Sapien Funds Ltd, Mauritius V. CIT(International Taxation), New Delhi

ITA 2890/DEL/2022

• Counselvise Citation: [2023] 100 COUNSELVISE.COM (IT) 5228 (ITAT-DELHI)
• Duration Of Justice: 11 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 27-08-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 11-12-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Double taxation relief; Transactions in derivatives; Wholly owned subsidiary; Set aside; Capital Gains
• Section: 263; 10; 90; 2; 143(3); 43; 115A; 119

Judgement Text

I.T.A. No. 2890/Del/2022 1 IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH “D” : DELHI ] BEFORE SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER A N D SHRI M. BALAGANESH, ACCOUNTANT MEMBER आ.अ.सं./I.T.A No.2890/Del/2022 िनधाᭅरणवषᭅ/Assessment Year: 2018-19 Sapien Funds, 12-Central Lane, Ground Floor, Bengali Market, New Delhi – 110 001. बनाम Vs. CIT, International Taxation, New Delhi. PAN No. AAWCS2495N अपीलाथᱮ /Appellant ᮧ᭜यथᱮ/Respondent िनधाᭅᳯरतीकᳱओरसे /Assessee by : Ms. Ananya Kapoor, Advocate; राज᭭वकᳱओरसे / Department by : Shri Vijay Vasanta, [CIT] - D. R.; सुनवाईकᳱतारीख/ Date of hearing : 28/08/2023 उ᳃ोषणाकᳱतारीख/Pronouncement on : 21/11/2023 आदेश /O R D E R PERC.N. PRASAD, J.M. : 1. This appeal is filed by the assessee against the order of the ld. Commissioner of Income Tax (International Taxation)-3 [hereinafter I.T.A. No. 2890/Del/2022 2 referred to CIT (IT)] Delhi, dated 7.11.2022 under section 263 of the Income Tax Act, 1961 (the Act) for the assessment year 2018-19. 2. The assessee in its appeal has raised the following substantive grounds of appeal:- “1. That in view of the facts and circumstances of the case and in law, the impugned notice dated 22.08.2022 issued under Section 263 of the Income Tax Act, 1961 ('the Act') and the impugned order dated 07.11.2022 passed under Section 263 of the Act are illegal, bad in law, without jurisdiction and liable to be quashed. 2. That, the impugned notice dated 22.08.2022 and the impugned order dated 07.11.2022 do not satisfy the jurisdictional requirement for invocation of Section 263 of the Act. The Commissioner of Income Tax ('CIT') has erred in not establishing as to how the Assessing Officer ('AO') committed any error in passing the assessment order dated 27.09.2021 under Section 143(3) of the Act. Therefore, jurisdiction assumed by the CIT under Section 263 of the Act is illegal, bad in law, without jurisdiction and liable to be quashed. 3. That the assessment order dated 27.09.2021 passed by the AO under Section 143(3) of the Act is neither erroneous nor prejudicial to the interest of the Revenue and as such the impugned order dated 07.11.2022 passed by the CIT under Section 263 of the Act is illegal and bad in law. 4. That the CIT failed to appreciate that the issue was duly examined during the course of original assessment proceedings and the same was, therefore, outside the scope of revisionary jurisdiction under Section 263 of the Act and the view taken by the AO is a plausible view, hence, the impugned order is illegal and bad in law. 5. That this is not a case of lack of enquiry as the assessment order dated 27.09.2021 is passed after making due enquiries and application of mind. I.T.A. No. 2890/Del/2022 3 6. That during the course of original assessment proceedings, detailed questionnaires were issued from time-to-time which were duly responded to and enquiries were conducted and thereafter the assessment order dated 27.09.2021 was passed. Hence, the assessment order is valid and correct in law. 7. That without prejudice, no independent enquiry has been done by the CIT and in absence of the same, the impugned order is illegal, bad in law and without jurisdiction. 8. That, in view of the facts and circumstances of the case and in law, the CIT has incorrectly invoked Section 263 of the Act without appreciating that if two views are plausible and the AO takes one view, then no revisionary jurisdiction can be exercised. 9. That the impugned notice dated 22.08.2022 and the impugned order dated 07.11.2022 passed by the CIT under Section 263 of the Act is clearly without application of mind. Hence, the impugned notice dated 22.08.2022 and the impugned order dated 07.11.2022 passed under Section 263 of the Act are liable to be quashed. 10. That all the facts and circumstances of the case and the material available on record have not been properly considered by the CIT while passing the impugned order dated 07.11.2022 under Section 263 of the Act and as such the same is illegal, arbitrary, and bad in law. 11. That, even otherwise, specific query was made during original assessment proceedings and the AO accordingly took the view that the gains on derivatives of Rs. 5,63,99,933/-, interest income of Rs91,28,125/-, long term capital gain on sale of bonds of Rs. 23,49,000/- and short term capital gain on transfer of shares of Rs. 28,90,711/- are not taxable in India and the Appellant is a Mauritius based Fund and a tax resident of Mauritius and as such is entitled to benefits of India-Mauritius Double Taxation Avoidance Agreement. 