Taxpayers who claim exemption from tax on capital gains by furnishing a residency certificate of Mauritius had better watch out. Now, income-tax (IT) authorities can ask for evidence from Mauritius government to examine the authenticity of a taxpayer who claims exemption on capital gains tax provided under the Indo-Mauritius Double Taxation Avoidance Agreement( DTAA).
This is a departure from the practice of furnishing a tax residency certificate from Mauritius for claiming exemption from capital gains tax. According to an Income-Tax Appellate Tribunal (ITAT) Delhi order on March 26, more documents are needed from the Mauritius government to support the claim of the taxpayer, SMR Investments that it is a Mauritius resident.
The ITAT order was released last week. If the order is not rejected by the high court, it will have a bearing on similar cases.
Nearly five years ago, SMR Investments, a company registered in Mauritius, had sold shares of HCL Technologies and BFL Software and generated over Rs 9 crore as capital gains. The taxpayer claimed exemption from capital gains tax under Articel 13 of India-Mauritius tax treaty. The taxpayer further claimed that it did not have a permanent establishment in India, a prerequisite for being liable to pay tax in India, and therefore is eligible for exemption fromcapital gains tax under the India- Mauritius tax treaty.
But the assessing officer (AO) disagreed. The AO claimed that it is the actual location of the effective management and not the location in which the company ought to be managed, decides the residency of the company. The company was set up in 1995-96 during which period its founder Suresh Rajpal was working in India. Mr Rajpal was a resident in India when the taxpayer purchased the shares in 1996-97. Therefore, for all practical purpose the taxpayer is not a resident of Mauritius, the AO said.
IT IS STRIKINGLY INTRIGUING TO NOTE THAT IN THE WRITE-UP THERE IS NOT EVEN A WHISPER ABOUT CERTAIN VERY CRUCIAL ASPECTS HAVING A DIRECT BEARING ON THE POINT THAT HAPPENS TO HAVE ONCE AGAIN CROPPED UP LENDING SCOPE FOR A FRESH SPATE OF CONTROVERSY AND BATTLE OF WITS.
TO BRIEFLY PINPOINT:
‘THE PRACTICE” MENTIONED IN THE SECOND PARAGRAPH, AS ONE OUGHT TO BE AWARE, DERIVES ITS LEGAL SANCTITY FROM, AND IS SQUARELY COVERED BY, A ‘BENEFICIAL CIRCULAR’ (DIRECTION) ISSUED TEARS AGO, BY NO LESS A COMPETENT AUTHORITY THAN THE CBDT, WHICH IS UNQUESTIONABLY THE HIGHEST COMPETENT AUTHORITY TO DO SO.
IN THE OFT CITED CASE OF ANDOLAN BACHAO, THE APEX COURT HAS, ACCEPTING THE COMPREHENSIVE SUBMISSIONS OF THE GOVERNMENT ITSELF, CONCLUSIVELY UPHELD THE CONSTITUTIONAL VALIDITY OF THE ABOVE REFRRED CIRCULAR.
IN SUCH A BACKDROP, THE VIEW SAID TO HAVE BEEN TAKEN BY THE AO, TO SAY THE LEAST, IS EXTREMELY BAFFLING OR BRAINTEASING. IN PATICULAR, THE VIEW IS BLATANTLY INCOMPATIBLE WITH, AND GOES AGAINST THE VERY GRAIN OF THE CIRCULAR OF THE CBDT AND THE RULING OF THE APEX COURT, BOTH BINDING ON THE AUTHORITIES UNDER THE ACT.
VSWAMINATHAN