ITAT Delhi Ruling on Treaty Abuse Allegation and DTAA Benefits

Executive Summary:

• The Delhi Tribunal, in a recent ruling, has decided in favour of Gagil FDI Ltd., a Cyprus-based investment holding company, granting exemption on capital gains and dividend income under the India-Cyprus Double Tax Avoidance Agreement (DTAA).

• The Tribunal categorically rejected the Revenue’s allegations of treaty abuse, noting the existence of a valid Tax Residency Certificate (TRC) and the company’s operational control in Cyprus. The decision reinforces the legal sanctity of TRC(s) and the significance of regulatory approvals granted by RBI, SEBI, and FIPB.

Revenue’s Contentions:

• Conduit Structure Allegation: AO alleged that the assessee routed investments through Cyprus only to exploit DTAA provisions.

• Beneficial Ownership in US: Claimed the real beneficiaries and directors were US- based.

• Control from USA: Asserted decision-making was managed from the US. Link to Panama Papers: Claimed the use of a service provider named in the Panama Leaks.

Assessee’s Submissions:

• Valid TRC & Economic Substance: TRC from Cyprus, with independent functioning.

• Operational Management in Cyprus: Demonstrated control via board records.

• Multi-jurisdictional Funds: Funding from Bermuda, Germany, Delaware.

• Regulatory Scrutiny: Approvals from SEBI, RBI, and FIPB were substantive.

• No Link to Panama Entity: Differentiated ABACUS Ltd. from Panama-named firm.

ITAT Delhi Ruling:

• Rejects Treaty Abuse Allegation: Found no substantial merit in Revenues claim.

• Valid TRC Holds Ground: TRC and bona fide operations suffice for DTAA.

• No Control from USA: Confirmed Cyprus-based governance.

• Approvals Are Material: Criticized DRPs view on SEBI/RBI scrutiny.

• Differentiates ABACUS Entities: Found no linkage to Panama leaks.

Key Takeaways

• Substance over Form

It is important to check where the company is effectively managed and controlled.

• TRC Remains Vital

A valid TRC is a crucial piece of documentary evidence to establish eligibility for benefits of Tax Treaty.

• Regulatory Vetting Is Not Cosmetic

Approvals from regulatory bodies like RBI, SEBI, or FIPB are substantive and lend credibility to the legitimacy and genuineness of cross-border structures.

• Avoid Over-reliance on Panama Leaks

Allegations drawn solely from data leaks like the Panama Papers require corroborating evidence to hold weight in legal or tax proceedings.

• Case Law Reinforced

The ruling is in line with previous judicial decisions such as in the Saif II-Se Investments Mauritius Ltd. vs. ACIT, 154 taxmann.com 617 (Delhi-Trib) and Tiger Global International III Holdings vs. The Authority for Advance Rulings (Income Tax & Ors.), reaffirming similar legal interpretations.