2011 (3) TMI 167 - AAR - Income Tax

DTAA - The Applicant has approached this Authority to determine whether by virtue of being a Mauritius resident, it is eligible to the benefits of the India-Mauritius DTAA and hence not subject to tax in India on the capital gains realized - TDS u/s 195 - In the case of Azadi Bachao Andolan reported in 2003 TMI - 6130 - SUPREME Court , the Honorable Supreme Court has held that the certificate of residence issued by Mauritius Revenue Authority constitutes a valid and sufficient evidence of residential stat us under India - The tax payer is entitled in law to seek the benefit under the DTAA if the provision therein is more advantageous than the corresponding provision in the domestic law. The applicant is not liable to pay capital gains tax in India in respect of the transfer of shares held in Quippo Telecom Infrastructure Limited (Indian Company) to Geraldton Finance Limited, a Mauritius based company having regard to the provisions of India-Mauritius DTAA

Summary

Issues Involved:
1. Maintainability of the application under section 245N of the Income-tax Act, 1961
2. Tax liability in Mauritius on capital gains from the sale of shares
3. Tax liability under Income Tax Act 1961 and India-Mauritius DTAA for the sale of shares
4. Withholding tax liability under section 195 of the Income-tax Act, 1961

Analysis:

Issue 1: Maintainability of the application
The applicant sought clarification on the eligibility for benefits under the India-Mauritius DTAA regarding capital gains tax. The Authority deleted Question No.1 as it was deemed unnecessary under section 245R(2) of the Act.

Issue 2: Tax liability in Mauritius
The applicant, holding a Tax Residence Certificate from Mauritius, claimed benefits under the DTAA. The DTAA provides that gains from the alienation of shares by a resident of a contracting state shall be taxable only in that state. Various legal precedents and CBDT Circulars supported the applicant's position, emphasizing that residents of Mauritius are liable to tax only in Mauritius for gains from the alienation of shares.

Issue 3: Tax liability under Income Tax Act and India-Mauritius DTAA
The applicant argued that under the DTAA, residents of Mauritius deriving income from the alienation of shares of Indian companies are liable to tax only in Mauritius. The DTAA provision under Article 13(4) specified that gains derived by a resident of a contracting state from the alienation of property shall be taxable only in that state, irrespective of the location of the capital asset.

Issue 4: Withholding tax liability
The applicant, supported by legal principles and Circulars issued by the CBDT, contended that the Tax Residency Certificate from Mauritius was sufficient evidence for non-liability to pay Indian income tax on capital gains. The Circulars clarified that residents of Mauritius, including foreign institutional investors, should not be taxable in India on income from capital gains arising from the sale of shares.

In conclusion, the Authority ruled in favor of the applicant, stating that they were not liable to pay capital gains tax in India for the sale of shares under the India-Mauritius DTAA. The ruling was based on legal interpretations, precedents, and the provisions of the DTAA between India and Mauritius.