ITAT Rules TRC as Sole Evidence for DTAA Benefits, Deletes Tax Liability on Mauritius Company [Read Order]

The New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) recently ruled that the Tax Residency Certificate (TRC) is sole evidence for Double Taxation Avoidance Agreement (DTAA) benefits and deleted Tax liability on Mauritius Company. The Assessee Sapien Funds Limited (SFL) was incorporated and registered outside India according to law of Mauritius with permanent establishment in Mauritius and a Tax Residency in Mauritius, the TRC in this regard had been provided to Income Tax Authorities in India. SFL is an independent and distinct corporate legal entity. SFL is managed by Sapien Capital (Mauritius) Limited (SCML). SCML as well as its directors are tax resident of Mauritius. FL is a Collective Investment Scheme (CIS) registered and regulated by the Financial Service Commission (FSC) in Mauritius. While it was registered as a Foreign Portfolio Investor (FPI) with SEBI in India, none of its investors are residents of India, and it has no establishment in the country. The fund's operations, management, and decision-making processes are conducted outside India, with its books of accounts maintained in Mauritius. SFL engaged in investment activities in India limited to Government Securities (Bonds) and trading in Exchange Traded Cash Equities and Derivatives, utilizing ICICI and Globe Capital Markets Ltd for various transactions and custody. They had shown income of Rs.12,93,77,569/- as exempt income for Assessment Year 2017-18. The case was selected under CASS. The assessment was completed, after considering the exempted income accepted the returned income at Rs. Nil. The CIT held that during the assessment proceedings for the year under consideration the Assessing Officer had not obtained the nature of income claimed as exempt nor verified the claim of Rs.12.93 Cr. The CIT held that the Assessing Officer had not obtained any explanation whatsoever to ascertain the Assessee’s contention that such income was not chargeable to tax. It further added that the assessee had used a tax avoidance scheme called treaty shopping. The company is a conduit, with the actual owners being tax residents of different countries. The establishment of the company in Mauritius lacks a commercial rationale as the location of funds has no impact on the commercial outcomes. The counsel for the assessee argued that the case was taken up for scrutiny regarding two specific issues, and expanding the scope beyond that is outside the jurisdiction of the CIT. They relied on CBDT instructions and previous decisions of the Tribunal, stating that the revisional authority cannot examine issues not specified in the limited scrutiny assessment under Section 263 of the Income Tax Act, 1961. The counsel for the revenue asserted that even in complete scrutiny cases, certain points of examination and verification may be prompted in the Computer-Assisted Scrutiny Selection (CASS), but this does not restrict the authority of the Assessing Officer (AO) or the CIT to undertake a comprehensive scrutiny of the case. Further claimed that this was 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 was 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 the treaty allows control & management tests in case of dual residency. The counsel for the Assessee further maintenaned that according to the latest version of the OECD MTC, the term "beneficial owner" should be understood in context and in light of the objectives of avoiding double taxation and preventing fiscal evasion. He emphasized that the term applies to difficulties related to dividends rather than the ownership of shares. The Counsel also referred to a circular by the CBDT and a clarification by the Finance Ministry, stating that the Tax Residency Certificate (TRC) issued by Mauritian authorities is sufficient evidence of residency and beneficial ownership. The High Court of Delhi upheld the validity of the circular, reaffirming that the TRC is the only evidence required for DTAA benefits. The Bench, consisting of Judicial Member Saktijit Dey and Accountant Member Dr. B. R. R. Kumar disagreed with the CIT's observation and ruled that the Tax Residency Certificate is sole evidence for Double Taxation Avoidance Agreement (DTAA) benefits and deleted Tax liability on assessee. The Bench noted that the assessee had engaged in various transactions beyond bonds and cash, including investments in derivatives, concluding that the income earned was not taxable in India. In result, the appeal of the assessee was allowed. Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates