We refer to the decision of Hon’ble Delhi bench of Income Tax Appellate Tribunal (‘ITAT’) in the case GAGIL FDI Limited v. Assistant Commissioner of Income Tax. The Hon’ble ITAT held that once it is established that GAGIL FDI Limited (‘assessee’) is carrying its business activities in Cyprus and holds a valid Tax Residency Certificate (‘TRC’) issued by Revenue Authority at Cyprus, it is not merely a pass through entity.  

Below is a summary of the case law for your ready reference –

Facts of the case

• GAGIL FDI Limited is a company incorporated in Cyprus as an investment holding company. 
• The assessee is a wholly owned subsidiary of GA Global Investments Ltd (‘GA Global’). A company incorporated in Cyprus. 
• The assessee held a valid TRC issued by Cyprus Revenue Authorities for the relevant assessment year.
• The assessee acquired equity shares of National Stock Exchange India Limited (‘NSE’) from GA Global in June 2014
• The assessee sold shares of NSE in multiple tranches to unrelated independent third party buyers in AY 2021-22.
• The assessee filed its return of income disclosing Long Term Capital Gain (‘LTCG’) on sale of equity shares of NSE and claimed benefit under Article 13 of India-Cyprus Double Taxation Avoidance Agreement (‘India-Cyprus DTAA’)
• The assessee also earned dividend income from shares of NSE and offered the same to tax at the beneficial rate of 10% under Article 10 of India-Cyprus DTAA.

Assessing Officer’s (‘AO’) contentions

• The AO alleged that the ultimate beneficiary of the transaction of sale of shares on NSE is General Atlantic Company based in USA. The entire profits have been routed through the assessee to its controlling company General Atlantic Company (USA). 
•  The AO alleged that directors of General Atlantic Company USA are the directors of the assessee and are the decision makers. Further, he mentioned that the authorised signatory of an operating bank account was not based in Cyprus and the person authorized by the Board to operate the bank account was not the director of the assessee company and was based in US and is the VP, Finance & Accounting of General Atlantic USA.
•  AO also alleged that the registered office address of the assessee in Cyprus and the agency, which was providing professional secretarial services to the assessee, both were found to be mentioned in the infamous Panama leaks. The names of all companies appearing in Panama papers were shell companies. 
•  Accordingly, AO concluded that the assessee’s company was run, controlled and managed by General Atlantic USA. Further, he concluded that assessee was merely a shell company established in Cyprus with an intention of circumventing Indian tax laws using India-Cyprus DTAA as a tool.
•  Thus, the AO denied India-Cyprus DTAA benefit for LTCG as well as the dividend income.
• The Dispute Resolution Panel (‘DRP’) confirmed the findings of the AO.

Submissions by the assessee

• The assessee was incorporated in 2012 in Cyprus and held a TRC issued by the Revenue Authorities in Cyprus.
• The assessee mentioned that before acquisition of shares in NSE by GA Global, and at the time of transfer of shares by GA Global to the assessee, a detailed scrutiny was carried out by Securities Exchange Board of India (‘SEBI’), Reserve Bank of India (‘RBI’), Foreign Investment Promotion Board (‘FIPB’) housed in the Department of Economic Affairs, Ministry of Finance.
• The assessee also referred to fitness tests done by SEBI, of a person to whom shares of stock exchange are to be allotted. Further, the assessee mentioned that SEBI keeps check over the shareholding pattern of stock exchange by each group directly or indirectly.
•  The assessee submitted that every year it had to seek fitness from NSE under SEBI regulations.
• The assessee denied that there was no company by the name of General Atlantic in USA having control over the assessee.
•  The assessee pointed out that for applying tax residency certificate, the assessee had to give a declaration/confirmation wherein, if, any facts are wrongly declared, the assessee would be liable for committing criminal offense.
•  The assessee further submitted that the funds referred by the AO were not based in US but in Bermuda, Germany and Delaware.
•  The assessee submitted that all other directors were from Cyprus, except for two regular directors from USA and one alternate director from USA. Further, during the AY 2021-22, the director from USA did not attend board meetings except one. Hence, the entire decision making process was carried out by the directors based in Cyprus.
•  In relation to Panama leaks, the assessee submitted that International Consortium of Investigative Journalists remarked that it does not intend to suggest or imply that the people and companies included in the database have broken the law or otherwise acted improperly. There are legitimate reasons to use offshore companies and trusts.
•  The assessee also relied on the decision of Hon’ble Delhi ITAT in the case of Saif II-Se Investments Mauritius Ltd. v. ACIT having similar objection of treaty shopping, which was upheld by the Delhi High Court. 
•  The assessee also submitted that the AO has wrongly referred to Panama papers and erred in observing Abacus Cyprus Ltd mentioned in the Panama Papers as the professional secretarial services provider instead of Abacus Ltd.

Decision of the Hon’ble Delhi ITAT

• ITAT held that SEBI, RBI and FIPB are reputed agencies performing various regulatory functions. The approvals are granted after intense scrutiny and therefore cannot be overlooked and termed as mere paperwork.
• ITAT held that on perusal of gist of board meetings, key decisions made therein, and the name of the directors who participated in the meetings, it is evident that the assessee company was managed in Cyprus and not USA. 
•  ITAT held that AO in order to substantiate his findings has referred to Abacus Cyprus Ltd which has been mentioned in Panama leaks, whereas the assessee has obtained professional secretarial services from Abacus Ltd. ITAT found that these two companies are different entities and there is no finding by the AO or the DRP to link these two companies or even remotely say that these are the same group companies.
•   ITAT held that once it is established that the assessee company is carrying its business activities in Cyprus and holds a valid TRC issued by the Revenue Authority at Cyprus, it is not merely a pass-through entity and the allegation of Revenue that it is merely a pass-through entity has no feet to stand.
• ITAT relied on the judgement of Saif II-Se Investments Mauritius Ltd. vs. ACIT, where the bench deprecated the approach of Revenue in raising doubt over the investigations carried out by various agencies of the Government before granting the approval and allowed the benefit of DTAA to the assessee therein.
• In light of the above, the Hon’ble ITAT concurred that the contentions of the Revenue of treaty abuse by the assessee are fallacious and held that the assessee is entitled to India-Cyprus DTAA.