In the matter of
SC Lowy P.I. (LUX) S.A.R.L., Luxembourg Vs ACIT, International Taxation
(ITA No.3568/DEL/2023 )
Summary
M/s S C Lowy P.I. (LUX) S.A.R.L., Luxembourg (“The Assessee” or “The Appellant”) is incorporated in the year 2015 in Luxembourg. The Assessee is FPI registered with SEBI. The Assessee filed an ITR for AY 2021-22 declaring interest Income, Business Income, and Capital Gain Income. The Assessee charged tax @ 10% on interest income claiming benefit of Article 11 of India- Luxembourg DTAA and exempted other incomes under Articles 7 and 13(6) of DTAA. The Assessee submitted various documents such as TRC issued by Luxembourg, ITR Filed in Luxembourg for 2015 to 2019, Details of investments made outside India, etc. The AO denied the benefit of DTAA invokingthe Principal Purpose Test (PPT) as given under Article 29 of DTAA contending that the Assesee is based in Luxembourg only to claim the benefit of the Treaty and have original benefit interest in Cayman Island. The assessee company is just a conduit and the real owner is the SC Lowy Primary Investments Limited who are tax residents of the Cayman Islands.
The Hon’ble ITAT held that the activities of the assessee are beyond Indian jurisdiction and it also filed tax returns and paid tax in Luxembourg on its worldwide income. The assessee controls the assets as well as income on its own and cannot be termed a conduit. Further, the AO has not brought any cogent material on record to indicate that the assessee in substance a conduit except for expressing his views and presumptions. The benefit of the reality can’t be denied without any cogent material with the revenue to establish that the assessee is only a conduit
Therefore, the AO was directed to grant the benefit of the treaty to the Assessee.
Article:
1. Brief facts of the case:
- M/s S C Lowy P.I. (LUX) S.A.R.L., Luxembourg (“The Assessee”) is a Limited Liability Company incorporated in 2015 under the law of Luxembourg. It is a Category II – Foreign Portfolio Investor registered with the Securities and Exchange Board of India (SEBI).
- The Assessee is a subsidiary of SC Lowy Primary Investments Limited, Cayman Island and it invests in securities.
- The Assessee filed its return of Income for AY 2021-22 declaring the following incomes:
- Interest Income- Chargeable to Tax @ 10% claiming the benefit of Clause claiming the benefit of Article 11 of India- Luxembourg DTAA.
- Business Income- Exempted under Article 7 of DTAA
- Capital Gain Income- Exempted under Article 13(6) of DTAA
- The Assessee’s case was selected for complete scrutiny under CASS due to a large refund claimed by the non-resident.
- During the Assessment proceedings, the Assessee furnished the following documents:
- Difference between commercial activities of the Holding Company and Subsidiary Company;
- Commercial Rationale of the existence of the Assessee in Luxembourg;
- Tax Residency Certificate (TRC) issued by Luxembourg;
- ITRs filed in Luxembourg from 2015 to 2019;
- Details of investments made in India and income earned in India
- The Assessing officer made the following observations and denied the benefit of DTAA to the Assessee:
- The Assessee arranged to avoid tax through a treaty shopping mechanism.
- The assessee company is just a conduit and the real owner is SC Lowy Primary Investments Limited which are tax residents of the Cayman Islands;
- TRC is not sufficient to establish the tax residency if the substance establishes otherwise.
- The assessee company is also not a beneficial owner of income as control and dominion of funds is not with the company.
- There is no commercial rationale for the establishment of the assessee company in Luxembourg as the commercial outcomes would be identical irrespective of the location of funds.
- the Assessee preferred objections before the Ld. DRP and Ld. DRP sustained the additions made by the AO including denial of DTAA benefits. Subsequently, AO has passed the final assessment order.
- Therefore, the Assessee filed an appeal against the Impugned assessment order before the Income Tax Appellate Tribunal.
2. Contention of the Assessee:
The Assessee made the following submission:
- The Assessee is a Tax Resident of Luxembourg and is liable to pay tax in Luxembourg on worldwide Income. The Assessee is holding a valid TRC.
- The Assessee placed reliance on the decision of the Hon’ble Delhi High Court in the case of Tiger Global International III Holdings [W.P.(C) 6764/2020] wherein the Hon’ble Court held that validity and sanctity of TRC issued by competent authority cannot be questioned unless in case of fraud, sham transactions where the entity has no vestige of economic substance or the transaction is alleged to be aimed at camouflaging an illegality. Furthermore, the onus is on Revenue to establish that the transaction is a sham or a colorable device.
