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2010 (3) TMI 106 - AAR - Income TaxIndia-Mauritius DTAA - Permanent Establishment ( PE ) in India as defined in Article 5 - E TRADE Mauritius Limited Non resident applicant - The Applicant held equity shares in IL&FS Investsmart Limited ( Indian Company ) which are listed on Stock Exchange in India. The Applicant had acquired these shares in the years 2005, 2006 and 2007. The shares were acquired by way of direct purchases as well as upon conversion of the Global Depository Receipts ( GDRs ) as per the details set out in Exhibit A . The Applicant has transferred 30,625,692 shares in the Indian Company to HSBC Violet Investment (Mauritius) Limited, a company organized under the laws of Mauritius, at Rs.200/- per share on 29th September 2008 and realized long term capital gains there-on in India. A Share Purchase Agreement was entered into on 16th May, 2008 By virtue of Article 13.4 of India-Mauritius DTAA, capital gain tax is not liable to be charged in India. We find no justification to accept the Revenue s contention that the advance ruling should be refused at this stage as further inquiries might unravel some incriminating facts. Though it looks odd that the Indian tax authorities are not in a position to levy the capital gains tax on the transfer of shares in an Indian company, this is an inevitable effect of the peculiar provision in India-Mauritius DTAA, the Circular issued by CBDT and the law laid down by Supreme Court in Azadi Bachao case. Whether the policy considerations underlying the crucial Treaty provisions and the spirit of the Circular issued by the CBDT would still be relevant and expedient in the present day fiscal scenario is a debatable point and it is not for us to express any view in this behalf.
Issues Involved:
1. Exemption from capital gains tax under the India-Mauritius Double Taxation Avoidance Agreement (DTAA). 2. Determination of tax liability under the proviso to Section 112(1) of the Income-tax Act, 1961 if the DTAA exemption is not applicable. 3. The concept of beneficial ownership and its relevance to the capital gains tax exemption. 4. The applicability and interpretation of Circular No. 789 issued by the Central Board of Direct Taxes (CBDT). 5. The relevance of the Supreme Court's decision in the Azadi Bachao Andolan case. Detailed Analysis: 1. Exemption from Capital Gains Tax under the India-Mauritius DTAA: The primary issue is whether the applicant, a tax resident of Mauritius, is exempt from paying capital gains tax in India under the India-Mauritius DTAA. The DTAA, specifically Article 13, Paragraph 4, stipulates that gains derived by a resident of a contracting state from the alienation of any property other than those mentioned in paragraphs (1), (2), and (3) shall be taxable only in that state. Therefore, as the applicant is a resident of Mauritius and has a Tax Residency Certificate from Mauritius, it claims exemption from Indian capital gains tax. 2. Determination of Tax Liability under Section 112(1) of the IT Act: If the exemption under the DTAA is not applicable, the applicant questions whether it would be liable to pay tax on long-term capital gains at 10% under the proviso to Section 112(1) of the IT Act. However, the ruling primarily focuses on the DTAA exemption and does not delve deeply into this alternative tax liability. 3. Beneficial Ownership: The Revenue contends that the beneficial ownership of the capital gains lies with the US entity that controls the applicant, suggesting that the applicant is merely a facade to avoid capital gains tax in India. However, the applicant argues that beneficial ownership is irrelevant in the context of Article 13 of the DTAA, which does not explicitly require beneficial ownership for capital gains exemption. The applicant supports its claim with the Tax Residency Certificate from Mauritius. 4. Applicability and Interpretation of Circular No. 789: Circular No. 789 clarifies that a certificate of residence issued by Mauritius authorities constitutes sufficient evidence for accepting the status of residence and beneficial ownership for applying the DTAA. This circular, upheld by the Supreme Court in the Azadi Bachao Andolan case, supports the applicant's claim for exemption from Indian capital gains tax. The Revenue's attempt to limit the circular's applicability to dividends and not capital gains is dismissed, as the circular explicitly mentions both. 5. Relevance of the Supreme Court's Decision in Azadi Bachao Andolan: The ruling extensively references the Supreme Court's decision in the Azadi Bachao Andolan case, which upheld the legality of treaty shopping and clarified that tax planning within the framework of law is legitimate. The Supreme Court emphasized that the motive of tax avoidance is irrelevant if the act is done within the legal framework. The decision also affirmed that the CBDT circulars have legal consequences and override inconsistent provisions of the Income-tax Act. Conclusion: The Authority for Advance Rulings concludes that the applicant, by virtue of being a resident of Mauritius and holding a Tax Residency Certificate, is eligible for the benefits of the India-Mauritius DTAA. Consequently, the applicant is not liable to pay capital gains tax in India on the transfer of shares. The ruling is given in favor of the applicant, affirming that the capital gains tax is not chargeable in India under the provisions of the DTAA and the supporting CBDT circulars, as upheld by the Supreme Court in the Azadi Bachao Andolan case.
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