12. That, in view of the facts and circumstances of the case and in law, the CIT has erred in holding that the gains on derivatives of Rs. 5,63,99,933/-, interest income of Rs. 91,28,125/-, long term capital gain on sale of bonds of Rs. 23,49,000/- and short term capital gain on transfer of shares I.T.A. No. 2890/Del/2022 4 of Rs. 28,90,711/- are taxable under the provisions of the Act whereas the same are not liable to tax in India. 13. That, in view of the facts and circumstances of the case and in law, the CIT has erred in not appreciating that the Appellant is a Mauritius based Fund and a tax resident of Mauritius and as such is entitled to benefits of India- Mauritius Double Taxation Avoidance Agreement and the transaction is genuine in nature. 14. That, in view of the facts and circumstances of the case and in law, the CIT has erred in not appreciating the case of the Appellant. The evidences/documents/material filed and placed on record has not been judiciously interpreted and considered/appreciated by the CIT. 15. That, in view of the facts and circumstances of the case and in law, the CIT has grossly erred in not providing the Appellant an opportunity before passing the impugned order and as such the impugned order is illegal, bad in law, without jurisdiction and liable to be quashed. 16. That, in view of the facts and circumstances of the case and in law, the CIT has erred in cancelling earlier assessment order dated 27.09.2021 and directing the AO to revise the assessment order in view of the findings of the CIT. The said act of the CIT is illegal and bad in law.” 3. The ld. Counsel for the assessee, at the outset, referring to page 29 para 15 of the ld. CIT’s order submits that on identical facts for the assessment year 2017-18 the ld. CIT by order under section 263 dated 24.03.2022 cancelled the assessment order passed under section 143(3) of the Act holding that the said assessment order passed was erroneous and prejudicial to the interest of Revenue for the reason that the interest income received by the assessee and the capital gains on derivative transactions were not taxed under the Income Tax Act rejecting the contention of the assessee that the assessee is entitled for the benefit of Article 11 of the Indo Mauritius DTAA as the assessee is tax resident of Mauritius. The ld. I.T.A. No. 2890/Del/2022 5 Counsel submits that for the assessment year 2017-18 the order passed by the ld. CIT under section 263 has been cancelled by the Tribunal by order dated 8.06.2023 in ITA. No. 976/Del/2022 holding that the interest income and the gains on investments and bonds exchange traded equities are not taxable in India. The ld. Counsel therefore, submits that since facts in this assessment year i.e. 2018- 19 are identical to the facts for the assessment year 2017-18 as also noted by the ld. CIT in his order in para 15 and since the Tribunal cancelled the order passed by the CIT under section 263 for the assessment year 2017-18, the same may be followed for the assessment year 2018-19. 4. The ld. DR strongly supported the orders of the authorities below. 5. Heard rival contentions. On identical facts the Tribunal for the assessment year 2017-18 cancelled the order passed under section 263 of the Act by the ld. CIT in holding that the assessee is not entitled to the benefits of Article 11 of Indo Mauritius DTAA and the income would be chargeable to tax in India on gross basis at the tax rate as per section 115A of the Act observing as under:- “16. On going through the entire issue, we deem it prudent to determine whether the income earned by the assessee who is a tax resident of Mauritius, out of the gains on currency derivates and the interest income on bonds is taxable in India or not. 17. The taxability of the receipts would validate the proceedings u/s. 263 with regard to error as well as the prejudice caused to the revenue. I.T.A. No. 2890/Del/2022 6 18. The arguments of the revenue are as under: “As per the tax return and financial statement filed, it pays a minimal tax with majority of income from foreign jurisdiction is exempt from taxation. The Mauritian Tax law provides an extremely l iberal taxation regime for fund which holds a global business l icense and are formed under Col lective Investment Scheme. This regime provides for an income tax exemption of 80% on income derived by a Col lective Investment Scheme, Closed-end fund, CIS manager, CIS administrator, Investment adviser or assets manager licensed or approved by the FSC. The exemption appl ies to the following income: • Foreign dividend, subject to amount not al lowed as deduction in source country. • Foreign-source interest income. • Profit attributable to a PE of a resident company in a foreign country. • Foreign-source income derived by a CIS, Closed End Funds, CIS manager, CIS administrator, investment adviser or asset manager l icensed or approved by the FSC. • Income