Capital gains on transfer of shares acquired prior to April 1, 2017, are not taxable under Double Taxation Avoidance Agreement (DTAA) between India and Mauritius due to ‘grandfathering provisions’, Delhi Bench of Income Tax Appellate Tribunal (ITAT) said.

“On overall consideration of facts and material available on record, we are of the view that the assessee, being entitled to claim exemption under Article 13(4) of India-Mauritius Treaty, the addition made is unsustainable,” Delhi Bench of ITAT said in its ruling dated March 19 while directing the Assessing Officer (AO) to delete it.

The matter is related to Mauritius-based Norwest Venture Partners X and for the Assessment Year 2020-21. The firm is a tax resident of Mauritius. The company is registered with SEBI and invests in shares here. I it offered Short-Term Capital Gain of over ₹15 crore whereas, the Long-Term Capital Gain of over ₹300 crore was not offered to tax as it claimed exemption under Article 13(4) of India Mauritius DTAA.

India-US DTAA

However, after assessment, AO concluded that the assessee was controlled and managed from outside and does not have any commercial substance or real economic activity in Mauritius. He observed, the ultimate parent company of the assessee is beneficially owned by the entity in USA. He observed that under India-USA DTAA, the long term capital gain would have been chargeable to tax.

Referring to certain judicial precedents, the AO ultimately concluded that the assessee being a shell/conduit company is not entitled to avail benefits under India-Mauritius DTAA. Accordingly, he framed the draft assessment order by bringing to tax the income derived from long-term capital gain on sale of shares. It was also said that Tax Residency Certificate (TRC) not enough to prove the tax residency of the assessee.

On record

Based on facts presented and arguments made, the Bench said that since the capital gain is derived from shares acquired prior to April 1, 2017 they are not taxable in terms DTTA.. “In our view, the Assessing Officer has failed to establish on record that the assessee is a shell/conduit company through proper evidence. Therefore, in our view, assessee remains entitled to treaty benefits,” it sad.

India and Mauritius signed DTAA in 1983. Because of this, Mauritius became the preferred channel for foreign portfolio and foreign direct investors due to the tax advantage. The agreement laid down that capital gains tax had to be paid in the country where the foreign investor was based. Since the rate of capital gains tax in Mauritius was zero, investors from this country paid no capital gains tax.

However, situation changed in 2016, with the double tax avoidance treaty with Singapore being linked to the agreement with Mauritius, investments from Singapore have also been brought in to the Indian tax net.  As part of the amendment, gain made on or before March 31, 2017 was grandfathered.

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