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Mauritius entity entitled to capital gains exemption on sale of Indian shares In brief
The Authority for Advance Rulings (“AAR”) has, in its recent ruling on the case of D. B. Zwirn Mauritius Trading No. 2 Ltd. (“the Applicant”)1, re-affirmed that capital gains on sale of Indian shares by a Mauritius resident company is not taxable in India.
1 D. B. Zwirn Mauritius Trading No. 2 Ltd. In re [2011-TII-04-ARA-INTL]
The conclusion of the AAR was based on the Supreme Court decision in the case of Azadi Bachao Andolan and another2, certain other judicial precedents3 and the Central Board of Direct Taxes (“CBDT”) circulars4.
Facts
• The Applicant, an investment company incorporated in Mauritius, held a Tax Residency Certificate (“TRC”) issued by the Mauritius tax authorities.
2 UOI and Anr. v. Azadi Bachao Andolan and Anr. [2003] 263 ITR 706 (SC)
3 E*Trade Mauritius Ltd., In re [2010] 324 ITR 1 (AAR); and DDIT v. Saraswati Holding Corporation [2009-TIOL-529-ITAT-DEL]
4 CBDT Circular No. 682 dated 30 March, 1994 and Circular No. 789 dated 13 April, 2000 www.pwc.com/in
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11 April, 2011
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• In September 2007, the Applicant had acquired equity shares in an Indian company at INR 245 million.
• In November 2009, the Applicant sold its entire stake to another Mauritius based company, under a share purchase agreement, earning capital gains of INR 347 million.
Issues
The question raised, by the Applicant, before the AAR, was as follows:
Whether the Applicant was liable to tax in India on the capital gains earned on sale of Indian shares, under the provisions of the Income-tax Act, 1961 (“the Act”) and the India-Mauritius Double Taxation Avoidance Agreement (“Tax Treaty”).
Applicant’s contentions
• The Applicant was a tax resident of Mauritius holding a TRC and was filing tax returns as a resident of Mauritius.
• Article 13(4) of the Tax Treaty provided that the profit made on sale of shares in an Indian company by a resident of Mauritius would be taxable in Mauritius.
• Reliance was placed on the Supreme Court decision in the case of Azadi Bachao Andolan and other judicial precedents (above) which support the view that a tax resident of Mauritius would be eligible to claim exemption from capital gains tax liability in India. This was further supported by the CBDT Circulars.
It is noteworthy that there were no representations / submissions from the revenue authorities to challenge the Applicant’s contentions.
AAR Ruling
• Capital gains on sale of shares in an Indian company is taxable in India.
However, the Applicant, being a non-resident, is entitled to seek relief under the Tax Treaty, if the provisions of the treaty are more beneficial as compared to the provisions of the Act.
• The fact that the capital asset (being shares in an Indian company) is located in India is immaterial.
• In light of the judicial precedents and the CBDT Circulars relied upon by the Applicant, it was ruled that the Applicant was not liable to pay capital gains tax in India in respect of transfer of shares of an Indian company.
• Accordingly, the withholding tax provisions were also not triggered on the transaction of sale of shares.
Conclusion
This is a reassuring decision, particularly for investors from Mauritius investing in India. It relies on the Supreme Court decision in the case of Azadi Bachao Andolan (above) to hold that capital gains earned by Mauritius entities are not taxable in India, in light of the India-Mauritius Tax Treaty.
While the ruling is legally binding on the concerned parties involved, it has a persuasive value on decisions on similar matters referred to the Indian tax authorities.
PwC News Alert April 2011
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