2018 (2) TMI 1428 - AAR - Income Tax

Capital gains arising to the Applicant- Transferor, a tax resident of Mauritius, from sale of shares - Benefit of DTAA - whether the Transferee shall not have any liability to deduct tax at source under section 195? - department contended that the working of capital gain involves correctly working out the total sales consideration which in turn depends upon the value assigned to each share of SIPL and Scorpio and this involves the determination of fair market value of the said property Held that - We do not feel that questions raised involve any valuation and determination of fair market value of property. The computation of capital gains is embedded in the concept of valuation and merely for this reason the question of capital gains arising in Application cannot be held to be barred by clause (ii) of the proviso to section 245 R(2). Especially so when it is stressed that the questions pertain to the legal admissibility of the transaction and not of any valuation the aspect of profit shifting raised by the Revenue is also unclear in regard to the law from which the inference is drawn - it is merely an assumption on the part of the Department and cannot be considered as a bar. The Departmental Officer sought some more time to make submission in regard to clause (iii) of the proviso to section 245 R(2) and that being declined by this Authority, he requested that the issue may be kept open for consideration during the proceedings under section 245 R(4). Thus the Application is admitted under section 245 R(2) for giving rulings on the two questions mentioned earlier, keeping open the issue of avoidance of tax which the Department may raise, if so desired, during section 245 R(4) proceedings.

Summary

Issues involved:
1. Whether capital gains arising from the sale of shares of Indian companies by a Mauritius tax resident to a US entity are exempt from capital gains tax in India under the India-Mauritius Double Tax Avoidance Agreement?
2. Whether the US entity is liable to deduct tax at source under section 195 of the Income Tax Act?

Analysis:

Issue 1: The Applicant, a tax resident of Mauritius, sought an advance ruling on the taxability of capital gains from selling shares of Indian companies to a US entity under the India-Mauritius Double Tax Avoidance Agreement. The Department raised objections, alleging potential profit shifting and misuse of the General Anti Avoidance Rule (GAAR). The Applicant clarified that the purpose was to determine tax chargeability, not valuation, and referenced legal precedents to support their position. The Department argued that the transaction was designed for tax avoidance, invoking GAAR provisions. The Authority found that the questions raised did not involve valuation issues, and the capital gains computation was within the scope of legal admissibility, not valuation. The Department's profit shifting concerns lacked legal basis, and the issue of GAAR applicability was deferred for future consideration.

Issue 2: The Department contended that the ultimate beneficiary being a US-based group indicated potential tax avoidance, invoking GAAR provisions. The Authority admitted the application for ruling on the tax exemption issue while keeping the tax avoidance issue open for future proceedings. The Department's objections regarding tax avoidance and profit shifting were addressed, emphasizing legal admissibility over valuation concerns. The Authority's decision to admit the application under section 245 R(2) for ruling on tax exemption highlighted the distinction between legal admissibility and valuation issues, setting aside the Department's objections for further consideration.

This judgment clarifies the distinction between tax chargeability and valuation concerns in determining the tax treatment of cross-border transactions under double tax avoidance agreements, emphasizing legal admissibility over valuation disputes and addressing potential tax avoidance issues through deferred consideration under GAAR provisions.