxation in India at full domestic tax rate will take place from financial year 2019-20 onwards. The benefit of 50% reduction in tax rate during the transition period shall be subject to the Limitation of Benefits Article, whereby a resident of Mauritius (including a shell / conduit company) will not be entitled to benefit of 50% reduction in tax rate, if it fails the main purpose test and bona fide business test. A resident is deemed to be a shell / conduit company, if its total expenditure on operations in Mauritius is less than Rs.2,700,000 (Mauritian Rupees 1,500,000) in the immediately preceding 12 months. The Protocol further provides for source-based taxation of interest income of banks, whereby interest arising in India to Mauritian resident banks will be subject to I.T.A.No.1568/Del/2022 42 withholding tax in India at the rate of 7.5% in respect of debt claims or loans made after 31 st March, 2017. However, interest income of Mauritian resident banks in respect of debt-claims existing on or before 31 st March, 2017 shall be exempt from tax in India as per existing provisions in the Convention. The Protocol also provides for updating of the Exchange of Information Article as per the international standard, provision for assistance in collection of taxes, source-based taxation of other income, amongst other changes. The Protocol will tackle treaty abuse and round tripping of funds attributed to the India-Mauritius treaty, curb revenue loss, prevent double non-taxation, streamline the flow of investment and stimulate the flow of exchange of information between the two Contracting Parties. It will improve transparency in tax matters and will help curb tax evasion and tax avoidance. (Meenakshi J Goswami) Commissioner of Income Tax (Media and Technical Policy) Official Spokesperson, CBDT.” 50. The said press release expressly provides for grandfathering of capital gains exemption provided under the erstwhile Mauritius DTAA. The protocol provides for source based taxation of capital gains arising from alienation of shares acquired with effect from 1st April 2017 in a company resident in India viz. from Financial year 2017-18. Investments made before 1st April 2017 have been grandfathered and will not be subject to capital gains taxation in India. 51. The Authority appears to have clearly missed the clear import of this Circular as the entire sale by Petitioner was prior to 1st April, 2017. The arguments of the Revenue with respect to shell company/ conduit I.T.A.No.1568/Del/2022 43 can only be considered for investments with effect from 1st April 2017 and not case at hand. 52. Therefore, to say that in the JV, Petitioner is a shell company without any tangible employees, space, assets, etc., incorporated only a few days before bidding or that it has no management experts or financial advisors on its payroll, thereby the Petitioner having no economic or commercial rationale would not be relevant as the concept of LOB in cases of shell company / conduit would become applicable to investments with effect from 1 st April 2017 only. 53. Therefore, for the Authority to hold that if Petitioner was not interposed, the Bidvest group in accordance with the Indo-SA DTAA would have to pay capital gains on the share sale as the same is taxable in India is misplaced as not relevant as the investment is by the Petitioner. As noted above, the Petitioner has been incorporated in Mauritius, holds a TRC which is sufficient proof of its residence in Mauritius, which as noted above, cannot be enquired into unless there is a fraud or illegal activity, which in this case, has neither been alleged nor demonstrated. Even if as observed by the Authority that the entire value creation activities are happening in India leading to rise in share valuations, in our view absent any element of fraud or illegality that cannot be a reason to hold the Petitioner’s investment as a device to evade tax. The suggestions / findings with respect to shell company / conduit, in our view, would apply only in accordance with Article 27A of the Mauritius DTAA which is applicable for investment with effect from 1 st April 2017 and not prior to that, and therefore, same would have to be reconsidered in that light. 54. True that there may have been abuse of tax treaty laws and contracting States have taken corrective measures to prevent abusive transactions by amending the bilateral conventions, however, as noted above, the amendments to the Mauritius DTAA for plugging such transactions have been made effective from 1 st April 2017, unless there is a fraud or any illegal activity I.T.A.No.1568/Del/2022 44 involved. In fact, as noted above, the investments prior to 1 st April 2017 have been grandfathered and are not subject to capital gains taxation in India. The Press Release dated 29 th August 2016 quoted above also takes care of the transition period from 1 st April 2017 to 31 st March 2019 where the tax rate has been limited to 50% of domestic tax rate in India. That taxation in India at full domestic rate is stated to take place from financial year 2019-20 onwards, subject to other conditions. 55. Although the observations of the Authority in paragraph 62 with respect to the claim of treaty shopping of as well as the doctrine of substance over formed in paragraph 63 cannot be faulted with, however, it needs to be emphasized that the LOB clause has been made effective for investments only from 1st April 2017. As noted above, even the press release dated 29th August 2016 confirms that investments made before 1st April 2017 will not be subject to capital gains taxation in India. That being the position these observations of the authority appear to be misplaced.” 9. Ratio of the above decision squarely applies to the facts of the assessee’s case. As could be seen from the above decision of Bombay High Court the assessee which was holding valid TRC of Mauritius sold its investments which were made prior to 01.04.2017. The Hon’ble High Court considering the press release issued by Finance Ministry’s clarification on tax residency certificates, Circular of CBDT No.789/2000, Article 13(4) of India – Mauritius DTAA, press release of CBDT on Protocol of amendment of convention for avoidance of double taxation and the judgments of Hon’ble Supreme Court in the case of Vodafone International Holdings B.V. Vs. Union of India & Another (supra) and Union of India Vs. Azadi Bachao Aandolan & I.T.A.No.1568/Del/2022 45 another (supra) the Hon’ble High Court held that the investments made prior to 01.04.2017 have been grandfathered and will not be subject to capital gain taxation in India. The Hon’ble High Court considering the press release dated 29.08.2016 issued by the CBDT post amendment to Mauritius DTAA which was effect to from 01.04.2017 held that the press release expressly provides for grandfathering of capital gains exemption provided under the Erstwhile Mauritius DTAA. The Hon’ble High Court held that the protocol provides for source based taxation of capital gains arising from aviation of shares acquired w.e.f. 01.04.2017 in a company resident in India from FY 2017 & 2018. The Hon’ble High Court thus, held that the investments made before 01.04.2017 have been grandfathered and will not be subject to capital gains taxation in India. Similar is the situation in the case on hand before us. The assessee undoubtedly made investments in Indian company namely M/s Pearl Retail Solutions Pvt. Ltd. in AY 2011-12 and 2012-13. During the impugned assessment year i.e. 2018-19 assessee company being a resident of Mauritius and holding a valid TRC has sold its part shareholding to LEI Singapore Holdings Pte Ltd. and reported long term capital gain and this long term capital gain claimed as exempt in view of Article 13(4) of DTAA between India & Mauritius. I.T.A.No.1568/Del/2022 46 Therefore, applying the ratio of the decision of the Bombay High Court since the investments were made by the assessee a Mauritius company holding a valid TRC prior to 01.04.2017 the resultant capital gain is not liable to be taxed in India. Respectfully following the decision of the Hon’ble Bombay High Court (supra) we allow the grounds of appeal of the assessee. 10. In the result, appeal of the assessee is allowed. Order pronounced in the open court on 05/03/2024 Sd/- Sd/- (G.S. PANNU) (C.N. PRASAD) VICE PRESIDENT JUDICIAL MEMBER Dated: 05/03/2024 *Kavita Arora, Sr. P.S. Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. By order Assistant Registrar, ITAT: Delhi Benches-Delhi