2012 (8) TMI 162 - AAR - Income Tax

India-Mauritius DTAC - sale of shares of a US Company holding 100 per cent shares of company incorporated in India by a Mauritian company to another US company - Held that - The beneficial ownership has not prevailed over the apparent legal ownership & Company law also recognized the recorded owner of the shares and not the person on whose behalf it may have been held thus the applicant is justified in its view that capital gains arising on the sale of shares of Exevo Inc., US by Copal Market Research Ltd. ( CMRL ) to the applicant would not be chargeable to tax in India in the hands of CMRL. Earn-out would be part of the full value of consideration receivable by CMRL i.e.seller as the share purchase agreement also provided for the seller to get earn-out consideration calculated as per a formula contained in clause 5.3 of the agreement and subject to clause 3.8 and 5.5 of the agreement. Section 115JB of the Act would apply even to a foreign company but no ruling on this point as nothing was argued on it. There would be no liability in the applicant to withhold tax under section 195. Sale by a Mauritian company of the shares held by it in an Indian company to a Cyprus company - Held that - The Capital Gains arising on the sale of shares of Indian company helb by Mauritian company are not chargeable to tax in India in the hands of the applicant as the transactions are held to be taxable in India, going by the DTAC, the transactions which give rise to capital gains, can be taxed only in Mauritius, in view of paragraph 4 of Article 13 of the India-Mauritius DTAC Earn-Out consideration would be part of the full value of consideration receivable by the applicant - no obligation on Moody s Group Cyprus Limited, Cyprus to withhold tax under section 195.

Issues Involved:
1. Taxability of capital gains arising from the sale of shares by Mauritian companies.
2. Applicability of the India-Mauritius Double Taxation Avoidance Convention (DTAC).
3. Determination of beneficial ownership and effective management.
4. Requirement to withhold tax under section 195 of the Income-tax Act.
5. Inclusion of 'earn-out' consideration in capital gains.
6. Applicability of section 115JB (Minimum Alternate Tax) to foreign companies.

Detailed Analysis:

1. Taxability of Capital Gains:
The primary issue was whether capital gains arising from the sale of shares by Mauritian companies (CRL Mauritius and CMRL Mauritius) to entities in Cyprus and the USA were chargeable to tax in India. The ruling concluded that the capital gains were not chargeable to tax in India, relying on the India-Mauritius DTAC, which stipulates that such gains are taxable only in Mauritius.

2. Applicability of the India-Mauritius DTAC:
The applicants argued that the transactions should be governed by the India-Mauritius DTAC, which provides that capital gains arising from the sale of shares can only be taxed in Mauritius. The Revenue contended that the transactions were designed to avoid tax in India. However, the ruling upheld the applicability of the DTAC, referencing the Supreme Court decision in Azadi Bachao Andolan, which supports the validity of Tax Residency Certificates (TRCs) and the applicability of the DTAC even if no tax is actually paid in Mauritius.

3. Determination of Beneficial Ownership and Effective Management:
The Revenue argued that the beneficial owner of the shares was CPL Jersey, and since there was no DTAC between India and Jersey, the transactions should be taxable under the Indian Income-tax Act. The ruling, however, maintained that the legal ownership of the shares rested with the Mauritian companies, and the management and control of these companies were effectively in Mauritius, not with Rishi Khosla, a UK resident, who was involved in the transactions.

4. Requirement to Withhold Tax under Section 195:
The ruling addressed whether the purchasers (Moody's USA and Moody's Cyprus) were required to withhold tax under section 195 of the Income-tax Act on the income chargeable to tax in India. The ruling concluded that there was no liability for the purchasers to withhold tax, given that the capital gains were not chargeable to tax in India.

5. Inclusion of 'Earn-Out' Consideration in Capital Gains:
The applicants contended that the 'earn-out' consideration should be included as part of the sale consideration for computing capital gains. The ruling agreed with this position, stating that the 'earn-out' consideration would form part of the full value of consideration receivable by the seller.

6. Applicability of Section 115JB (Minimum Alternate Tax) to Foreign Companies:
The ruling declined to give a definitive ruling on the applicability of section 115JB to foreign companies, though it noted that section 115JB would apply even to foreign companies.

Conclusion:
The ruling concluded that the capital gains arising from the transactions were not chargeable to tax in India due to the applicability of the India-Mauritius DTAC. The 'earn-out' consideration was included in the sale consideration for computing capital gains. The purchasers were not required to withhold tax under section 195, and the management and control of the Mauritian companies were effectively in Mauritius. The applicability of section 115JB to foreign companies was not definitively ruled on.

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