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Tax Publishers Applicability of Indo-Mauritius Treaty Article 13(4) - Grandfathering provisions on capital gains *Facts:* Assessee a tax resident of Mauritius had furnished their Tax residency certificate (TRC) to tax authorities for claiming exemption from the Capital gains which had risen out of sale of shares of two Indian entities viz. Sewa Gruh Rin Ltd. and Veritas Finance Pvt. Ltd. Subsequently they filed a revised return offering the capital gains from Veritas Finance Pvt. Ltd. alone as taxable under Article 13(3B) of the DTAA. AO and DRP denied the treaty benefits on both the sale of shares and their capital gains thereto citing that the assessee entity to be a sham. AO's stand was - 1. The scheme of arrangement employed by the assessee is a tax avoidance through treaty shopping mechanism. 2. The assessee company is just a conduit and the real owner is the shareholders/investors who are tax residents of different countries. 3. The TRC is not sufficient to establish the tax residency if the substance establishes otherwise. 4. The assessee company is also not a beneficial owner of income as control and dominion of fund is not with the company. 5. There is no commercial rationale of establishment of assessee company in Mauritius as the commercial outcomes would identical irrespective of location of funds. Assessee relied on the CBDT Circular No. 789 dated 13-04-2000 and Circular No. 684 dated 30-03-1994 and on the verdict of Union of India v. Azadi Bachao Andolan, (2003) 132 Taxman 373 (SC) : 2003 TaxPub(DT) 1429 (SC) claiming that the TRC was conclusive and they were not a sham entity and the benefit of Article 13(4) be made available to them as the original investments were all done prior to 01-04-2017. On Veritas Finance Pvt. Ltd.assessee was an investor in their CCPS (cumulative convertible preference shares) issued on 18-03-2016 and on 04-08-2017 the CCPS were converted into equity shares. It was in an element of doubt that they claimed the capital gain on application of Article 13(4) read with Article 13(3B) (Grandfathering provision) and then withdrew the same in the revised return offering it to Capital gains tax erroneously while the correct reading on the holding period for Grandfathering provision was not from the date of conversion of CCPS but was from the date of original holding of the CCPS which was.prior to 01-04-2017 Thus they were eligible on the exemption of Article 13(4) which enables only Mauritius to tax these capital gains and not India. On higher appeal - Held in favour of the assessee that they were eligible for the benefit of Article 13(4) of the Indo-Mauritius DTAA. TRC was conclusive and thus capital gains was not taxable in India. *Applied:* Blackstone Capital Partners (Singapore) VI FDI Three Pte Ltd. v. ACIT, (2023) 146 taxmann.com 569 (Del) : 2023 TaxPub(DT) 765 (Del-HC) MIH India (Mauritius) Ltd. v. ACIT (ITA No. 1023/Del/2022) (Del ITAT) *Ed. Note:* Reference be made to Flash no 39/2023/Blackstone Capital Partners v. The Assistant_Commissioner/W.P.(C) 2562/2022 & CM Appl. 7332/2022 (for stay)/Del HC/Favour of the assessee/30-01-2023 : 2023 TaxPub(DT) 765 (Del-HC) on Blackstone verdict and its aftermath writ petition etc. *Case:* Sarva Capital LLC v. Asstt. CIT 2023 TaxPub(DT) 5326 (Del-Trib)

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Applicability of Indo-Mauritius Treaty Article 13(4) - Grandfathering provisions on capital gains

Facts:

Assessee a tax resident of Mauritius had furnished their Tax residency certificate (TRC) to tax authorities for claiming exemption from the Capital gains which had risen out of sale of shares of two Indian entities viz. Sewa Gruh Rin Ltd. and Veritas Finance Pvt. Ltd. Subsequently they filed a revised return offering the capital gains from Veritas Finance Pvt. Ltd. alone as taxable under Article 13(3B) of the DTAA. AO and DRP denied the treaty benefits on both the sale of shares and their capital gains thereto citing that the assessee entity to be a sham. AO's stand was -

1. The scheme of arrangement employed by the assessee is a tax avoidance through treaty shopping mechanism.

2. The assessee company is just a conduit and the real owner is the shareholders/investors who are tax residents of different countries.

3. The TRC is not sufficient to establish the tax residency if the substance establishes otherwise.

4. The assessee company is also not a beneficial owner of income as control and dominion of fund is not with the company.

5. There is no commercial rationale of establishment of assessee company in Mauritius as the commercial outcomes would identical irrespective of location of funds.

Assessee relied on the CBDT Circular No. 789 dated 13-04-2000 and Circular No. 684 dated 30-03-1994 and on the verdict of Union of India v. Azadi Bachao Andolan, (2003) 132 Taxman 373 (SC) : 2003 TaxPub(DT) 1429 (SC) claiming that the TRC was conclusive and they were not a sham entity and the benefit of Article 13(4) be made available to them as the original investments were all done prior to 01-04-2017.

On Veritas Finance Pvt. Ltd.assessee was an investor in their CCPS (cumulative convertible preference shares) issued on 18-03-2016 and on 04-08-2017 the CCPS were converted into equity shares. It was in an element of doubt that they claimed the capital gain on application of Article 13(4) read with Article 13(3B) (Grandfathering provision) and then withdrew the same in the revised return offering it to Capital gains tax erroneously while the correct reading on the holding period for Grandfathering provision was not from the date of conversion of CCPS but was from the date of original holding of the CCPS which was.prior to 01-04-2017

Thus they were eligible on the exemption of Article 13(4) which enables only Mauritius to tax these capital gains and not India. On higher appeal -

Held in favour of the assessee that they were eligible for the benefit of Article 13(4) of the Indo-Mauritius DTAA. TRC was conclusive and thus capital gains was not taxable in India.

Applied:

Blackstone Capital Partners (Singapore) VI FDI Three Pte Ltd. v. ACIT, (2023) 146 taxmann.com 569 (Del) : 2023 TaxPub(DT) 765 (Del-HC)

MIH India (Mauritius) Ltd. v. ACIT (ITA No. 1023/Del/2022) (Del ITAT)

Ed. Note: Reference be made to Flash no 39/2023/Blackstone Capital Partners v. The Assistant_Commissioner/W.P.(C) 2562/2022 & CM Appl. 7332/2022 (for stay)/Del HC/Favour of the assessee/30-01-2023 : 2023 TaxPub(DT) 765 (Del-HC) on Blackstone verdict and its aftermath writ petition etc.

Case: Sarva Capital LLC v. Asstt. CIT 2023 TaxPub(DT) 5326 (Del-Trib)