Sapein Funds Ltd. Vs CIT (ITAT Delhi)
ITAT Delhi held that Tax Residency Certificate (TRC) is statutorily the only evidence required to be eligible for the benefit under the DTAA. Accordingly, benefit of India-Mauritius DTAA duly available.
Facts- Sapien Funds Limited (SFL) is incorporated and registered outside India according to the law of Mauritius with a permanent establishment in Mauritius and a Tax Residency in Mauritius, the Tax Residence Certificate in this regard has been provided to IT authorities in India. SFL is an independent and distinct corporate legal entity. SFL is managed by Sapien Capital (Mauritius) Limited (SCML). SCML, as well as its directors, are tax residents of Mauritius.
The assessee company is created under Collective Investment Scheme. Collective investment vehicles (CIVs) generally do not meet the definition of “liable to tax” in order to qualify as a resident of a contracting state for the purposes of tax treaties. As a general rule, domestic tax laws in several countries treat the income and gains of CIV as arising directly from the investors and not from CIV itself. In short, the CIV is treated like a transparent entity. As a result, CIV is not entitled to the benefits of tax treaties.
It was held that the assessee company is not entitled to avail benefits under the India-Mauritius DTAA being not a resident for tax purposes because of non-fulfillment of condition of “liable to tax” criteria.
Conclusion- The Hon’ble High Court of Delhi in the case of Blackstone Capital Partners (Singapore) VI FDI Three Pte. Ltd. Vs. ACIT in CM Appeal 7332/2022 vide order dated 30.01.2023 reiterated that TRC is statutorily the only evidence required to be eligible for the benefit under the DTAA and the respondent’s attempt to question and to behind the TRC is wholly contrary to the Government of India’s consistent policy and repeated assurances to Foreign Investors. Further, we are also not in agreement with the observation of the ld. CIT that the assessee has about 21 investors who are non-tax resident of Mauritius and hence the assessee is a conduit. What is relevant is whether the assessee company is a taxable entity in Mauritius or not?
We also find the observation of the ld. CIT that the assessee has entered in only two transactions in the whole years in G-sec Bonds and few transactions in cash is only a partial truth. In addition to the investments in bonds and exchange traded cash equities, the assessee has large number of exchange traded derivatives transactions. The same can be proved by examination of the contracts notes which have been already provided to the ld. CIT. These contract notes reflect transactions of the assessee on MCX, BSE & NSE. In addition to the investments in India, the assessee has also invested in LME, CMX, SSE & DGCX. Hence, the contention of the ld. CIT that the income earned by the assessee from derivatives is not a business income also cannot be accepted.
Hence, keeping in view the entire facts, we have no hesitation to say that the receipt is not taxable in India, hence there is no prejudice caused to the revenue and as the result, the order passed of ld. CIT u/s 263 is liable to be obliterated.
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeal has been filed by the assessee against the order of ld. CIT(IT)-3, New Delhi dated 24.03.2022.
2. Following grounds have been raised by the assessee:
“1. That in view of the facts and circumstances of the case and in law, the impugned notice dated 06.01.2022 issued under Section 263 of the Income Tax Act, 1961 (‘the Act’), and the impugned order dated 24.03.2022 passed under Section 263 of the Act is illegal, bad in law, without jurisdiction and liable
2. That the impugned notice dated 06.01.2022 and the impugned order dated 24.03.2022 does not satisfy the jurisdictional requirement for invocation of Section 263 of the Act. The Principal Commissioner of Income Tax (‘PCIT’) has erred in not establishing how the Assessing Officer (‘A O’) committed any error in passing the assessment order dated 24.12.2019 under Section 143(3) of the Act. Therefore, the jurisdiction assumed by the PCIT under Section 263 of the Act is illegal, bad in law, without jurisdiction and liable to be quashed.
3. That the order passed under Section 143(3) of the Act by the AO is neither erroneous nor prejudicial to the interest of the Revenue and as such the impugned order passed by the PCIT under Section 263 of the Act dated 24.03.2022 is illegal and bad in law.
4. That the PCIT failed to appreciate that issue was duly examined during the course of original assessment proceedings and the same was, therefore, outside the scope of revisionary jurisdiction under Section 263 of the Act. The view taken by the AO is a plausible view, hence the order passed under Section 263 is illegal and bad in law.
5. That this is not a case of lack of enquiry as the assessment order dated 24.12.2019 is passed after making the enquiries and after due application of mind.
