India-Mauritius Treaty Protection for Pre-2017 Investments Reaffirmed by ITAT Delhi

1. Background and Context

The Delhi Bench of the Income Tax Appellate Tribunal in Norwest Venture Partners X-Mauritius Vs DCIT, ITA No. 2311/Del/2023, order dated 19/03/2024, has once again clarified the scope of capital gains relief under the India-Mauritius Double Taxation Avoidance Agreement (DTAA) for investments made before 1 April 2017.

The dispute related to the Assessment Year 2020-21 and turned on whether a Mauritius-resident investment entity, armed with a valid Tax Residency Certificate (TRC) and other regulatory approvals, could be denied treaty benefits on the mere allegation that it was a shell or conduit company.

The Tribunal’s ruling is important for cross-border investors, fund structures, and advisory professionals dealing with India-Mauritius structures and the grandfathering protection available to pre-1 April 2017 investments.

2. Essential Facts of the Case

(i) Incorporation and Status of the Assessee

  • The assessee, Norwest Venture Partners X-Mauritius, was incorporated in Mauritius on 4 September 2006.
  • It held a Category-1 Global Business Licence issued in Mauritius.
  • It was registered with the Securities and Exchange Board of India (SEBI) as a Foreign Venture Capital Investor (FVCI) from 17 July 2007.
  • The assessee was part of a wider investment group whose ultimate holding company was based in the United States.

(ii) Nature of Income and Return Position

For Assessment Year 2020-21:

  • The assessee disclosed short-term capital gains of ₹15,03,99,442 as taxable income in India.
  • It claimed exemption in respect of long-term capital gains of ₹3,02,30,69,163, arising on sale of shares acquired prior to 1 April 2017.
  • The claim was based on Article 13(4) of the India-Mauritius DTAA, which provides grandfathering for gains on qualifying pre-2017 share investments.

The assessee also highlighted that, even after the DTAA was amended with effect from 1 April 2017, it continued to make substantial investments into Indian companies, including investments amounting to US$376,886,444 in post-2017 acquisitions, where gains are subject to tax under the amended provisions.

3. Revenue’s Allegations and Assessment Proceedings

(i) Stand of the Assessing Officer

The Assessing Officer (AO) refused to accept the assessee’s claim under Article 13(4) and brought the long-term capital gains of ₹3,02,30,69,163 to tax in India.

Key grounds advanced by the AO included:

  • The assessee was allegedly a shell or conduit company set up in Mauritius.
  • The real control and management were claimed to be with the ultimate holding company in the USA.
  • Allegations that:
    • The assessee did not have sufficient employees in Mauritius.
    • It lacked independent and substantial office infrastructure.
    • Its operating expenditure in Mauritius was not commensurate with the scale of investments.
    • Key investment and exit decisions were effectively taken outside Mauritius.
  • The AO contended that the Mauritius entity had been interposed primarily to secure treaty relief, which would not be available under the India-USA DTAA.
  • Based on these assertions, the AO denied the benefit of Article 13(4) and treated the long-term capital gains as taxable in India.

(ii) Directions of the Dispute Resolution Panel

The assessee approached the Dispute Resolution Panel (DRP) under Section 144C of the Income-tax Act, 1961.

The DRP:

  • Required factual verification of certain aspects.
  • However, it did not conclusively adjudicate all objections on merits.
  • The AO, in the final assessment order passed under Section 144C(13), effectively reiterated the draft assessment, largely maintaining the earlier reasoning and sustaining the addition.

This led the assessee to file an appeal before the ITAT Delhi.

4. Assessee’s Contentions Before the Tribunal

(i) Treaty Eligibility and Documentation

The assessee placed reliance on a robust set of documents and legal authorities to support its treaty claim:

  • A valid Tax Residency Certificate issued by the Mauritius Revenue Authority.
  • A Category-1 Global Business Licence, confirming that it was a recognized global business entity in Mauritius.
  • SEBI registration as a Foreign Venture Capital Investor from 2007.
  • Compliance with Section 90 of the Income-tax Act, 1961, read with Rule 21AB:
    • Furnishing of Form 10F.
    • Supporting details required for claiming DTAA benefits.

The assessee argued that once a valid TRC is produced, it is sufficient evidence of residence and entitlement to treaty relief, unless there is cogent proof of fraud or sham.

(ii) Reliance on CBDT Circulars and Press Release

The assessee invoked: