Place of effective management essential to substantiate the residential status of the Mauritius company while claiming the capital gains exemption in India

Facts

• The assessee (SMR Investments Limited) is a company incorporated in Mauritius with two shareholders (Mr. Suresh Rajpal and Ms. Mavis Tse Rajpal, who respectively hold 99% and 1% of the share capital) and three directors.
• During the financial year 2001-02, the assessee sold shares held in M/s HCL Technologies, an Indian company.
• The resultant long-term capital gains was claimed as exempt from tax in India in terms of Article 13(4) (See note- 1) of the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius, on the premise that the assessee was a tax resident of Mauritius and the tax residence certificate issued by the Financial Services Commission, Mauritius was produced to this effect.
• The Assessing Officer (AO), however, sought to tax the capital gains in India, by maintaining that assessee was a resident of India as its place of effective management was situated in India.

Issues before the Tribunal:- Whether the place of effective management of the assessee is in India or Mauritius, and consequently whether the capital gains are taxable in India or Mauritius?

Contentions of the assessee

• Neither the AO nor the Commissioner of Income tax (Appeals) has been able to substantiate the allegation that the control and management of the assessee is situated in India with any documentary evidence.
• Reliance was placed on the ruling of the Honourable Delhi Tribunal 2 wherein, the residential status of a non­resident company was determined based on the tax residency certificate issued by a foreign government and the place where the board meetings were conducted.
• Copies of the passport of, and an affidavit filed by, a former director of the company, were placed before the Tribunal, to substantiate that the director of the assessee was in Mauritius on the dates on which the board meetings of the assessee were held, thereby indicating that the effective control was in Mauritius.
• Reliance was placed of the provisions of the Indian Evidence Act, 1872 that, in case any party rebuts the general presumption that the board meetings of a Mauritius activity would have been held in Mauritius, then the onus to prove such allegation is on the party making the allegation. However, both the lower authorities have failed to discharge this onus. Hence the assessee’s income cannot be taxed in India.

Contentions of the Revenue

• In view of the provisions of the DTAA³, where the assessee is a resident of both India and Mauritius, it shall be deemed to be a resident of the State in which the place of effective management is situated.
• The place of effective management of the assessee was in India due to the following reasons :

– The orders for the sale of shares were placed by Mr. Suresh Rajpal, the 99% shareholder and also one of the directors, who is not a citizen of Mauritius. In the absence of the assessee furnishing the passport details of Mr. Suresh Rajpal, it was held that he was residing in India when the shares were sold

– In the year of purchase of shares by the assessee, Mr. Suresh Rajpal was a resident of India

-The shares were held by the assessee in a de-mat account in India for a period of 8 years

–  Minutes of the board meetings, claimed as held in Mauritius, were not authenticated by any government agency in Mauritius

• The assessee was registered in Mauritius in 1994. Investment in the shares of M/s. HCL Technologies was made in the financial year 1995-96. During this period, Mr. Suresh Rajpal was residing and working in India. In these circumstances, the floating of a company in Mauritius shows that the purpose of setting up the company was merely to escape capital gains liability in India.
• Since the place of effective management is situated in India, capital gains are liable to be taxed in India.

Ruling of the Tribunal

•  It is essential to examine the authenticity of the documents placed before the Tribunal and the lower authorities and their relevance with regard to board meetings.
• Either third party evidence or evidence by any government agency in Mauritius or in India is required to be brought on record to substantiate the assessee’s claim
• In the interest of justice and fair play, the appeals were restored to the file of the AO for deciding the same afresh / de-novo.

Conclusion

Mere tax residence certificate may not be the conclusive determinant of residential status of the Mauritius company. It may be essential to substantiate the residential status based on the place of effective management. Documents like board minutes etc would need to be authenticated by the government agency in Mauritius in order to be relied upon as evidence in case of dispute on place of effective management.

Source: SMR Investments Ltd Vs. DDIT – ITA Nos. 4084/Del/2006 & 46/Del/2006 dated 26 March 2010.

Note

1. Article 13(4) of the DTAA provides that capital gains mentioned therein shall be taxable only in the State of which the alienator is a resident.
2. Radha Rani Holding (P) Ltd 2007 (ITA No. 2094/Del/2006) dated 30.05.2007
3. Article 4(3) of the DTAA