Delhi ITAT rules Tax Residency Certificate as statutory evidence of residency, shifting onus on Revenue to establish that entity is a conduit, created and run for treaty shopping

Introduction

The Delhi Income Tax Appellate Tribunal upheld the validity of the Tax Residency Certificate as primary and statutory evidence of residency, emphasizing that the onus shifts to the Revenue to prove treaty shopping, if a valid Tax Residency Certificate has been presented. This significant ruling was made in the case of Tiger Global Eight Holdings¹ v/s DCIT, International Taxation dated 26 July 2024.

Significant investments and management activities in Mauritius were noted, and the Revenue’s claims of treaty abuse were dismissed. The Tribunal’s decision reinforces the principle of substance over form, affirming that genuine business operations and proper residency documentation are crucial in claiming Double Taxation Avoidance Agreement (DTAA) benefits. This ruling underscore the importance of Tax Residency Certificates (TRCs) in facilitating tax exemptions for cross-border investments.

Facts of the case

• Tiger Global Eight Holdings (Assessee), a Mauritius-based company established in 2014, was established for the purpose of acting as an investment platform for investing in Countries in a regional groupings such as the Cayman Islands and Asia.
• The Assessee was predominantly owned by Tiger Global Private Investment Partners VIII, L.P. (Cayman) with a 99.80% stake, while Tiger Global Side Fund LLC (Delaware) held the remaining shares and possessed a valid Tax Residency Certificate (TRC) issued by the authorities of Mauritius.
• In AY 2020-21, the Assessee, sold shares held in Etechaces Marketing and Consulting (operating under the brand name ‘Policybazaar’).
• Out of the total shares sold, 1,581 shares acquired on October 13, 2017 were offered to tax @ 10% and the Assessee paid tax on the same of INR 40.427 crore as they had been purchased after April 1, 2017).
• However, the long-term capital gain for sale of 9,013 shares were not offered to tax, as the same were purchased before April 01, 2017 and exemption was claimed under Article 13(4) of India-Mauritius DTAA.
• The Revenue denied the DTAA benefit to the Assessee, arguing that the Assessee failed to sufficiently prove its residency in Mauritius, thereby making the long-term capital gains on sale of 9,013 shares purchased before April 01, 2017 taxable under Section 112 of the Income Tax Act, 1961 (‘the Act’). The Dispute Resolution Panel (DRP) sustained this disallowance.
• The Assessee challenged these proceedings by filing an appeal in the Delhi ITAT.

Assessee’s Contention

• In the year of incorporation, the Assessee invested a total of INR 4,030.087 Crores across various jurisdictions, with INR 142.688 crores (3.54% of the total) directly invested in Indian company securities.
• The Assessee meets the conditions prescribed under Mauritius law for determining the “management and control” of an entity in Mauritius.
• The Assessee argued that they provided TRC issued by the authorities of Mauritius for the year in consideration, which should be sufficient to claim benefits under the India-Mauritius DTAA.
• Consequently, the Assessee insisted that tax should not be levied on capital gains under Section 112 of the Act, for the 9,013 shares purchased before April 01, 2017.

Revenue’s Contention

• A Tax Residency Certificate (TRC) issued by the Government of Mauritius would be considered statutory evidence of residency, but not conclusive proof of the residential status and beneficial ownership of Mauritian entities for DTAA purposes.
• The Assessee’s submissions were reviewed, but were unable to justify the commercial rationale for establishing operations in Mauritius, other than leveraging the benefits of the India-Mauritius DTAA.
• The Assessee was also requested to provide the TRCs for its directors. Despite multiple opportunities being granted, the Assessee failed to furnish these documents. Additionally, the Assessee was specifically asked to provide details about director remuneration but did not comply.
• By making certain arrangements, the Assessee had engaged in treaty shopping and tax avoidance practices, failing to pay taxes in any of the countries where they are situated, including Mauritius, India, China, Singapore, and the Cayman Islands.

