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2018 (2) TMI 855 - AAR - Income TaxTaxability of capital gains in India - transfer of shares held in AB International Private Limited ( AB International) to a group company, AB Singapore Pte - eligibility of benefits of India-Mauritius tax treaty - Held that - Yes, the Applicant would 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; and the income and capital gains arising to the Applicant from the proposed sale of shares in AB International to a group company in Singapore would not be liable to tax in India in terms of Article 13 of the said Treaty. Applicability of section 195 - whether tax has to be withheld on the gains arising from the sale of shares? - Held that - As held in GE Technology Centre P. Ltd. v. CIT 2010 (9) TMI 7 - SUPREME COURT OF INDIA that in cases where there is no chargeability to tax under the provisions of the Act, as per expressions used in the section itself (unlike section 92), there will be no obligation to withhold tax. Respectfully following that decision, we are of the view that there is no obligation on the Applicant to withhold tax in this case, as we have held that the capital gains arising in the hands of the Applicant was not chargeable to tax in view of paragraph 4 of Article 13 of the India Mauritius DTAC. 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 for TP provisions to get attracted. Hence, the transaction in the instant case of sale of shares in AB International will have to be benchmarked as per the transfer pricing provisions contained in Chapter X of the Act. Thus transfer pricing provisions contained in sections 92 to 92F of the Act would apply to the proposed transaction. Applicability of section 115JB on the subject transaction - Held that - 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. The provisions of section 115JB shall not be applicable.
Issues Involved:
1. Eligibility for benefits under the India-Mauritius tax treaty. 2. Taxability of capital gains arising from the sale of shares under the India-Mauritius tax treaty. 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 Act. 5. Applicability of section 115JB of the Act to the income earned from the proposed transaction. Detailed Analysis: Issue 1: Eligibility for Benefits under the India-Mauritius Tax Treaty The Applicant, a company incorporated in Mauritius, sought an advance ruling on its eligibility for benefits under the India-Mauritius tax treaty. The Applicant presented a valid Tax Residency Certificate (TRC) issued by the Mauritius tax authorities. It relied on several rulings, including UOI v. Azadi Bachao Andolan, CIT v. P. V. A. L. Kulandagan Chettiar, and various CBDT circulars, to assert its entitlement to treaty benefits. The Revenue argued that the Applicant was a paper company controlled from the US, thus not genuinely entitled to treaty benefits. However, the Authority concluded that the Applicant was a legitimate entity with its place of effective management in Mauritius and thus eligible for treaty benefits. Issue 2: Taxability of Capital Gains The Applicant contended that capital gains from the transfer of shares to a group company in Singapore would not be taxable in India under Article 13 of the India-Mauritius tax treaty. The Applicant cited the Supreme Court's decision in Azadi Bachao Andolan and other AAR rulings to support its claim. The Revenue argued that the transaction was a tax avoidance scheme and that the Applicant was a conduit for the US-based parent company. However, the Authority found that the transfer of shares was part of a legitimate business reorganization and not a colorable device for tax avoidance. Consequently, the capital gains were not taxable in India. Issue 3: Obligation to Withhold Tax under Section 195 The Applicant argued that since the capital gains were not taxable in India, there was no obligation to withhold tax under section 195 of the Income Tax Act, 1961. The Applicant relied on the Supreme Court's decision in GE India Technology Centre (P) Ltd vs. CIT. The Authority agreed, stating that there was no obligation to withhold tax as the capital gains were not chargeable to tax in India under the India-Mauritius tax treaty. Issue 4: Applicability of Transfer Pricing Provisions The Applicant contended that the transfer pricing provisions would not apply as the transaction did not give rise to any tax incidence in India. The Revenue argued that the transfer pricing provisions under sections 92 to 92F of the Act would apply regardless of the taxability of the income. The Authority agreed with the Revenue, citing its earlier ruling in Castleton Investments Limited, and held that the transaction would have to be benchmarked as per the transfer pricing provisions. Issue 5: Applicability of Section 115JB The Applicant and the Revenue agreed that the provisions of section 115JB, which deals with Minimum Alternate Tax (MAT), would not be applicable to the Applicant as per the retrospective amendment by the Finance Act, 2016. The Authority concurred with this view. Conclusion: 1. The Applicant is entitled to the benefits of the India-Mauritius tax treaty. 2. The capital gains arising from the sale of shares are not taxable in India under Article 13 of the India-Mauritius tax treaty. 3. There is no obligation to withhold tax under section 195 of the Income Tax Act, 1961. 4. The transfer pricing provisions under sections 92 to 92F of the Act would apply to the proposed transaction. 5. The provisions of section 115JB of the Act are not applicable to the Applicant. The ruling was pronounced on 8th November 2017.
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