Dept. Can Dispute Residential Status On Strength Of TRC But Not Without Establishing Assessee To Be Shell Company: ITAT

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has held that though the department has the authority to dispute the residential status of the assessee merely on the strength of the Tax Residency Certificate (TRC), it is incumbent upon the department to make a proper inquiry and to establish the fact that the party claiming benefit and the strength of the TRC is a shell or conduct company.

The bench of G.S. Pannu (Vice President) and Saktijit Dey (Vice President) has observed that no material has been brought on record to establish that there is round-tripping of money or any other illegal activities.

The appellant/assessee is a non-resident corporate entity incorporated under the laws of Mauritius and a tax resident of Mauritius. The assessee is an investment holding company incorporated under the Mauritius Companies Act, 2001, on January 12, 2006. The assessee also holds a valid Tax Residency Certificate (TRC) for the year under consideration.

As observed by the Assessing Officer, though, for the assessment year under dispute, the assessee filed a return of income on 29.09.2016; however, such a return was not subjected to scrutiny. Subsequently, information was received from the Income Tax Officer, International Taxation, New Delhi, that an Indian company, i.e., M/s. Logix Soft-tel Pvt. Ltd., has remitted an amount of Rs. 162 crores to the assessee towards the purchase of shares of M/s. Noida Cyber Park Pvt. Ltd. without withholding any tax. Based on the information received, the assessing officer verified the records and found that, as per the returns filed by the assessee for past assessment years, it is continuously claiming loss.

On one hand, the assessee was claiming a loss; on the other hand, a remittance of Rs. 160 crore was made to the assessee without deduction of tax. The assessing officer reopened the assessment under Section 147. In response to the notice issued under Section 148, the assessee filed its return of income, declaring a net long-term capital loss of Rs. 33,34,167. In the course of assessment proceedings, the Assessing Officer called upon the assessee to furnish information relating to transactions in the purchase and sale of shares in Indian companies. From the information and details furnished by the assessee, the assessing officer noticed that the assessee has received a total sum of Rs. 407,32,20,235 towards the sale of shares of four Indian companies. Whereas, it has claimed a net long-term loss of Rs. 33,34,167.

On verifying the computation of income, the Assessing Officer found that the assessee has computed the capital gain in respect of the sale of shares by applying the provisions of the first proviso to Section 48, read with Rule 115A. The assessee has not followed the provisions contained under Section 112(1)(c)(iii), which specifically debar the benefits given under the second proviso to Section 48 of the Act. Thus, he held that the assessee cannot claim benefit under the first proviso to Section 48 by reducing capital gain. After analyzing the issue in detail, the assessing officer ultimately disallowed the assessee’s computation of net long-term capital loss by applying the provisions to the first proviso to Section 48(1) read with Rule 115A.

Thus, ultimately, the AO held that the assessee had a net long-term capital gain of Rs. 141,28,52,811, which is subject to tax in India. Having held so, he also rejected the assessee’s claim of exemption under Article 13(4) of the India-Mauritius Double Taxation Avoidance Agreement (DTAA) on the reasoning that the assessee is not entitled to treaty benefits, as it is merely a paper company created in Mauritius to avail treaty benefits. Thus, after allowing unabsorbed long-term capital loss pertaining to assessment year 2012–13, the Assessing Officer added back net capital gain amounting to Rs. 122,42,10,688. The AO framed the draft assessment order.

The assessee contended that the assessee, being a tax resident of Mauritius holding a valid TRC, is entitled to treaty benefits. There is no dispute between the parties that the shares, sales of which resulted in capital gain, were purchased by the assessee prior to April 1, 2017. In terms of Article 13(4) of the India-Mauritius DTAA, long-term capital gain arising on the sale of shares is exempt. As per CBDT Circular No. 789, TRC is the determinative factor for tax residency. The departmental authorities cannot go behind the TRC to decline the treaty benefits to the assessee by questioning the residential status of the assessee.

The department contended that since huge remittances were made to the assessee without deduction of tax at source, the issue was never examined at any stage due to the mere processing of the return under Section 143(1) without any scrutiny or assessment. The Assessing Officer has validly formed the belief that income chargeable to tax has escaped assessment. Since the issue was never examined earlier, there is no change of opinion during the reopening of the assessment.

The tribunal held that the assessee is entitled to claim exemption under Article 13(4) of the tax treaty for the capital gain arising on the sale of shares.

Counsel For Appellant: Ajay Vohra

Counsel For Respondent: Vizay B. Vasanta

Case Title: CPI India Ltd. Versus ACIT

Case No.: ITA No.382/Del/2023

Click Here To Read The Order