2011 (11) TMI 15 - AAR - Income Tax

Sale of shares of Indian Company - non resident company - Mauritius Tax Treaty - TDS - Held that - capital gains on the proposed sale of shares by the applicant to Ardex Beteligungs-GmbH is not chargeable to tax on capital gains in India in view of Article 13.4 of the India-Mauritius Tax Treaty. - the applicant would be entitled to receive the sale proceeds without the deduction of tax at source. Filing of income tax return - held that - Since the shares to be transferred are the shares of an Indian company which would otherwise have been taxable under the provisions of the Income-tax Act, we rule that the applicant is bound to file a return of income in India in respect of the income from the proposed transfer of the shares.

Summary

Issues:
1. Whether capital gains on the proposed sale of shares would be taxable in India under the India-Mauritius Tax Treaty?
2. Whether the applicant is entitled to receive sale proceeds without deduction of income tax at source?
3. Whether the applicant is required to file a return of income in India for the proposed share transfer?

Analysis:

Issue 1:
The Revenue argued that the applicant was a facade created to invest in India by a UK company to avoid taxation under the India-UK Treaty, benefiting from the India-Mauritius Treaty. They claimed the shares' beneficial ownership vested with the UK company, making the India-UK Treaty applicable. However, the applicant contended it was a Mauritius tax resident, and under the India-Mauritius Treaty, capital gains were taxable only in Mauritius unless the applicant had a Permanent Establishment in India. The Authority ruled in favor of the applicant, stating that capital gains from the share sale were not taxable in India under Article 13.4 of the India-Mauritius Tax Treaty.

Issue 2:
Regarding the entitlement to receive sale proceeds without tax deduction, the Authority ruled in favor of the applicant, stating they could receive the proceeds without deduction of tax at source.

Issue 3:
The question of whether the applicant needed to file an income tax return in India for the share transfer was also addressed. The Authority ruled that since the shares were of an Indian company, the applicant was obligated to file a return for the income from the share transfer. Despite citing precedents, the Authority held that the applicant must file a return of income based on their interpretation of the law.

In conclusion, the Authority's ruling favored the applicant on the taxation of capital gains under the India-Mauritius Tax Treaty and their entitlement to receive sale proceeds without tax deduction. However, the Authority mandated the applicant to file a return of income in India for the proposed share transfer due to the nature of the transaction involving shares of an Indian company.