2015 (8) TMI 1219 - HC - Income Tax

Court rules no capital gains tax in India-Mauritius transaction, upholds Tax Residency Certificates validity

Serco BPO Private Limited Versus Authority for Advance Rulings New Delhi and others.

The court quashed the order issued by the Authority for Advance Rulings, ruling that no capital gains tax was payable by the parties involved in the ... Taxation of income from dividents and capital gains under the Indo-Mauritius Double Tax Avoidance Convention - Application for advance ruling - Whether the capital gains arising in the hands of Blackstone GPV Capital Partners Mauritius V-B Ltd. (‘Blackstone Mauritius’) and Barclays (H&B) Mauritius Limited (‘Barclays Mauritius’) (Collectively referred to as the ‘Sellers’) on account of the sale of shares of SKR BPO Services Private Limited is not chargeable to tax having regard Article 13(4) of the Agreement for the Double Taxation and Prevention of Fiscal Evasion with Mauritius (‘India Mauritius DTAA’) read with Section 90(2)? - Held that:- Capital gains arising from the sale of the said shares can only be brought to tax in Mauritius. This is also clear from Article 13. Clause-4 of Article 13 provides that the gains derived by a resident of a contracting State (Blackstone Mauritius and Barclays are residents of Mauritius a contracting State), from the alienation of any property other than those mentioned in paragraphs (1) (2) and (3) thereof (the shares of SKR BOP sold by Blackstone Mauritius and Barclays do not fall within paragraphs (1), (2) and (3) of Article 13 shall be taxable only in that State i.e. Mauritius. The gains derived from the alienation of any property would include the gains derived on account of the sale of shares. The words ‘any property’ are wide enough to cover shares in a company incorporated under the Companies Act, 1956. The gains from the sale of shares are taxable under the Income Tax Act, 1961. Article 2 of the DTAC, which stipulates the existing taxes to which the convention applies in the case of India, includes income tax including any surcharge thereon imposed under the Income Tax Act, 1961. The words ‘contracting States’ obviously refers to Mauritius. This is obvious as the reference in first part of paragraph-4 of Article 13 is to the ‘Contracting State’. The concluding words therein viz. ‘that State’ therefore refer to the Contracting State. Thus the capital gains that arose on account of the sale of the shares of SKR BPO by Blackstone Mauritius and Barclays are derived by a resident of a Contracting State from the alienation of property other than property mentioned in paragraphs 1, 2 and 3 of the Article 13 and are, therefore, taxable only in ‘that State’ i.e. Mauritius. It is declared that no capital gain tax was payable by Barclays (H&B) Mauritius Limited. and Blackstone GPV Capital Partners (Mauritius) V-B Ltd. in respect of the sale of the shares of SKR BPO by them to the petitioner. The petitioner was, therefore, not liable to withhold the tax in respect thereof under the Act. - Decided in favour of assessee. Issues Involved:1. Validity of the order dated 02.05.2014 issued by the Authority for Advance Rulings under Section 245-R of the Income Tax Act, 1961.2. Whether the transaction in question was designed for avoidance of income tax.3. Whether the petitioner was required to withhold tax on the consideration paid for the shares.4. Application of the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius.5. The relevance and acceptance of the Tax Residency Certificates issued by Mauritius.Detailed Analysis:1. Validity of the Order by the Authority for Advance Rulings:The petitioner challenged the order dated 02.05.2014 issued by the Authority for Advance Rulings under Section 245-R of the Income Tax Act, 1961. The Authority declined to give a ruling on the application based on a prima-facie finding that the transaction was designed for avoidance of income tax. The court accepted the petitioner's request to decide the matter on merits instead of remanding it due to the considerable delay, noting that the application for advance ruling under Section 245R(6) should be decided within six months, but over four years had elapsed.2. Transaction Designed for Avoidance of Income Tax:The Authority's order suggested that the transaction was designed for avoidance of income tax, but the court found no specific findings of fact or evidence supporting this. The court noted that the Authority's order lacked correlation between the documents on record and the prima-facie finding. The court emphasized that the Department did not substantiate its general submissions with evidence, and all required documents had been furnished by the petitioner.3. Requirement to Withhold Tax:The petitioner contended that the sellers, being residents of Mauritius, were not liable to capital gains tax in India due to the DTAA between India and Mauritius, and therefore, the petitioner was not required to withhold tax. The court agreed, noting that the DTAA provisions and the Central Board of Direct Taxes (CBDT) Circulars clarified that capital gains derived by a resident of Mauritius from the sale of shares of Indian companies are taxable only in Mauritius.4. Application of the DTAA between India and Mauritius:The court referred to the DTAA and CBDT Circulars, particularly Circular No. 682 and Circular No. 789, which clarified that residents of Mauritius deriving income from the sale of shares of Indian companies are liable to capital gains tax only in Mauritius. The Supreme Court's judgment in Union of India vs. Azadi Bachao Andolan was also cited, which upheld the validity of such circulars and the DTAA provisions, emphasizing that the certificates of residence issued by Mauritius authorities must be accepted.5. Relevance and Acceptance of Tax Residency Certificates:The court highlighted that the Tax Residency Certificates issued by the Mauritius authorities to Blackstone Mauritius and Barclays were valid and established their residency in Mauritius. The CBDT Circular No. 789 stated that such certificates constitute sufficient evidence for accepting the status of residence and beneficial ownership for applying the DTAA. The court reiterated that these certificates should be accepted, and the genuineness and validity of the certificates were not questioned.Conclusion:The court quashed the impugned order, declaring that no capital gain tax was payable by Barclays (H&B) Mauritius Limited and Blackstone GPV Capital Partners (Mauritius) V-B Ltd. in respect of the sale of shares to the petitioner. Consequently, the petitioner was not liable to withhold tax under the Income Tax Act. The questions raised by the petitioner before the Authority for Advance Ruling were answered in the affirmative in favor of the petitioner.