Mauritius treaty relief for share gains coexists with transfer pricing, no withholding, and MAT exposure

Shares held as a long-term investment were treated as a capital asset under section 2(14). Capital gains on transfer by a Mauritius resident were not chargeable to tax in India because the more beneficial India-Mauritius DTAA applied, supported by a valid tax residency certificate and Article 13(4). The transfer nevertheless constituted an international transaction, so transfer pricing provisions under sections 92 to 92F applied. No withholding tax obligation arose under section 195 because the gains were not taxable in India, but a return of income remained required under section 139. Section 115JB was also held applicable where its statutory conditions were met.

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Issues: (i) Whether the shares held by the applicant in the Indian company constituted a capital asset; (ii) whether the capital gains arising on transfer of those shares were chargeable to tax in India or were exempt by virtue of the India-Mauritius DTAA; (iii) whether transfer pricing provisions applied to the proposed transfer and whether withholding tax and filing obligations arose; and (iv) whether section 115JB of the Income-tax Act, 1961 applied to the applicant.

Issue (i): Whether the shares held by the applicant in the Indian company constituted a capital asset.

Analysis: The shares had been held by the applicant since 1996 and were treated as an investment. The Revenue did not seriously dispute the character of the holding. On the facts, the investment was held as a capital asset within the meaning of section 2(14).

Conclusion: The shares constituted a capital asset in the hands of the applicant.

Issue (ii): Whether the capital gains arising on transfer of those shares were chargeable to tax in India or were exempt by virtue of the India-Mauritius DTAA.

Analysis: The applicant was a tax resident of Mauritius and relied on section 90(2) to invoke the more beneficial treaty provisions. The transaction was not shown to be a device for tax avoidance, and the tax residency certificate supported the claim of treaty entitlement. By virtue of Article 13(4) of the DTAA, the gains were taken outside the Indian taxing charge.

Conclusion: The capital gains were not chargeable to tax in India under Article 13(4) of the India-Mauritius DTAA.

Issue (iii): Whether transfer pricing provisions applied to the proposed transfer and whether withholding tax and filing obligations arose.

Analysis: The transfer constituted an international transaction between related parties, so the transfer pricing provisions were attracted. Since the gains were not chargeable to tax in India, no obligation to deduct tax at source arose under section 195. The ruling on taxability did not remove the obligation to file a return where chargeability under the Act existed, even though treaty relief was available.

Conclusion: Sections 92 to 92F applied, no withholding tax obligation arose under section 195, and a return of income was required under section 139.

Issue (iv): Whether section 115JB of the Income-tax Act, 1961 applied to the applicant.

Analysis: The Authority followed its earlier view that section 115JB applies where the statutory conditions are met, including in transactions of the kind under consideration.

Conclusion: Section 115JB was applicable to the applicant.

Final Conclusion: The ruling upheld treaty-based non-taxability of the capital gains while also holding that transfer pricing and MAT provisions applied, with no withholding obligation but a return-filing obligation remaining.

Ratio Decidendi: Where a Mauritian resident produces a valid tax residency certificate and the treaty is more beneficial, Article 13(4) of the India-Mauritius DTAA prevails to exempt the capital gains, while related-party cross-border transfers may still attract transfer pricing and MAT provisions under the Act.

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