AO Can’t Deny DTAA Benefits Without Invoking GAAR Provisions | ITAT

Case Details: Accion Africa-Asia Investment Company v. ACIT - [2024] [2024] 161 taxmann.com 582 (Delhi-Trib.)

Judiciary and Counsel Details

• • Saktijit Dey, Vice President & Dr. B.R.R. Kumar, Accountant Member
  • Deepak Chopra, Aditya Chandel & Ankul Goyal, Advs. for the Appellant.
  • Vizay B. Vasanta, CIT-DR for the Respondent.

Facts of the Case

The assessee was a non-resident corporate entity incorporated under the laws of Mauritius and was a tax resident of Mauritius. In the relevant assessment year, the assessee derived long-term capital gain on selling shares of two Indian companies.

It furnished a return of income, offering the short-term capital gain to tax but not offering the long-term capital gain to tax in terms of Article 13(4) of the India – Mauritius treaty.

However, the Assessing Officer (AO) contended that the assessee was merely a paper company set up to avail of treaty benefits. Accordingly, he passed a draft assessment order, denying the treaty benefit and taxing the entire long-term capital gain under the provisions of the Act.

Aggrieved by the order, the assessee preferred an appeal to the Dispute Resolution Panel (DRP), which confirmed AO’s order. The assessee filed an appeal to the Delhi Tribunal.

ITAT Held

The Tribunal held that the Assessing Officer (AO) denied the treaty benefits to the assessee because he had alleged that the assessee was a conduit company and had been set up as a part of an impermissible tax avoidance arrangement. However, surprisingly, he had not invoked the provisions of GAAR as provided under the Act.

Further, the Departmental Authorities have not invoked the LOB clause as provided under Article 27A of India -Mauritius DTAA. Thus, facts on record clearly indicate that the departmental authorities were accepting the fact that the shares in the Indian companies had been acquired prior to 01.04.2017.

Hence, the capital gain derived from the sale of such shares would be exempt from taxation in India in terms of Article 13(4) of the Indian – Mauritius DTAA.

Only to defeat the assessee’s claim of exemption under Article 13(4) of the treaty the AO introduces the theory of impermissible tax avoidance arrangement and Conduit Company.

Since the allegations that the assessee was a conduit company and had been set up under a scheme of impermissible tax avoidance arrangement remained unsubstantiated through cogent evidence brought on record, the assessee’s claim of exemption under Article 13(4) of India – Mauritius DTAA, qua the capital gain derived from the sale of subject shares held in two Indian entities, was to be accepted.

List of Cases Referred to

• • Union of India v. Azadi Bachao Andolan [2003] 184 CTR 450/263 ITR 706/132 Taxman 373 (SC) (para 7)
  • Blackstone Capital Partners (Singapore) v. Fdi Three Pte. Ltd. v. Asstt. CIT (International Taxation) [2023] 146 taxmann.com 569/452 ITR 111 (Delhi) (para 11)
  • Vodafone International Holdings B.V. v. Union of India [2012] 17 taxmann.com 202/247 CTR 1/341 ITR 1/204 Taxman 408 (SC) (para 17).