2018 (2) TMI 856 - AAR - Income Tax

Taxability of capital gains in India - transfer of shares held in AB India to its subsidiary company, AB Singapore - eligibility of benefits of India-Mauritius tax treaty - benami transaction - Held that - Neither was the Applicant acting on its own behalf in taking decisions like an independent company with a separate legal status in a foreign territory, regarding the investment in AB India, though it was an Investment Holding company itself; and also that the manner and accounting followed in acquiring those shares only go to show that they were taken on its books on hindsight, at the directions of the Holding company. Only this can explain the various lacunae noticed, and as discussed above. It had only lent its name and was a benami of the C Group. We are unable to rule that the shares were genuinely acquired by the Applicant, that it became the beneficial owner of those shares, and that the capital gains derived on the transfer of those shares to AB Singapore was income in its hands. On the above facts, since the C Group, comprising of two US companies had acquired the shares in AB India from two other US companies, the gain having arisen in India in the hands of the C Group of the US, was taxable in India as per the India-US DTAA. In the above factual matrix, the Applicant, AB Mauritius, would not be entitled to the benefits of the Agreement between the Government of Mauritius and the Government of the Republic of India for the avoidance of double taxation and prevention of fiscal evasion, with respect to taxes on income from capital gains. Applicability of section 195 - i.e. whether tax has to be withheld on the gains arising from the sale of shares - Held that - Since in the instant case we have held that the income would be chargeable to tax in India, there would be a liability to withhold tax as required by this section. The cases cited by the Applicant are not applicable. Applicability of transfer pricing provisions - Held that - As against the position in section 195 of the Act, there is no such requirement in section 92 that the transaction should result in income chargeable to tax under the Act. Hence, the transaction in the instant case of sale of shares in the Indian Company will have to be benchmarked as per the transfer pricing provisions contained in Chapter X of the Act. Transfer pricing provisions contained in section 92 to 92Fof the Act would apply to the proposed transaction. Application of section 115JB on the subject transaction - Held that - As the Applicant as well Revenue agree that the provisions of the said section shall not be applicable to foreign companies, as per the retrospective amendment to section 115JB by Finance Act, 2016, and the clarification issued by the CBDT dated 24 September 2015. This being so, we have no reason to disagree. Thus the provisions of section 115JB shall not be applicable.

Summary

Issues Involved:
1. Entitlement to benefits under the India-Mauritius Double Taxation Avoidance Agreement (DTAA).
2. Taxability of capital gains from the transfer of shares.
3. Obligation to withhold tax under section 195 of the Income Tax Act, 1961.
4. Applicability of transfer pricing provisions under sections 92 to 92F of the Income Tax Act.
5. Applicability of section 115JB of the Income Tax Act.

Detailed Analysis:

1. Entitlement to Benefits under the India-Mauritius DTAA:

The Applicant, a Mauritius-incorporated company, sought to benefit from the India-Mauritius DTAA for capital gains arising from the transfer of shares in an Indian company to its Singapore subsidiary. The Applicant argued it was a tax resident of Mauritius and held a valid Tax Residency Certificate (TRC). However, the Revenue contended that the Applicant was merely a name lender, with the real investment being made by the 'C' Group, a US entity. The Authority for Advance Rulings (AAR) noted that the Applicant's incorporation and stated objectives were decided by the holding company, and the Applicant did not independently manage or control its investment decisions. The AAR concluded that the Applicant was not the beneficial owner of the shares and merely acted as a benami for the 'C' Group. Thus, the Applicant was not entitled to the benefits of the India-Mauritius DTAA.

2. Taxability of Capital Gains:

The AAR held that the capital gains arising from the transfer of shares in the Indian company to the Singapore subsidiary were taxable in India. The shares were acquired by the 'C' Group through the cancellation of debt owed by the sellers, and the Applicant did not pay any consideration for the shares. Therefore, the gains were deemed to arise in the hands of the 'C' Group, a US entity, and were taxable under the India-US DTAA.

3. Obligation to Withhold Tax under Section 195:

Given that the capital gains were held to be taxable in India, the AAR ruled that there was an obligation to withhold tax under section 195 of the Income Tax Act, 1961. The Applicant's reliance on various case laws and rulings was found inapplicable.

4. Applicability of Transfer Pricing Provisions:

The AAR ruled that the transfer pricing provisions contained in sections 92 to 92F of the Income Tax Act would apply to the proposed transaction. The ruling in the case of Castleton Investments Limited (AAR 999 of 2010) was cited, which held that the applicability of section 92 does not depend on the chargeability of income under the Act.

5. Applicability of Section 115JB:

Both the Applicant and the Revenue agreed that the provisions of section 115JB of the Income Tax Act, which relate to the Minimum Alternate Tax (MAT), would not apply to foreign companies as per the retrospective amendment by the Finance Act, 2016, and the clarification issued by the CBDT. The AAR concurred with this view.

Conclusion:

The AAR concluded that the Applicant was not entitled to the benefits of the India-Mauritius DTAA, and the capital gains from the transfer of shares were taxable in India under the India-US DTAA. Consequently, there was an obligation to withhold tax under section 195, and the transfer pricing provisions were applicable to the transaction. However, the provisions of section 115JB were not applicable to the Applicant.