References made:

• Union of India v. Azadi Bachao Andolan
• Vodafone International Holdings B. V. v. UOI and Anr
• Blackstone Capital Partners (Singapore) v. ACIT, Delhi
• MIH India (Mauritius) Ltd v. ACIT, Delhi
• Reverse Age Health Services Pte Ltd v. DCIT, Delhi
• Ruling of the AAR in AB Mauritius

Issues raised before the ITAT

1. Whether TRC is sufficient statutory evidence for DTAA benefits?
2. Whether the Assessee is engaged in treaty shopping?

Decision of the ITAT

1. Whether TRC is sufficient statutory evidence for DTAA benefits?

• The ITAT observed that the Assessee meets the conditions prescribed under Mauritius law for determining the “management and control” of an entity in Mauritius.
• The Assessee maintained an office space in Mauritius where it keeps all accounting records, registers, books of accounts, and other statutory documents. Additionally, it also employed two staff members based in Mauritius.
• The Assessee was managed and controlled by its Board of Directors in Mauritius. The Assessee had also provided details of the board composition and the qualifications of its directors, demonstrating that the directors are professionals with the necessary qualifications and experience to manage funds.
• The board minutes provided to the Assessing Officer indicated that the Assessee was controlled and managed by the Board of Directors in Mauritius, with all decisions regarding the Company’s affairs made by the Board in Mauritius.
• The Assessee prepared and regularly submited financial statements, audited by an accounting firm in Mauritius and also filed the same annually with the relevant authorities. Additionally, the Assessee filed its Income tax return with the Mauritius tax authorities each year.
• Further, the Assessee had secured an expert opinion from a Mauritian legal counsel, who, after reviewing the case and applicable laws, confirmed that the Assessee qualifies as a resident of Mauritius.
• The tax authorities did not provide concrete evidence to disprove the TRC’s validity and relied instead on suspicion and inferences to accuse the Assessee of treaty shopping.

The ITAT referenced CBDT Circulars and Supreme Court rulings reinforcing the TRC’s role as valid statutory evidence.

Hence, basis the above observations, the ITAT held that the TRC issued by the Government of Mauritius constituted adequate statutory evidence for claiming DTAA benefits by the Assessee. The ITAT further held that Revenue had failed to rebut the statutory evidence of the TRC with cognent evidence, and merely on the basis of suspicion and inferences, Revenue had alleged that the Assessee was not genuinely resident in Mauritius.

1. Whether the Assessee is engaged in treaty shopping?

• The Assessee demonstrated that its directors, based in Mauritius, managed and were overseeing all investments and divestments decisions, including the sale of Policybazaar shares. All sale agreements were signed by these Mauritian resident directors.
• The Assessee, acting as an investment platform, did not hold its own funds; instead, any profits from disinvestment were distributed to the original investors who relied on the Assessee’s expertise.
• The Assessee’s limited investment in India relative to its global portfolio undermines the tax authorities’ substance-over-form arguments.
• The ITAT opined that there was no doubt that the Assessee was a dropdown entity associated with the entities operating in Cayman Islands, but that does not taint its genuine activities as investment platform and doctrine of “substance of form” cannot be extended to taint the investments which were made in a prestigious Indian Company in the initial years of growth just because it has associated enterprises operating from the Cayman Island.

Consequently, the ITAT determined that the Assessee was not engaged in treaty shopping as the miniscule percentage of funds invested in India as compared to the investments made across various economies rebuts all inferences drawn by Revenue. The Revenue’s allegations were based on suspicion rather than concrete evidence, and the Assessee’s international investment activities affirmed its legitimate business operations.

Conclusion

In this landmark ruling, the ITAT reaffirmed that the TRC is valid statutory evidence for claiming DTAA benefits, though not conclusive. The ITAT highlighted that the Revenue’s burden was to prove that the entity was a mere conduit for treaty shopping, which was not established for treaty shopping.

The Tribunal noted the Assessee’s significant investments, operational presence in Mauritius, qualified board of directors, and compliance with local tax laws as evidence of genuine residency. The ITAT dismissed the Revenue’s suspicion-based claims and reaffirmed that the Assessee’s role as an investment platform did not taint its genuine business activities, thereby allowing the Assessee’s appeal. This emphasizes the Regulatory framework’s commitment to ensuring fairness and integrity in taxation.

¹https://itat.gov.in/files/uploads/categoryImage/1722246929-Tiger%20Global%20Eight%20Holdings.pdf