Tax Appeal Case ITA 1023/DEL/2022: MIH India (Mauritius) Ltd. vs ACIT – Examination of Short-term Capital Gain Exemption

Tax Appeal Case ITA 1023/DEL/2022: MIH India (Mauritius) Ltd. vs ACIT – Examination of Short-term Capital Gain Exemption

The appeal case ITA No.1023/Del/2022, presided over by the Income Tax Appellate Tribunal Delhi Bench ‘D’, has garnered notable interest within the taxation and legal communities. The case involves MIH India (Mauritius) Ltd. (‘the appellant’), a Mauritius-based corporate entity, and the Assistant Commissioner of Income Tax, Circle -2(2)(1), International Taxation, New Delhi (‘the respondent’), concerning the assessment year 2017-18. This comprehensive analysis explores the tribunal’s final judgment, the intricacies of the legal arguments presented, and the broader implications for taxation jurisprudence.

Background of the Case

The appellant, MIH India (Mauritius) Ltd., challenged the final assessment order dated 06.04.2022 related to the assessment year 2017-18, specifically addressing the taxability of short-term capital gains amounting to Rs.4,77,44,375/- arising from the sale of shares.

The pivotal issue at the core of the appeal revolves around the application of the India-Mauritius Double Taxation Avoidance Agreement (DTAA) and whether the appellant was entitled to claim exemptions on short-term capital gains derived from these transactions. The controversy stemmed from the sale of equity shares in Citrus Payments Solutions Pvt. Ltd. to PayU Payments Pvt. Ltd., with the respondent challenging the tax exemption under the treaty, categorizing the appellant as a conduit entity.

Appellant’s Arguments

The appellant argued that it is a legitimate enterprise incorporated in Mauritius, holding a valid Tax Residency Certificate (TRC) from Mauritian authorities, thereby qualifying for treaty benefits. It was contended that the gains from the sale of shares are taxable only in Mauritius under the provisions of the DTAA, citing precedents and circulars that support the stance against treaty shopping allegations. The appellant emphasized its substantial investment activities, juxtaposing the respondent’s portrayal of the appellant as lacking commercial substance.

Respondent’s Perspective

The respondent highlighted the structuring of the investment transactions, suggesting that the primary intent was to bypass Indian tax liabilities. By examining the financial transactions and the relationship between the appellant and the entities involved in the share sale, the respondent argued that the appellant served as a mere conduit for the ultimate benefit of the holding company based in the Netherlands, thus nullifying the treaty benefits.

Judicial Findings and Conclusion

The tribunal meticulously analyzed the provisions of the India-Mauritius DTAA, along with the amendments and the applicability of the Multilateral Instrument (MLI). The judgment reaffirmed the sanctity of the TRC and the consequential entitlement to treaty benefits, underscoring the principle upheld in the case of Azadi Bachao Andolan. It was concluded that the appellant’s transactions were squarely covered under the DTAA provisions, thereby exempting the capital gains from tax in India. The tribunal’s decision underscores the legal clarity surrounding treaty benefits and the non-application of conduit entity allegations in determining tax liabilities under the DTAA framework.

Implications of the Tribunal’s Decision

This landmark judgment elucidates critical aspects of tax law, especially in the context of double taxation avoidance agreements and the concept of beneficial ownership. It provides significant insights for corporations engaged in cross-border transactions, affirming the importance of adhering to treaty provisions and the sanctity of TRCs. Moreover, the ruling sets a precedent for similar disputes, potentially influencing future tax assessment and litigation regarding international tax treaties.

Tax Appeal Case ITA 1023/DEL/2022: MIH India (Mauritius) Ltd. vs ACIT – Examination of Short-term Capital Gain Exemption