derived by companies engaged in ship and aircraft leasing. • Interest derived by a person from money lent through a peerto- peer lending platform operated under a l icense issued by the FSC. As said before, l iabi l ity to tax for treaty purposes refers to ful l or comprehensive l iabi l ity and not l iabi l ity that is l imited under the domestic law of the relevant contracting state. Therefore, the criteria of “l iable to tax” is not ful fi l led in this case. In view of the above, the assessee is not a tax resident for the purposes of appl ication of India- Mauritius DTAA. In the instant case, the assessee company is created under Col lective Investment Scheme. Col lective investment vehicles (CIVs) general ly, do not meet the def inition of “l iable to tax” in order to qual i fy as a resident of a contracting state for the purposes of tax treaties. As a general rule, domestic tax laws of several countries treat the income and gains of CIV as arising directly to the Investors and not to CIV itself . In short, the CIV is treated l ike a transparent I.T.A. No. 2890/Del/2022 7 entity. As a result, CIV does not get entitled to the benefits of tax treaties. Therefore, OECD Commentary to Article 1 (2017) in para 31 recommends that the contracting states should publicize their position on this issue bi lateral ly either by express provision in the tax treaties by stating that CIV is entitled to tax treaty benefits or through exchange of notes. In the absence of such action, the CIV would not be entitled to benefits of tax treaties. Accordingly, as under India-Mauritius DTAA, no such position has been taken, then assessee company being a CIV wi l l not get the benefits of India- Mauritius DTAA.” 19. Hence, it was held that the assessee company is not entitled to avail benefits under India- Mauritius DTAA being not a resident for tax purposes because of non-fulfillment of condition of “l iable to tax” criteria. 20. Rebutting the arguments of the revenue, the ld. AR argued that the Assessee is a f iscal ly transparent entity as it is incorporated as company under the laws of Mauritius. Further, Mauritius Income Tax Act, 1995 under section 43 states: “This Part shal l apply to companies, unit trust schemes, trusts col lective investment schemes, societies and Foundations”. Section 45A of the Mauritian Act specif ical ly provides for taxation of col lective investment schemes. The Assessee f i les its income tax return in Mauritius. The same was also provided during the proceedings before ld. CIT. It was argued that the ld. CIT in his Order also states that the Assessee is liable to tax in Mauritius although it enjoys 80% exemption as per the domestic laws of Mauritius. 21. From the perspective of a textual interpretation, “l iable to tax” is supposed to mean l iable to comprehensive taxation and not actual ly being subject to tax, as l inguistical ly, the phrase “l iable to tax” has a much wider scope than “subject to tax. 22. Further Section 2(29A) of the Income Tax Act, 1961 inserted vide Finance Act, 2021 clarif ied that the Act currently does not def ine the term liable to tax though this term is used in section 6, in clause (23FE) of section 10 and various agreements entered into under section 90 or section 90A of the Act. Hence, it is proposed to insert clause (29A) to section 2 of the Act providing its definition. The term liable to tax in relation to a person means that there is a l iabi lity of tax on that person I.T.A. No. 2890/Del/2022 8 under the law of any country and wi ll include a case where subsequent to imposition of such tax l iabi lity, an exemption has been provided. This amendment wi l l take ef fect from 1st Apri l, 2021 and wi ll, accordingly, apply in relation to the assessment year 2021-22 and subsequent assessment years. The ld. AR further rel ied on the judgments in the case of Union of India Vs. Azadi Bachao Andolan & Anr. 263 ITR 706, Serco BPO Pvt. Ltd. Vs. AAR 379 ITR 256 and In Re General Electric Pension Trust 280 ITR 425. 23. On going through the entire facts, we find that the observation of the ld. CIT that the assessee company is not entitled to treaty benef its being a non-resident for tax purpose because of non-fulf il lment of condition of l iable to tax criteria is wrong on facts. Just because, tax exemption is provided by the resident country doesn’t give an automatic right to the revenue authorities to tax the income in the contracting state. 