ITAT: Treaty Benefit Can’t Be Denied on Suspicion

Two Mauritius-based investment holding companies together owned a combined 22.04% stake in an Indian telecom firm. They acquired these shares through funding from related entities, with ECL receiving the shares directly after Essar Telecom Investments Ltd. was liquidated due to regulatory issues.

In FY 2011-12, the two companies sold their entire stake in the telecom firm to a Vodafone group company and sought to avoid Indian capital gains tax by claiming residency in Mauritius. However, Indian tax authorities rejected their claim, arguing that their management was based in India and the structure was merely a tax avoidance tactic. The denial was upheld by the Commissioner of Income Tax (Appeals), leading ECL and ECom to appeal the decision before the ITAT.

Main Issue Before the Tribunal: Whether the capital gains earned by the Mauritius-based assessees on the sale of shares of an Indian company were exempt from Indian taxation under Article 13(4) of the India-Mauritius DTAA or taxable in India as the assessees were effectively Indian residents under Section 6(3) of the Income Tax Act.

ITAT Held: The Income Tax Appellate Tribunal (ITAT) held in favor of the assessee, observing that both companies were incorporated in Mauritius, held valid TRCs and Global Business Licenses, and conducted board meetings in Mauritius. The Tribunal noted that control and management of their affairs were not shown to be wholly situated in India. Thus, the assessees were not Indian residents under Section 6(3) of the Act.

Accordingly, the ITAT concluded that the capital gains arising from the sale of VEL shares were not chargeable to tax in India under Article 13(4) of the India-Mauritius DTAA. The Tribunal found no evidence to support the Revenue’s allegation that the assessees were conduit entities or lacked commercial substance and thus set aside the orders of the CIT(A).

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