TII Instant Update - 2017-TII-INSTANT-ALL-475

2017-TII-41-HC-MUM-INTL

CIT Vs JSH MAURITIUS LTD: BOMBAY HIGH COURT (Dated: July 28, 2017)

Income tax - Sections 9(1)(i) & 245(R)(2) - India-Mauritius DTAA - Article 13

Keywords - Application to AAR - avoidance of income tax - capital gains - alienation of shares

The Revenue preferred the present petition challenging the advance ruling rendered by the AAR, whereby it was held that the Applicant i.e., JSH (Mauritius) Ltd. would be entitled to the benefits of the India Mauritius DTAA for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income and capital gains. The AAR in its impugned ruling also held that the gains arising to the Applicant from transfer of shares in Tata Industries Limited to Tata Sons Limited would not be liable to tax in India having regard to the provisions of Article 13 of the India Mauritius tax treaty.

On appeal, the HC held that,

Whether when the AAR on considering the application & facts on record had conclusively held that the transaction is not designed for avoidance of income-tax, it would not be open for the Revenue to fall back on Section 245(R)(2)(iii) - YES: HC

+ the factual matrix that the Assessee is incorporated in Mauritius, holds a Category 1 Global Business License issued by Financial Services Authority of Mauritius and is incorporated on 04/04/1996, is not disputed. It is also not disputed that the Certificate is issued by the Mauritius Revenue Authority to the Assessee evidencing that it is a tax resident in Mauritius during the relevant period. The Assessee had acquired shares of Tata Industries Limited in June 1996 is a matter of record. The Assessee sold shares of TIL on 10th July 2009 is also a matter of record. Section 90(2) of the Act specifically provides that where the Government of India had entered into DTAA with the Government of any other country for granting relief of tax or any avoidance of double taxation, then in relation to the Assessee to whom said agreement applies, the provisions of Tax Treaty shall apply to the extent they are more beneficial to the Assessee. The Circular dated 30th October 1995 so also above referred Circulars of the year 2003 and 2013 clarifies the said aspect. The Apex Court in a case of Azadi Bachao Andolan & Anr, has observed that the court cannot judge the legality of treaty shopping merely because one section of thought considers it improper. The Apex Court in the said Judgment further observed that Section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the DTAA. When that happens, the provisions of such an agreement with respect to cases to which they apply would operate even if inconsistent with the provisions of Income Tax Act. The Apex Court further observed that the Circulars issued by the CBDT u/s 119 of the Act are binding on all officers and employees employed in the execution of the Act, even if they deviate from the provisions of the Act. The Apex Court in the said Judgment observed that the whole purpose of DTAA is to ensure that the provisions thereunder are available even if they are inconsistent with the provisions of Indian Income Tax Act. The further observation is made by the Apex Court that the principle of piercing the veil of incorporation can hardly apply to a situation as the one before it;

Whether capital gains from alienation of shares situated in India, could only be taxed in Mauritius and not in India, as per Indo Mauritius DTAA - YES: HC

+ in the present matter, it would be relevant to note that the shares were purchased by the Assessee in the year 1996 and were held for long period of 13 years and were sold in the year 2009. This goes to suggest the bona fide of the applicant. The said shares were again invested in the another company of the same group in India and the same are being held by the Assessee. Considering this aspect, it has been observed by the AAR that the Assessee is not a Fly By Night or a Shell Company. It does not appear that while considering the factual matrix of the matter, the AAR has perversely recorded any finding. It has based its finding on the basis of evidence on record. The said findings is a findings of fact arrived at on the basis of appreciation of evidence. With regard to the objection raised by the Revenue u/s 245(R) (2)(iii) of the Act, the same would not arise at this stage. The said provision would come into operation when the application by the party relates to a transaction or an issue which is designed prima facie for the avoidance of income tax. On 14th day of September 2011, the AAR passed an Order stating that the issue with regard to the investment made by holding company would be considered while considering the application for ruling u/s 245(R)(4) of the Act. The said Order was never assailed by the Revenue. The Revenue thereafter submitted to the jurisdiction of the AAR and contested the matter on merits. The Ruling is given by the AAR. The AAR on considering the application and the documents and the facts on record had conclusively held that the transaction is not designed for avoidance of income-tax. Once such conclusive finding is given, it would not be open for the Revenue to fall back on Section 245(R)(2)(iii). The reliance placed on Section 9(1)(i) and Explanation 5 thereto by the counsel for Revenue would not be of any avail. In the present case, the Assessee has placed reliance on the DTAA between India and Mauritius. It is clear from the said Agreement that the capital gains from alienation of the shares situated in India could only be taxed in Mauritius and not in India. The Apex Court in a case of Azadi Bachao Andolan & Anr. has clearly observed that the terms and provisions of the Agreement i.e. DTAA shall operate even if they are inconsistent with the provisions of the Income Tax Act. On perusal of the Judgment of the AAR, it transpires that the AAR has considered all the relevant aspects of the matter and has arrived at the just conclusion. The Treaty has also been rightly considered.

Revenue's petition dismissed