24. The revenue further argued that the assessee is not a legitimate resident and the assessee is a classic case to treaty shopping to avoid payment of taxes. The arguments of the revenue are as under: “The preamble of the DTAA (in this case India-Mauritius DTAA) put forth the object and intent of the DTAA. As general rules of interpretation of the provisions of the DTAAs, the text must be read along with its object and purpose. The object and purpose of the DTAAs including the India-Mauritius DTAA is not only to avoid double taxation but also the prevention of fiscal evasion. The preamble of India-Mauritius DTAA is reproduced as under: “Whereas the annexed Convention between the Government of the Republ ic of India and the Government of Mauritius 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 has come into force on the noti fication by both the Contracting States to each other on completion of the procedures required by their respective laws, as required by Article 28 of the said Convention; Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961) and section 24A of the Companies (Prof its) Surtax Act, 1964 (7 of 1964), the Central Government hereby directs that al l the provisions of the said I.T.A. No. 2890/Del/2022 9 Convention, shal l be given effect to in the Union of India.” Under a Tax Treaty framework, treaty benefits are extended only to the tax residents of the contracting states. However, treaty abuse may occur when a taxpayer resident of a third country, takes advantage of the favourable tax positions of a treaty that would not normal ly be avai lable to him. This practice is popularly known as treaty shopping. Prior to BEPS initiative, there were no speci fic provisions under OECD model or UN model to address treaty shopping in a comprehensive manner. As an initiative, “beneficial ownership” requirement was introduced in 1977 OECD model to address situations where dividend, interest or royalty payments are made to an intermediary, such as an agent or nominee interposed between the benef iciary and the payer. However, benef icial ownership test has l imitation to intermediate companies as companies are legal owners of the income and they are under no obl igation to pass on the income as in the case for agents or nominees. Subsequently, a section on improper use of the convention was added to the Commentary on Article 1.” 25. Taking cue from the order of the ld. CIT, the ld. DR argued that in Post BEPS, a new Article 29, concerning the entitlement to tax treaty benefits, was added to the OECD Model as well as the UN model update of 2017. The model article includes several alternative provisions that contracting states may choose from when drafting their tax treaties to ensure that tax treaty benef its are not granted in situations of evasion or avoidance. These provisions reflect the intention of the contracting states as included in the preamble to OECD and UN Model which is to el iminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements. The intention included in the preamble and the provisions stipulated under Article 29 stem from the work carried out under OECD BEPS initiative and corresponds to the minimum standard as detai led in the Final Report on Article 6 of “Preventing the granting of Treaty benefits in inappropriate circumstances. Relying on the post BEPS scenario, the revenue argued that India has deposited the Instrument of Ratif ication to OECD, Paris along with its Final Position in terms of Covered Tax Agreements (CTAs), Reservations, Options and Notif ications under the MLI, as a result of which MLI wi ll enter into force for India on 01st October, 2019 and its provisions wi l l have effect I.T.A. No. 2890/Del/2022 10 on India’s DTAAs from FY 2020-21 onwards. Two modifications were made. One, in the l ight of Article 6 of the MLI India had agreed to modify the Purpose of a CTA. This is done through insertion of a l ine in the Preamble of the treaty stating that the parties intend to avoid creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, as wel l as through treaty shopping. Therefore, post-BEPS, the issue becomes expl icit that tax residents using treaty shopping to avoid payment of legitimate taxes is no more entitled to tax treaty benef its. Second, in view of Article 7 of MLI dealing with Prevention of treaty abuse, envisages the fol lowing approaches in bi lateral treaties to curb treaty abuse. India has accepted to apply PPT as an interim measure and intends where possible to adopt LOB provision, in addition or replacement of PPT, through bi lateral negotiations along with Simpl if ied LoB. India and Mauritius both have signed the MLI and ratif ied their tax treaties to include Article 6 of MLI. 26. Therefore, it was argued that any arrangement to avoid payment of legitimate taxes such as treaty shopping or conduit companies is not entitled to India- Mauritius DTAA benef its being held to be improper use of treaties. On this background, the examinations of facts are conducted to ascertain as to whether the arrangement made by the assessee company is tantamount to tax avoidance. 