Tax tribunal ruling wherein a Mauritius based investment Company (‘the Taxpayer’) was allowed exemption from tax on disposal of tax that arose from conversion of cumulative convertible preference shares (‘CCPS’) based on the validity of the Tax Residency Certificate (‘TRC’) held by the taxpayer.

Key excerpts from the ruling

• The taxpayer being a resident of Mauritius was incorporated for making investments in India in education, agriculture, healthcare, microfinance institutions and other financial services;
• The taxpayer made investment in equity shares of two Indian companies which were later sold and the long-term capital gain earned was claimed as exempt income under Article 13(4) of the India-Mauritius tax treaty;
• Subsequently, the taxpayer filed revised return to offer the capital gains from sale of equity share of one Company under Article 13(3B) of India-Mauritius tax treaty;
• The tax officer contended that the taxpayer is avoiding tax through treaty shopping mechanism, the taxpayer is just a conduit and shareholders/ investors are not tax residents of Mauritius, the taxpayer is not a beneficial owner of income and no commercial rationale of establishment exists. Hence dislodging the validity of the TRC and denied the benefits of the tax treaty;
• Regarding, denial of treaty benefits due to capital gain tax exemption in Mauritius, the Tribunal observes that Supreme Court in Azadi Bachao held that ‘liable to taxation’ and ‘actual payment of tax’ are two different aspects and merely because tax exemption is granted under the domestic tax laws of Mauritius, it cannot lead to the conclusion that the entities availing such exemption are not liable to tax;
• The Tribunal relied on Supreme Court ruling in Azadi Bachao, jurisdictional High Court ruling in Blackstone and co-ordinate bench ruling in MIH India upholding the validity of Circular No. 789 of 2000 and observed that the TRC is sufficient evidence to claim not only the tax residency and legal ownership but also treaty eligibility;
• The Tribunal notes that tax officer’s argument of treaty shopping and the taxpayer being a tax conduit lacks evidence;
• The Tribunal observed that the taxpayer acquired CCPS for one of the Company on March 18, 2016, which were converted to equity shares on August 04, 2017, without there being any substantial change in the rights of the tax payer;
• The Tribunal notes that there are no material differences between CCPS and preference shares except for dividend on equity shares being not fixed and preference share having preferential rights on receiving dividend or repaying capital;
• The Tribunal opines that, Article 13(3A) covers ‘gains from alienation of shares and  the word ‘shares’ being used in a broader sense will take within its ambit all shares, including preference shares and thus, CCPS acquired prior to Apr 1, 2017 would fall within Article 13(4), hence exempt from taxation;
• The Tribunal holds that the revised return offering to tax gain from such shares would not preclude the taxpayer from claiming benefit under Article 13(4).

This judgement once again reaffirms the settled principle that once the taxpayer holds a valid TRC, the tax officer cannot go behind the TRC to question the residency of the entity.