6. That, during the course of original assessment proceedings, detailed questionnaires were issued from time-to-time which were duly responded to and enquiries were conducted and thereafter the assessment order was passed dated 24.12.2019. Hence, the assessment order is valid and correct in law.
7. That without prejudice, no independent enquiry has been done by the PCIT and in the absence of same the order passed u/s 263 is illegal, bad in law and without jurisdiction.
8. That, in view of the facts and circumstances of the case and in law, the PCIT has incorrectly invoked Section 263 of the Act without appreciating that ifm two views are plausible and the AO takes one view, then no revisionary jurisdiction can be exercised.
9. That the impugned notice dated 06.01.2022 and impugned order dated 24.03.2022 passed by the PCIT under Section 263 of the Act is clearly without application of mind. Hence, the impugned notice dated 06.01.2022 and impugned order dated 24.03.2022 passed under Section 263 of the Act is liable to be quashed.
10. That all the facts and circumstances of the case and the material available on record have not been properly considered by the PCIT while passing the impugned order dated 24.03.2022 under Section 263 of the Act. The impugned order is illegal, arbitrary and bad in law.
11. That, even otherwise, specific query was made during original assessment proceedings and the AO accordingly took the view the gains on derivates of Rs.12,14,40,069/- and interest income of Rs. 79,37,500/- is not taxable and the Assessee is a Mauritius based Fund and a tax resident of Mauritius and as such is entitled benefits of India-Mauritius Double Taxation Avoidance Agreement.
12. That, in view of the facts and circumstances of the case and in law, the PCIT has erred in holding that the gains on derivates of Rs. 12,14,40,069/- and interest income of Rs. 79,37,500/- is taxable in law. The same is not liable to tax in India.
13 .That, in view of the facts and circumstances of the case and in law, the PCIT has erred in not appreciating that the Assessee is a Mauritius based Fund and a tax resident of Mauritius and as such is entitled benefits of India-Mauritius Double Taxation Avoidance Agreement and the transaction is genuine in nature.
14. That, in view of the facts and circumstances of the case and in law, the PCIT has erred in not appreciating the case of the Assessee. The evidences/documents/material filed and placed on record has not been judiciously interpreted and considered/appreciated by the PCIT.
15. That, in view of the facts and circumstances of the case and in law, the PCIT has erred in cancelling earlier assessment order dated 24.12.2019 and directing the AO to revise the assessment order in view of findings of the PCIT. The said act of the PCIT is illegal and bad in law.
16. That the observations made are unjust, illegal, arbitrary, bad in law, highly excessive and based on surmise conjecture.”
3. Heard the arguments of both the parties and perused the material available on record.
4. Sapien Funds Limited (SFL) is incorporated and registered outside India according to law of Mauritius with permanent establishment in Mauritius and a Tax Residency in Mauritius, the Tax Residence Certificate in this regard has been provided to IT Authorities in India. The registered address of the company is 3rd Floor, 355 NEX, Rue du Savoir Cybercity Ebene 72201, Mauritius. SFL is an independent and distinct corporate legal entity. SFL is managed by Sapien Capital (Mauritius) Limited (SCML). SCML as well as its directors are tax resident of Mauritius.
5. SFL is a Collective Investment Scheme (“CIS”), authorized and regulated by the Financial Service Commission (FSC), Mauritius. The fund Investors are resident of various countries across the globe. None of the investor to the fund is resident of India. SFL is registered with SEBI as a Foreign Portfolio Investor (FPI) and has no establishment in India. VSFL, to undertake transactions in India) is registered with SEBI as FPI registration number INMUFP251315, certificate dated December 2, 2015 is attached. As per SEBI, the registration of FPI is valid for 3 years. The books of accounts of the fund are maintained outside India in Mauritius. The assessee is managed by the investment management company, Sapien Capital (Mauritius) Limited through its directors, Mrs. Pamela Gopaloodoo and Mr. Nadarajen Anadachee. The fund independently has separate directors – Mr. Ramesh Awatar Sing and Mr. Nowrattan Bhurtun. All the named four personnel are residents of Mauritius.