27. It was argued that two individuals namely Ramesh Kumar Ahuja and Aditi Agrawal incorporated Sapien Capital Ltd, a UK company with 50% shareholding each. Both are tax residents of UK. Sapien Capital Ltd f loated a wholly owned subsidiary namely Sapien Capital( Mauritius) Ltd in Mauritius which inturn created Sapien Funds Ltd, a Collective Investment Vehicle. This CIV is registered as FPI in India and made investments in India. Admittedly, there are around 21 investors in the CIV who are tax residents of third countries. As per the detai ls furnished during the proceedings, two investors were holding more than 10% of shares of the fund. Raj Shah, Sita Shah and Ronak Shah together hold 13.64 % of shares. All of them are tax residents of Kenya. Abhishek Agrawal, a tax resident of the UK held 13.13% of the shareholding. Sapien Capital (Mauritius) Ltd is also the fund manager of this CIV. The moot question is then why the CIV is not formed at the level of the UK or any other place other than Mauritius because whether the investments are made from the UK or Mauritius or any other location, I.T.A. No. 2890/Del/2022 11 commercial outcome in India would be simi lar. The only reason is to obtain a favourable tax position of taxation of capital gains under the India-Mauritius as avai lable prior to modif ication of protocol in 2017. In order to understand the motive, one has to consider the arrangement as a whole instead of resorting to transactional analysis. In this regard, a reference may be made to the principle approved by Hon’ble Supreme Court in the case of Vodafone International Holdings B.V. v. Union of India (2012)341 ITR1 (SC). The Apex Court had held that in order to ascertain the taxabi lity of the cross-border transaction in India, the business activities as a whole is required to be ascertained. 28. It was argued that under the India-Mauritius DTAA, the taxing rights over the capital gains was with the country of residence. Alternatively, India being a source country had no rights to tax capital gains arising from transfer of shares of Indian companies. On the other hand, if the fund is invested from the UK, the capital gains that arise in India would suffer source taxation in India under India-UK DTAA. The other disadvantages is that CIVs are treated as transparent entities in the UK and therefore, prima facie would not be entitled to tax treaty benef its being not a resident for tax purposes in the UK. 29. On the top of it, the incorporation in Mauritius would provide several tax benefits at the level of Mauritius. For instance, there is no capital gains tax in Mauritius. There is no withholding tax on dividend and interest in Mauritius. There is no exchange control in force and funds can be repatriated freely. The maximum income tax l iabil ity on a fund which is tax resident in Mauritius is 3%. A fund can claim underlying taxes and benef it from tax sparing provisions. It is now even possible to incorporate an exempt fund in Mauritius as a company up under the Mauritius Companies Act 2001. Such corporate funds wi l l be exempt from tax but may not benef it from tax treaty advantages in certain situations. 30. Further, the fund manager in this case is Sapien Capital ( Mauritius) Ltd which is a wholly owned subsidiary of an UK company namely Sapien Capital Ltd, UK. This company is controlled by two individuals namely Ramesh Kumar Ahuja and Aditi Agrawal who are also tax residents of the UK. Therefore, the fund is actual ly control led by Ramesh Kumar Ahuja and Aditi Agrawal who are based in UK. Therefore, there is no commercial I.T.A. No. 2890/Del/2022 12 rationale of creating the fund at the level of Mauritius as the investment could actual ly be managed from the UK. This is a typical arrangement of several funds. The only motive is to avoid payment of legitimate taxes. As a result, the existence of assessee company in Mauritius lacks any commercial reasoning. Continuing the arguments, the revenue submitted that Ramesh Kumar Ahuja and Aditi Agrawal incorporated Sapien Capital Ltd., a UK company with 50% shareholding each. Both are tax residents of UK. Sapien Capital Ltd f loated a wholly owned subsidiary namely Sapien Capital (Mauritius) Ltd. in Mauritius which inturn created Sapien Funds Ltd., a Collective Investment Vehicle. This CIV is registered as FPI in India and made investments in India. Admittedly, there are around 21 investors in the CIV who are tax residents of third countries. The CIVs are created for a limited time frame. Once the investments are disposed of, the proceeds from the investments are completely disbursed to the investors on the basis of their contribution. In fact, the tacit arrangement is to pass on every income to its real owner after deducting expenses for fund management. Therefore, this is completely a back-to-back arrangement. A company may be coined as conduit if the dominion and control over the income is with somebody else. In the instant case, the economic owner of the income is the investors. Therefore, a conduit company would also fail the test of benef icial ownership. It was argued that the TRC is only a f irst step but it is not a final to accord benefits of the treaty provisions. 31. In nutshell, the revenue argued that this is a classic case of treaty shopping to avoid payment of taxes. Therefore, the company would not be entitled to tax treaty benefits under India-Mauritius DTAA as it is not a legitimate tax resident. Taking the arguments further, the revenue argued that the arrangement is a conduit and also that TRC is not conclusive and treaty al lows control & management test in case of dual residency. 