Case Note & Summary
The petitioner, Indostar Capital, a Mauritius-based company incorporated in October 2010, held a Category 1 Global Business Licence and a Tax Residency Certificate (TRC) from Mauritius. It was formed to promote an Indian Non-banking Financial Company, Indostar Capital Finance Limited (ICFL). Between 31.3.2011 and 17.8.2015, the petitioner acquired 7.13 crore shares of ICFL, representing 97.30% of its share capital. The petitioner filed an application under Section 197 of the Income Tax Act, 1961 seeking a certificate for deduction of tax at a lower rate on dividend income from ICFL, relying on the India-Mauritius Double Taxation Avoidance Agreement (DTAA). The Assistant Commissioner of Income Tax (International Taxation) rejected the application by order dated 20.6.2018, on the ground that the petitioner was not the beneficial owner of the shares and lacked commercial substance. The petitioner challenged this order by way of a writ petition before the Bombay High Court. The court considered the arguments of both sides. The petitioner argued that the TRC is sufficient evidence of residence for treaty benefits and that the Assessing Officer should have considered the DTAA. The respondents argued that the TRC is not conclusive and that the Assessing Officer was justified in examining beneficial ownership. The High Court held that the TRC is sufficient evidence of residence for the purposes of the DTAA and that the Assessing Officer must consider the DTAA provisions. The court set aside the impugned order and directed the Assessing Officer to pass a fresh order after considering the TRC and the DTAA, and after giving the petitioner an opportunity of being heard.
Headnote
A) Income Tax - Tax Deduction at Source - Section 197 of Income Tax Act, 1961 - Lower Deduction Certificate - The petitioner, a Mauritius-based company holding a Tax Residency Certificate (TRC), sought a certificate for lower tax deduction on dividend income from its Indian subsidiary. The Assessing Officer rejected the application on grounds of lack of beneficial ownership and commercial substance. The High Court held that the TRC is sufficient evidence of residence for treaty benefits and that the Assessing Officer must consider the DTAA provisions. The court set aside the rejection order and directed the Assessing Officer to pass a fresh order after considering the TRC and the DTAA. (Paras 1-10) B) Income Tax - Double Taxation Avoidance Agreement - India-Mauritius DTAA - Tax Residency Certificate - The court held that under the India-Mauritius DTAA, a Tax Residency Certificate (TRC) issued by the Mauritius Revenue Authority is sufficient evidence of residence for claiming treaty benefits. The Assessing Officer cannot disregard the TRC without valid reasons. The court directed the Assessing Officer to examine the petitioner's claim for lower tax deduction in light of the DTAA and the TRC. (Paras 5-10)
Issue of Consideration
Whether the Assessing Officer was justified in rejecting the petitioner's application under Section 197 of the Income Tax Act, 1961 for a certificate for deduction of tax at a lower rate on dividend income, without considering the Tax Residency Certificate (TRC) and the provisions of the India-Mauritius Double Taxation Avoidance Agreement (DTAA).
Final Decision
The High Court allowed the writ petition, set aside the order dated 20.6.2018, and directed the Assessing Officer to pass a fresh order after considering the Tax Residency Certificate and the provisions of the India-Mauritius DTAA, and after giving the petitioner an opportunity of being heard.
Law Points
- Tax Residency Certificate (TRC) is sufficient evidence of residence for treaty benefits
- Section 197 of Income Tax Act
- 1961
- India-Mauritius Double Taxation Avoidance Agreement (DTAA)
- beneficial ownership
- lower tax deduction certificate