- Principal Purpose Test (PPT): The DTAA has been amended by Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting signed by India and Luxembourg on 7th June 2017 (the ‘MLI”). The provisions of MLI applicable to DTAA take effect in India for “taxes levied concerning taxable periods beginning on or after 1st April 2020, i.e., before assessment year 2021-22 and hence applicable for the year under reference.
- The Assessee can’t be said to be incorporated in Luxembourg to obtain Treaty benefits as:
- It was incorporated in 2015 (PPT got implemented in India w.e.f. 01.04.2020);
- 86% of investments are made by the Appellant in jurisdictions other than India;
- the Appellant has filed tax returns and paid tax in Luxembourg on its worldwide income,
- the Appellant is, both, the legal and beneficial owner of the investments made;
- The Appellant has incurred substantial operational expenditures relating to investments in Luxembourg like consulting fees, legal and litigation fees, and other professional fees apart from other administrative expenses such as rent paid for office premises, bank account charges, accounting fees, etc.;
- the Appellant continues to exist to date in Luxembourg and continues to hold substantial investments.
3. Contention of the Respondent:
The Revenue made the following submissions:
- The Appellant was established in Luxembourg to get the tax benefit out of the DTAA since the company was established in Luxembourg by the Cayman Islands Holding Company.
- There is no treaty with the Cayman Islands and only a treaty exists to exchange the information, therefore, there is no DTAA in existence with the Cayman Islands. The offshore companies from the Cayman Islands have no physical presence in Luxembourg.
- Accordingly, Based on the MLI entered with Luxembourg, the assessee is not eligible to claim DTAA benefits because the assessee is only a conduit.
4. Analysis by the Hon’ble ITAT
The Hon’ble ITAT made the following analysis:
- The issue raised before Hon’ble ITAT is:
- whether the existence of TRC issued by the Luxembourg authorities is valid for availing DTAA benefits and the corresponding existence of LOB in the respective DTAA/MLI, compliance to Art.29 is sufficient; and
- Whether the revenue could go beyond to raise several other conditions to grant DTAA benefits.
- In the case of Tiger Global International III Holdings (supra), the Hon’ble High Court of Delhi held:
- A validity and sanctity of TRC issued by the competent authority must be considered to be sacrosanct and due weightage must be accorded to the same as it constitutes the relevant entity being a bona fide entity having beneficial ownership domiciled in the contracting state to pursue a legitimate business purpose in the contracting state unless there is evidence of Fraud and sham transactions.
- As per Circular No 789/2000, a TRC issued by authorities would constitute sufficient evidence for determining fiscal residence and beneficial ownership.
- The allegations of Revenue are based on cogent and convincing evidence and should not be mere conjecture, doubt, or a perceived need to investigate and enquire.
- Such an allegation has to be established at the outset itself before they discard the presumption of validity when the entity produces TRC and the LOB conditions are shown to be fulfilled.
- Pierce of corporate veil of a TRC holding entity is restricted to extremely narrow circumstances of tax fraud, sham transactions, camouflaging of illegal activities, etc. and the establishment of those charges would have to meet stringent and onerous standards of proof and not merely suspicion alone.
- Therefore, the revenue has to accept the TRC and if the facts on record satisfy the conditions specified in Article 29 on Limitation of Benefits (LOB), it cannot stretch beyond the above mandates unless they bring on record the cogent and convincing pieces of evidence to prove the existence of assessee being acted as conduit.
- In the Given case, the Appellant has submitted the TRC and The revenue has not raised any flag on the validity of the TRC.
- Further, the activities of the assessee are beyond Indian jurisdiction and it also filed tax returns and paid tax in Luxembourg on its worldwide income. The assessee has incurred substantial operational expenditure relating to investments in Luxembourg.
- The assessee controls the assets as well as income on its own and cannot be termed a conduit. Further, the AO has not brought any cogent material on record to indicate that the assessee in substance a conduit except for expressing his views and presumptions.
- The revenue authorities cannot bring on record other conditions to deny the benefit under the treaty when the assessee submits the relevant TRC and proves its existence from the date of its investment in the source country.
5. Final Order
The Hon’ble ITAT held that without any cogent material with the revenue to establish that the assessee is only a conduit, the benefit under the treaty cannot be denied.
Therefore, the AO was directed to grant the benefit of the treaty to the Assessee.