32. Rebutting the arguments of revenue, the ld. AR argued that the ld. CIT has erred in stating that India and Mauritius both have signed the MLI and ratif ied their tax treaties to include Article 6 of MLI whereas, in fact Mauritius has not notified its tax treaty with India as a “covered tax agreement” in its submission to OECD to implement MLI. Setting up a fund in Mauritius is a commercial decision based on many factors sans the incidental tax benef its the jurisdiction might provide. I.T.A. No. 2890/Del/2022 13 The jurisdiction also offers a complete range of f inancial products such as treasury/investment/asset management, investment funds (closed-end, open- ended, retai led etc), protected cel l companies, captive insurance, fami ly of fices and trusts, which adds to the completeness of the eco system being made avai lable to Fund Managers for an eff icient structuring of their businesses. It was argued by the ld. AR that Mauritius is a major f inancial center for fund management for global funds and has availabi lity of ski l led managers and administrators which are cost eff icient as compared to UK. Fund is active ti l l now and has not shut after the amending protocol came into effect. So there is no case that the fund was set up only take advantage of the treaty as it stood prior to its amendment. 33. The ld. AR argued that the ld. CIT has erred factual ly in al leging that the arrangement is a back-to-back arrangement and the fund is not the benef icial owner of the income as it has no dominion and control over the same, when in fact, the fund does not pass on each and every income it. 34. The ld. AR rel ied on the CBDT Circular 789 of 13th Apri l 2000 and also the fact that the constitutional validity of impugned circular was upheld by the Hon’ble Supreme Court of India. 35. The ld. AR argued that in the latest version of OECD MTC it is expressly mentioned that the term “benef icial owner is not used in a narrow technical sense, rather, it should be understood in its context and in l ight of the object and purposes of the Convention, including avoiding double taxation and the prevention of f iscal evasion and avoidance.” In the context of Article 10 & 11, the term “beneficial owner” is intended to address diff iculties arising from the use of the words “paid to” in relation to dividends rather than diff iculties related to the ownership of the shares of the company paying these dividends. The recipient of o dividend is the "beneficial owner" of that dividend where he has the ful l right to use and enjoy the dividend unconstrained by a contractual or legal obl igation to pass the payment received to another person. It was argued that this type of obl igation would not include contractual or legal obl igations that are not dependent on the receipt of the payment by the direct recipient such as an obligation that is not dependent on the receipt of the payment and which the direct I.T.A. No. 2890/Del/2022 14 recipient has as a debtor or as a party to financial transactions, or typical distribution obligations of pension schemes and of collective investment vehicles. 36. We find that the circular No. 789 of CBDT reads as under: “734. Clarif ication 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 def ines 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 domici le, residence, place of management or any other crite-rion of a simi lar nature." Foreign Institutional Investors and other investment funds, etc., which are operating from Mauritius are invariably incorporated in that country. These entities are ‘ l iable 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 sharehold-ing of the Mauritius resident. Under the Income-tax Act, 1961, tax was deductible at source at the rates specified under section 115A, etc. Doubts have been raised regarding the taxation of dividends in the hands of investors from Mauritius. It is hereby clarif ied that wherever a Certif icate of Residence is issued by the Mauritian Authorities, such Certif icate wil l constitute suff icient evidence for accepting the status of residence as wel l as benef icial 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. Accord-ingly, 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.” I.T.A. No. 2890/Del/2022 15 Circular : No. 789, dated 13-4-2000. 