ITAT Delhi affirms capital gains exemption for Mauritius investments made before 1 April 2017
1. Background and context
The Delhi Bench of the Income Tax Appellate Tribunal in Superb Mind Holding Ltd. Vs ACIT, ITA No. 1568/Del/2022, decided on 05/03/2024 for Assessment Year 2018-19, examined whether India could tax capital gains arising from the sale of shares by a Mauritius-based company where the underlying investment in Indian shares was made prior to 1 April 2017.
The core controversy revolved around the interplay of:
- Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement (DTAA),
- the 2016 Protocol amending the India-Mauritius DTAA (introducing source-based taxation for post-1 April 2017 acquisitions), and
- the grandfathering protection accorded to investments acquired before 1 April 2017.
The Tribunal ultimately accepted the assessee’s claim that capital gains on such grandfathered investments remained exempt from tax in India and allowed the appeal, deleting the capital gains addition.
2. Facts of the case
(i) Assessee’s profile and investment structure
- The assessee, Superb Mind Holding Ltd., is a company incorporated in Mauritius on 26 November 2007.
- It held a valid Tax Residency Certificate (TRC) issued by the Mauritius authorities for the relevant period.
- The assessee had invested in shares of Pearl Retail Solutions Pvt. Ltd. in India during Assessment Years 2011-12 and 2012-13, i.e., well before 1 April 2017.
During Assessment Year 2018-19, the assessee transferred 2,45,000 shares of Pearl Retail Solutions Pvt. Ltd. to LEI Singapore Holdings Pte. Ltd. It reported long-term capital gains amounting to ₹74,15,54,375 on this sale and sought exemption from tax in India by invoking Article 13(4) of the India-Mauritius DTAA and the grandfathering protection.
(ii) Return of income and refund claim
- The assessee filed its return of income for AY 2018-19 declaring nil taxable income.
- It claimed a refund of ₹8,04,79,300 on account of tax deducted at source.
- The position adopted was that no tax was payable in India on the said capital gains in view of treaty protection.
3. Revenue’s position and assessment findings
(i) Allegations of conduit / shell company and treaty shopping
The Assessing Officer (AO) declined to accept the assessee’s exemption claim. The AO’s reasoning included:
- The assessee was alleged to be a shell or conduit entity located in Mauritius with the objective of availing treaty benefits.
- The assessee was said to have:
- negligible or no substantial commercial operations in Mauritius;
- primarily one investment in India in the form of shares of Pearl Retail Solutions Pvt. Ltd.;
- ultimate control and management allegedly resting with Mr. Deepak Seth through a UAE-based entity, suggesting that beneficial ownership lay outside Mauritius.
On this basis, the AO concluded that:
- The assessee was not the real beneficial owner of the investment or of the resulting capital gains.
- The structure was claimed to be a treaty-shopping or conduit arrangement designed solely to obtain the benefit of the India-Mauritius DTAA.
- Accordingly, the AO held that the capital gains were taxable in India notwithstanding the TRC and Article 13(4).
(ii) Treatment of TRC and Mauritius residence
The AO accepted that the assessee held a Mauritius TRC but took the view that:
- Mere possession of a TRC did not bar the Revenue from scrutinising the commercial substance of the arrangement.
- Principles relating to abuse of treaty provisions and prevention of double non-taxation should be applied.
- The beneficial ownership test and substance-over-form doctrines should be used to pierce the corporate structure and tax the gains in India.
On this foundation, the AO brought the capital gains to tax in India.
4. Dispute Resolution Panel’s directions
The assessee challenged the proposed addition before the Dispute Resolution Panel (DRP). The DRP, however, affirmed the AO’s conclusion.
(i) DRP’s observations
Key elements of the DRP’s reasoning were:
- Possession of a TRC is relevant but not conclusive; the Revenue can still examine whether the assessee has genuine commercial substance in Mauritius.
- The DRP referred to jurisprudence on shell entities and arrangements alleged to lack business substance, including
DCIT Vs Leena Power Tech Engineers Pvt. Ltd., ITA No. 1330/Mum/2020 (ITAT Mumbai). - The DRP also relied on certain observations in
Vodafone International Holdings B.V. Vs Union of India & Another, (2012) 341 ITR 1 (Supreme Court)relating to treaty abuse, corporate structures and permissible anti-avoidance scrutiny.
The DRP therefore upheld the capital gains taxation in India on the premise that the assessee was a conduit without real substance in Mauritius and that treaty benefits could be denied.
5. Assessee’s arguments before ITAT
On appeal to the ITAT Delhi, the assessee mounted a multi-layered legal argument, anchored in treaty interpretation and binding judicial precedents.