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2019 (9) TMI 1549 - AAR - Income TaxAdvance ruling application - Income taxable in India - capital gains on the proposed sale of shares - transfer of shares from a holding company - India-Mauritius Tax Treaty - Applicability of provisions of section 90 - HELD THAT - Ruling the issues of advancing loan to the holding company with interest at 1 per cent. and waiver of earlier loan while advancing fresh loan, have no relevance while deciding the question before us. Even if the entire sale consideration goes back to the parent holding company it will not dilute the separate legal identity of the applicant. The matter regarding variance in the date of transfer of shares as per contribution agreement and the financial statements has been clarified by the applicant. Suitable clarification has also been provided in respect of the loan given by the applicant not found reflected in form 10-K accounts of the holding company. The other issues raised by the Revenue are also not found relevant for deciding the question before us. Accordingly, the information regarding manner of utilization of sale proceeds, copy of valuation report of shares of BD Singapore, copy of loan agreement between applicant and BS USA and the source of the loan etc., all become inconsequential and no adverse inference can be drawn if the details of the same are not provided by the applicant. We find that the investment was made out of the funds emanating from the applicant, the investment was held for a period of over 15 years during which the business operations in India was carried on and which continued even after the exit, there was continuous generation of taxable revenue in India and thus the applicant fulfils the conditions as laid out above. In fact the hon'ble Supreme Court had observed in that case that the funds coming from Mauritius were not originating from that country but from third nations, still the structure as set up cannot be considered to be a set up for tax evasion. The apex court further held that the Revenue cannot deny the benefits of transfer of shares by alleging that the Mauritius company was merely a conduit and the US company was the actual beneficial owner of the shares. We do not have any adverse finding and we are inclined to accept the plea of the applicant that it was not a benami or set up for tax avoidance as a colourable device and only for treaty shopping, which in any case is not taboo. It is not in dispute that the applicant is a tax resident of Mauritius, possesses a valid tax residency certificate granted by the Mauritius tax authorities and would be covered under the India-Mauritius DTAC The tax treaty between India and Mauritius was originally signed in 1983 which provided a capital gains tax exemption to a Mauritius resident on transfer of Indian securities. The availability of capital gains tax exemption under the Indo-Mauritius Treaty was challenged in courts which had resulted in the Government issuing Circular No. 789 assuring investors the benefits of capital gains exemption under the treaty and which was upheld by the Supreme Court in the Azadi Bachao Andolan case 2003 (10) TMI 5 - SUPREME COURT As per article 13(4) of India-Mauritius DTAC that the capital gains derived by the resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs 1, 2 and 3 of the article shall be taxable only in that State. The shares and securities are not specified in clauses 1, 2 and 3 of the article 13. Therefore, any gain arising on sale of shares is liable to tax only in the State in which the person alienating the shares is resident. In the instant case the applicant is resident of Mauritius and accordingly the capital gain arising on transfer of shares of BD India is liable to tax in Mauritius only. We, therefore, uphold the contention of the applicant that by virtue of article 13.4 of India-Mauritius DTAA, capital gain tax is not liable to be charged in India. The applicant is not liable to pay capital gains tax in India in respect of the transfer of shares held in BD India to BD Singapore having regard to the provisions of India-Mauritius DTAA. Question 1 as answered - The capital gains on the sale of shares of Becton Dickinson India Private Limited by the applicant to Becton Dickinson Holdings Pte. Ltd. would not be chargeable to Income-tax in India in the hands of the applicant, having regard to the provisions of article 13 of the India-Mauritius Tax Treaty.
Issues Involved:
1. Tax Residency and Beneficial Ownership 2. Taxability of Capital Gains under India-Mauritius Tax Treaty 3. Allegations of Tax Avoidance and Treaty Shopping 4. Submission of Relevant Information 5. Application of Judicial Precedents Issue-wise Detailed Analysis: 1. Tax Residency and Beneficial Ownership: The applicant, Becton Dickinson (Mauritius) Ltd., is a tax resident of Mauritius, holding a valid tax residency certificate (TRC) issued by the Mauritius Revenue Authority. The applicant is part of BD Group, which is involved in the development, manufacture, and sale of medical devices. The applicant holds 100% equity share capital of Becton Dickinson India Private Limited (BD India). The applicant contended that as per article 4 of the India-Mauritius Tax Treaty, it qualifies as a resident of Mauritius and hence, the capital gains derived from the alienation of shares should be taxable only in Mauritius. 2. Taxability of Capital Gains under India-Mauritius Tax Treaty: The applicant proposed to sell its entire stake in BD India to Becton Dickinson Holdings Pte. Ltd., Singapore (BD Singapore). The transaction was to be executed at fair market value, and the consideration was to be discharged in the form of shares of BD Singapore. The applicant argued that under article 13 of the India-Mauritius Tax Treaty, capital gains derived by a resident of Mauritius from the alienation of any movable property, including shares, are taxable only in Mauritius. The applicant further submitted that it did not have a permanent establishment in India, and hence, the capital gains should not be chargeable to Income-tax in India. 3. Allegations of Tax Avoidance and Treaty Shopping: The Revenue contended that the transaction was designed for tax avoidance, citing discrepancies in financial statements, the decision-making process being controlled by the US-based holding company, and the transfer of profits to the holding company in the form of a low-interest loan. The Revenue argued that the applicant was not the beneficial owner of the shares and that the transaction lacked commercial substance. The Revenue relied on various judicial pronouncements to support its contention that the corporate veil should be pierced to expose the tax avoidance scheme. 4. Submission of Relevant Information: The Revenue argued that the applicant had not provided complete information as required, and hence, the ruling should be declined. The applicant, however, clarified that it had provided all relevant information necessary for deciding the question before the authority. The authority found that the applicant had furnished the necessary information and that the ruling could not be declined for non-furnishing of certain information as contended by the Revenue. 5. Application of Judicial Precedents: The applicant relied on the decision of the Supreme Court in Union of India v. Azadi Bachao Andolan, which upheld the validity of Circular No. 789, ensuring the applicability of the India-Mauritius Tax Treaty to entities having a valid TRC issued in Mauritius. The authority also referred to the decision in Dow Agrosciences Agricultural Products Ltd., In re, where it was held that a long-standing investment could not be treated as a scheme to avoid payment of taxes. The authority found that the facts of the present case were identical to those in Dow Agro and ruled that the transaction was not designed for tax avoidance. Conclusion: The authority ruled that the capital gains on the sale of shares of BD India by the applicant to BD Singapore would not be chargeable to Income-tax in India, having regard to the provisions of article 13 of the India-Mauritius Tax Treaty. The applicant was found to be a legitimate tax resident of Mauritius, and the transaction was not designed for tax avoidance. The ruling was pronounced on September 11, 2019.
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