37. The aforesaid circular has been a subject matter of interpretation by Hon’ble High Court of Delhi wherein the circular was held to be ultra vires of the provisions to Section 90 and Section 119 of the Income Tax Act, 1961 and later on the Hon’ble Supreme Court upheld the validity of the Circular No. 789. Hence, the revenue cannot deny the benef it of India- Mauritius Tax Treaty to the assessee which is the assessee is legally entitled to on the strength of TRC issued by the Mauritian Tax Authorities. The Finance Ministry, through a clarif ication dated 2 March 2013, also clarif ied that the TRC produced by a resident of a contracting state would be accepted as evidence of residency in that contracting state and the Income-tax Authorities in India would not go behind the TRC and question the TRC holder’s resident status. For the sake of ready reference, the said Finance Ministry’s Clarification is reproduced below: FINANCE MINISTRY'S CLARIFICATION ON TAX RESIDENCY CERTIFICATE (TRC) PRESS RELEASE, DATED 1-3-2013 “Concern has been expressed regarding the clause in the Finance Bi l l 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 Certi ficate (TRC) in order to claim the benefit under DTAA. DTAAs recognize dif ferent kinds of income. The DTAAs stipulate that a resident of a contracting state wi l l be entitled to the benefits of the DTAA. In the explanatory memorandum to the Finance Act, 2012, it was stated that the Tax Residency Certi ficate containing prescribed particulars is a necessary but not suf ficient condition for avai l ing benef its 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 wi l l be clear that nothing new has been done this year which was not there already last year. I.T.A. No. 2890/Del/2022 16 However, it has been pointed out that the language of the proposed sub-section (5) of section 90 could mean that the Tax Residency Certif icate 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 Certi f icate 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.” 38. Further, the Hon’ble High Court of Delhi in the case of Blackstone Capital Partners (Singapore) VI FDI Three Pte. Ltd. Vs. ACIT in CM Appeal 7332/2022 vide order dated 30.01.2023 reiterated that TRC is statutori ly the only evidence required to be el igible for the benef it under the DTAA and the respondent’s attempt to question and to behind the TRC is whol ly contrary to the Government of India’s consistent policy and repeated assurances to Foreign Investors. Further, we are also not in agreement with the observation of the ld. CIT that the assessee has about 21 investors who are non-tax resident of Mauritius and hence the assessee is a conduit. What is relevant is whether the assessee company is a taxable entity in Mauritius or not? 39. Further, we also find the observation of the ld. CIT that the assessee has entered in only two transactions in the whole years in G-sec Bonds and few transactions in cash is only a partial truth. In addition to the investments in bonds and exchange traded cash equities, the assessee has large number of exchange traded derivatives transactions. The same can be proved by examination of the contracts notes which have been already provided to the ld. CIT. These contract notes reflect transactions of the assessee on MCX, BSE & NSE. In addition to the investments in India, the assessee has also invested in LME, CMX, SSE & DGCX. Hence, the contention of the ld. CIT that the income earned by the assessee from derivatives is not a business income also cannot be accepted. I.T.A. No. 2890/Del/2022 17 40. Hence, keeping in view the entire facts, we have no hesitation to say that the receipt is not taxable in India, hence there is no prejudice caused to the revenue and as the result, the order passed of ld. CIT u/s. 263 is liable to be obliterated.” 6. As no distinguishable facts have been brought on record by the Revenue and in view of the findings of the ld. CIT in para 15 of his order that on identical facts an order under section 263 was passed in assessee’s own case for assessment year 2017-18 by order dated 8.06.2023 cancelling the assessment as erroneous and prejudicial to the interest of Revenue and as the Tribunal had set aside the order of the ld. CIT under section 263 of the Act, following the order of the Tribunal, we set aside the order of the ld. CIT (IT) Delhi-3 dated 7.11.2022 for the assessment year under consideration i.e. 2018-19 for the reasons given by the Tribunal for the reasons given by the Tribunal in the order for assessment year 2017-18. 7. In the result, appeal of the assessee is allowed. Order pronounced in the open court on : 21/11/2023. Sd/- Sd/- ( M. BALAGANESH ) ( C. N. PRASAD ) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated : 21/11/2023. *MEHTA* Copy forwarded to :- 1. Appellant; I.T.A. No. 2890/Del/2022 18 2. Respondent; 3. CIT 4. CIT (Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, New Delhi. Date of dictation 17.11.2023 Date on which the typed draft is placed before the dictating member 20.11.2023 Date on which the typed draft is placed before the other member 21.11.2023 Date on which the approved draft comes to the Sr. PS/ PS 21.11.2023 Date on which the fair order is placed before the dictating member for pronouncement 21.11.2023 Date on which the fair order comes back to the Sr. PS/ PS 21.11.2023 Date on which the final order is uploaded on the website of ITAT 21.11.2023 Date on which the file goes to the Bench Clerk 21.11.2023 Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the order