Indian Tribunal holds Mauritian Co.’s share transaction with PayU India exempt under pre-amended double tax treaty

The ITAT remarks that the “Assessing Officer has made a desperate and unacceptable attempt to overcome the ratio laid down by the Hon’ble Indian Supreme Court in the case of Azadi Bachao Andolan by anticipating a future event of ratification of the MLI providing amendment to the preamble of the India-Mauritius Tax Treaty by the Mauritius government, which is yet to see the light of the day”.

The assessee company, a tax resident of Mauritius holding a valid tax residency certificate to claim benefits of the India-Mauritius DTT, sold shares of Citrus Payments Solutions Pvt. Ltd. (Citrus India) to PayU Payments Pvt. Ltd. (PayU India) for INR 2233.5 million, which resulted in a short-term capital gain of INR 47.7 Cr. that was claimed as exempt under the DTT. In the course of assessment for assessment year 2017-18 (equivalent to financial year 2016-17), Revenue (the Indian Income Tax Department) thus held that the entire share purchase arrangement was structured to claim treaty benefits and that the assessee had no economic or commercial substance. Revenue found that the beneficial owner of shares is a Dutch holding company of the assessee, i.e. PayU Global B.V., and therefore held that the benefits under the India-Mauritius DTT would not enure to the assessee. Revenue invoked the principle of substance over form and held that the assessee acted as a conduit for the Dutch company, thus that the short-term capital gains should be taxable in India.

The ITAT observes that the transaction in question pertains to the period prior to 1 April 2017, which is the effective date for the amendment of article 13 of the DTT, and therefore the assessee shall be eligible for the beneficial treaty provisions. The ITAT underscores that the assessee made substantial investments in India, and PayU India to whom the assessee had sold the shares of Citrus India is a company wherein the assessee holds 82.94% of shares. The ITAT also highlights that the shares of Citrus India sold to PayU India are still held by PayU India, which clearly establishes that the assessee is not a fly-by-night operator or mere conduit company. Further, the ITAT holds that merely borrowing money to invest in the shares of Citrus India cannot, ipso facto, be a reason to treat the assessee as a conduit company. The ITAT reiterates the legal position as per the Indian Direct Tax Board Circular that states that where a tax residency certificate is issued by the Mauritian tax authorities, it will constitute sufficient evidence for accepting the status of residence as well as the beneficial ownership for treaty benefits. Thus, the ITAT follows the Indian Supreme Court ruling in Azadi Bachao Andolan and finds “no hesitation in holding that the gain derived by the assessee on sale of shares of Citrus India to PayU India is not taxable in India as per pre-amended Article 13(4) of the India-Mauritius Tax Treaty”. Regarding Revenue’s reasoning that the transaction is covered by the India-Netherlands DTT, the ITAT relies on another bench ruling in Merrill Lynch Capital Market delivered in the context of the India-Spain DTT, where it was held that the onus to prove that the value of shares is derived principally from immovable property situated in the source country is entirely on the Revenue.

The ITAT holds that the Revenue did not give any finding to this effect in the assessment order nor did it bring any material on record during the course of appellate proceedings to demonstrate that the condition of article 13(4) of the India-Netherlands DTT was satisfied. It therefore holds that the capital gains will not be taxable in India as per the India-Netherlands DTT.