Benefits Of India- Mauritius DTAA Available To Collective Investment Vehicles: ITAT

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that the benefits of the Double Taxation Avoidance Agreement (DTAA) are available to collective investment vehicles.

The bench of Saktijit Dey (Judicial Member) and Dr. B. R. R. Kumar (Accountant Member) has observed that the TRC is statutorily the only evidence required to be eligible for the benefit under the DTAA, and the respondent’s attempt to question and to hide behind the Tax Residency Certificate (TRC) is wholly contrary to the Government of India’s consistent policy and repeated assurances to foreign investors.

The appellant, Sapien Funds Limited (SFL), is incorporated and registered outside India according to the law of Mauritius with a permanent establishment in Mauritius and a tax residency in Mauritius; the tax residence certificate in this regard has been provided to IT 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 residents of Mauritius.

The assessee company was created under the Collective Investment Scheme. Collective investment vehicles (CIVs) generally do not meet the definition of "liable to tax" in order to qualify as a resident of a contracting state for the purposes of tax treaties. As a general rule, domestic tax laws in several countries treat the income and gains of CIV as arising directly from the investors and not from CIV itself. In short, the CIV is treated like a transparent entity. As a result, CIV is not entitled to the benefits of tax treaties.

The department held that the assessee company is not entitled to avail benefits under the India-Mauritius DTAA because it is not a resident for tax purposes because of non-fulfillment of the "liable to tax" criteria.

The assessee contended that the assessee is a fiscally transparent entity as it is incorporated as a company under the laws of Mauritius. Section 45A of the Mauritian Act specifically provides for the taxation of collective investment schemes. The assessee files its income tax return in Mauritius. The CIT in his order also states that the assessee is liable to tax in Mauritius, although it enjoys an 80% exemption as per the domestic laws of Mauritius.

The department contended that it was a classic case of treaty shopping to avoid paying taxes. Therefore, the company would not be entitled to tax treaty benefits under the India-Mauritius DTAA as it is not a legitimate tax resident. The arrangement is a conduit, and the TRC is not conclusive, and the treaty allows control and management tests in cases of dual residency.

The Tribunal held that the receipt was not taxable in India, hence there was no prejudice caused to the department.

Case Title: Sapein Funds Ltd. Versus CIT(International Taxation)

Case No.: ITA No. 976/Del/2022

Date: 08.06.2023

Counsel For Appellant: Salil Kapoor, Ananya Kapoor

Counsel For Respondent: Vizay Vasanta

Click Here To Read The Order