2012 (7) TMI 497 - AAR - Income Tax

India-Mauritius Double Taxation Avoidance Convention - capital gain on sale of shares - Held that - The applicant has a Tax Residency Certificate from Mauritius is registered as a Foreign Venture Capital Investor considering Article 13 of the DTAC would govern such a transaction and under paragraph 4 of that Article, the capital gain that may arise would be taxable only in Mauritius and not in India - the buyer of the shares has no obligation to withhold taxes under section 195 of the Income-tax Act.

Summary

Issues:
1. Taxability of capital gains in India arising from the sale of shares held by an applicant.
2. Obligation of the buyer of shares to withhold taxes under section 195 of the Income-tax Act.

Analysis:
1. The applicant, a company incorporated in Mauritius, sought an advance ruling on the taxability in India arising from the sale of shares it holds in an Indian company. The applicant, a Foreign Venture Capital Investor, made investments in India in units and shares for long-term capital appreciation. The applicant claimed benefits under the India-Mauritius Double Taxation Avoidance Convention (DTAC) to avoid taxation in India on capital gains from the sale of shares. The ruling considered the applicant's tax residency status, investment structure, and reliance on legal precedents like Union of India v. Azadi Bachao Anodolan to conclude that the capital gains are not chargeable to tax in India under Article 13 of the DTAC.

2. The Revenue raised objections regarding the applicant's eligibility for an advance ruling and alleged tax avoidance through routing investments via Mauritius. The Revenue also questioned the control of the applicant, highlighting the composition of its Board of Directors. However, the ruling found insufficient evidence to support the Revenue's contentions. It dismissed objections related to the number and nationality of directors, emphasizing the applicant's tax residency status and decision-making process from Mauritius. The ruling rejected the Revenue's arguments against the application of DTAC based on the decision in Union of India v. Azadi Bachao Andolan, emphasizing the conclusive nature of the legal precedent.

3. The ruling addressed the Revenue's argument regarding the taxation of capital gains in Mauritius to apply DTAC benefits under section 90(1) and 90(2) of the Income-tax Act. It emphasized adherence to legal precedents and the binding nature of decisions like Union of India v. Azadi Bachao Andolan. The ruling concluded that the assets proposed for transfer fall under Article 13 of the DTAC between India and Mauritius, exempting the applicant from tax liability in India on the capital gains from the share sale. It also clarified the inapplicability of certain Act provisions introduced post the ruling's relevance period.

4. In the final ruling, the Authority held that the capital gains from the proposed share sale are not taxable in India under the India-Mauritius DTAC. Additionally, it determined that the buyer of the shares is not obligated to withhold taxes under section 195 of the Income-tax Act. The ruling provided a detailed analysis of the applicant's structure, investments, tax residency, legal arguments, and relevant legal precedents to support its decision on the taxability of capital gains and the buyer's withholding tax obligation.