6. The fund or the Management Company managing the fund have no permanent establishment in India. All substantive and material functioning relating to the fund and management company are carried and situated outside India along with the decision-making process, approvals, control and management in relation thereto. SFL became operational in February 2016. SFL activities in India are restricted to investment in Government Securities (Bonds) and Exchange Traded Cash Equities, trades in Exchange Traded Derivative, Equity and Currency (Future & Options). Investments in GSec and its custody is through ICICI. The investments relating to cash equities are executed through Globe, cleared and customized with ICICI. The trades in Derivatives are executed and cleared through Globe Capital Markets Ltd.
7. The Assessee is a tax resident of Mauritius and had shown income of Rs.12,93,77,569/- as exempt income for A.Y. 201718. The case was selected under CASS. The reasons cited for scrutiny were:
1. Foreign Remittances made to person(s) located in low tax jurisdiction countries (Assessee being remitter)
2. Value of foreign remittance sent by the assessee is higher than the gross total income (Assessee being remitter).
8. The assessment was completed u/s 143(3) on 24.12.2019 after considering the exempted income accepted the returned income at Rs. Nil.
9. The ld. CIT held that during the assessment proceedings for the year under consideration the AO has not obtained the nature of income claimed as exempt nor verified the claim of Rs.12.93 Cr. The ld. CIT held that the AO has not obtained any explanation whatsoever to ascertain the assessee’s contention that such income are not chargeable to tax.
10. The summary of the reasons given by the ld. CIT are as under:
1. The scheme of arrangement employed by the assessee is a tax avoidance through treaty shopping mechanism.
2. The assessee company is just a conduit and the real owner is the shareholders/investors who are tax residents of different countries.
3. The TRC is not sufficient to establish the tax residency if the substance establishes otherwise.
4. The assessee company is also not a beneficial owner of income as control and dominion of fund is not with the company.
5. There is no commercial rationale of establishment of assessee company in Mauritius as the commercial outcomes would be identical irrespective of location of funds.
11. After examination of the details and explanation given by the assessee, the ld. PCIT held that the assessee is not entitled to benefit of Article 11 of the India- Mauritius DTAA. Accordingly, the ld. CIT held that the income would be chargeable to tax in India on gross basis at the tax rate as per section 115A of the Income-tax Act.
12. Aggrieved the assessee filed appeal before us.
13. At the outset, the ld. Counsel for the assessee argued that the case has been taken up for scrutiny for verification of two issues only and expanding the ambit by the ld. CIT is beyond the jurisdiction. He relied on the CBDT instruction Nos. 7/2015, 20/2015 & 5/2016 and also CBDT letter dated 30.11.2017 and also on the decisions of Co-ordinate Benches of Tribunal in the case of Meena Choudhary Vs. PR. CIT in ITA No. 70/RPR/2020 order dated 12.10.2021, M/s Diamond Dealers Pvt. Ltd. Vs. PCIT in ITA No. 3098/Mum/2019 order dated 27.11.2019, Balvinder Kumar Vs. PCIT (2021) 125 com 83 (Del. Trib.) and Hill Queen Investment (P.) Ltd. Vs. PCIT (2021) 127 Taxmann.com 682 (Kol. Trib.) wherein it was held that where the scope of scrutiny is limited to the issues raised, the revisional authority is not entitled u/s 263 of the Income Tax Act, 1961 to examine the issue not specified in the limited scrutiny assessment.
14. The ld. DR argued that this is not the case of limited scrutiny and hence the order of the ld. CIT was in accordance with the guidelines. It was argued that even in complete scrutiny cases, certain points of examination and verification have been prompted in the CASS but that does not curtail the power of the AO or ld. CIT to undertake complete scrutiny of the case.
15. Having gone through the Assessment Order, we find that the arguments of the ld. DR are acceptable.
16. On going through the entire issue, we deem it prudent to determine whether the income earned by the assessee who is a tax resident of Mauritius, out of the gains on currency derivates and the interest income on bonds is taxable in India or not.
17. The taxability of the receipts would validate the proceedings u/s 263 with regard to error as well as the prejudice caused to the revenue.
18. The arguments of the revenue are as under:
“As per the tax return and financial statement filed, it pays a minimal tax with majority of income from foreign jurisdiction is exempt from taxation. The Mauritian Tax law provides an extremely liberal taxation regime for fund which holds a global business license and are formed under Collective Investment Scheme. This regime provides for an income tax exemption of 80% on income derived by a Collective Investment Scheme, Closed-end fund, CIS manager, CIS administrator, Investment adviser or assets manager licensed or approved by the FSC. The exemption applies to the following income:
