2016 (9) TMI 162 - AAR - Income Tax

India-Mauritius Tax Treaty: Mauritius Company Not Liable for Tax on Share Transfer

The Authority ruled in favor of the applicant, a Mauritius company, on all issues. The applicant was not liable to tax in India under the India-Mauritius ... Application of Article 13(4) of India Mauritius DTAA on taxation of capital gains - beneficial ownership and genuineness of investment (permitted transferee doctrine) - obligation to withhold tax under section 195 of the Income tax Act - requirement to file income tax return under section 139 where treaty exempts the income - applicability of section 115JB (minimum alternate tax) to foreign companies - relevance of Tax Residency Certificate (TRC) for treaty entitlementApplication of Article 13(4) of India Mauritius DTAA on taxation of capital gains - beneficial ownership and genuineness of investment (permitted transferee doctrine) - relevance of Tax Residency Certificate (TRC) for treaty entitlement - The applicant's capital gains on sale of shares are not taxable in India under the India Mauritius DTAA. - HELD THAT: - The Authority found that the applicant is a resident of Mauritius with a valid TRC and does not have a permanent establishment in India. Evidence including share subscription and bank statements showed that the applicant had paid for and held the shares in its own name and account. The presence of the parent Shinsei Bank Limited in the SPA was explained by its role as sponsor and settlor of the mutual fund and regulatory requirements, rather than evidence that the applicant was a mere nominee or 'permitted transferee'. The facts of this case were distinguished from Aditya Birla Nuvo where the parent had effectively paid for and owned the investment while using the Mauritius entity as permitted transferee. Having accepted that the applicant is the real and beneficial owner and a Mauritius resident entitled to treaty benefits, Article 13(4) applies and taxation of the capital gains is confined to the state of residence (Mauritius), not India. [Paras 7]The applicant is not liable to tax in India under the India Mauritius DTAA in respect of the transfer of the shares.Obligation to withhold tax under section 195 of the Income tax Act - application of DTAA in determining withholding liability - No withholding under section 195 is required from payments made to the applicant in respect of the share transfer. - HELD THAT: - Because the Authority held that Article 13(4) of the India Mauritius DTAA exempts the capital gains from Indian taxation and the applicant is a treaty resident and beneficial owner, there is no Indian tax liability to be discharged by withholding. Accordingly, purchasers (Daiwa and affiliates) are not required to withhold tax under section 195 on payments to the applicant. [Paras 9]There is no liability to withhold tax under section 195.Requirement to file income tax return under section 139 where treaty exempts the income - effect of treaty exemption on domestic filing obligations - The applicant is not required to file an income tax return in India when the capital gains are not taxable in India under the DTAA. - HELD THAT: - The Authority observed that where Article 13(4) of the India Mauritius DTAA applies and no Indian tax is leviable on the capital gains, there is no need for the applicant to file an income tax return in India under section 139 for the transaction. This view aligns with earlier rulings in similar cases. [Paras 8]The applicant is not required to file income tax returns in India in respect of the exempted capital gains.Applicability of section 115JB (minimum alternate tax) to foreign companies - Section 115JB (MAT) is not applicable to the applicant (a foreign company) in the circumstances of this case. - HELD THAT: - The Authority noted the Government's clarification before the Supreme Court that the provisions of section 115JB are not applicable to foreign companies and stated that it has consistently taken the same view in similar cases. On that basis, and given the applicant's foreign status and treaty entitlement, section 115JB does not apply to impose tax on the applicant. [Paras 8, 9]The applicant is not liable to tax under the provisions of section 115JB of the Income tax Act.Final Conclusion: The Authority ruled that the Mauritius resident applicant, being the beneficial owner with a valid TRC and having made the investment in its own name, is entitled to protection under Article 13(4) of the India Mauritius DTAA: the capital gains are not taxable in India, no withholding under section 195 is required, no Indian return need be filed in respect of the exempted gains, and section 115JB does not apply to the applicant. Issues Involved:1. Tax liability of the applicant under the India-Mauritius tax treaty for the transfer of shares.2. Requirement for Daiwa and its affiliates to withhold tax under section 195 of the ITA.3. Necessity for the applicant to file an income-tax return in India if capital gains are not taxable.4. Potential tax liability under section 115JB of the ITA.Issue 1 - Tax Liability under India-Mauritius Tax Treaty:The applicant, a Mauritius company, sought clarification on its tax liability in India for transferring shares under the India-Mauritius tax treaty. The applicant argued that capital gains from the sale of Indian company shares are taxable only in Mauritius as per Article 13(4) of the DTAA. They relied on Circulars issued by the CBDT and a Supreme Court decision to support their position. The Department of Revenue contested, alleging that the applicant was a nominal holder and not the actual owner of the shares. However, after analyzing the facts and documents, the Authority ruled in favor of the applicant, stating that the applicant had invested on its own, and the involvement of Shinsei Bank Ltd. was due to regulatory requirements, not ownership. Therefore, the applicant was not liable to tax in India under the treaty.Issue 2 - Withholding Tax Requirement:The Department argued that Daiwa and its affiliates should withhold tax under section 195 of the ITA from payments made to the applicant. However, the Authority ruled that since the applicant was not liable to tax in India, there was no requirement for Daiwa and its affiliates to withhold tax.Issue 3 - Income-tax Return Filing Requirement:Regarding the necessity for the applicant to file an income-tax return in India if capital gains were not taxable, the Authority clarified that if the applicant was not liable to capital gains tax in India under the treaty, there was no obligation to file an income-tax return in India.Issue 4 - Tax Liability under Section 115JB of the ITA:The Authority addressed the potential tax liability under section 115JB of the ITA and stated that these provisions were not applicable to foreign companies. They confirmed that in similar cases, the provisions of section 115JB were not applicable, and the same ruling applied to the applicant. Consequently, the Authority ruled that the applicant was not liable to tax under section 115JB of the Income-tax Act.In conclusion, the Authority ruled in favor of the applicant on all issues, stating that they were not liable to tax in India under the India-Mauritius tax treaty, withholding tax was not required, no income-tax return filing was necessary, and the applicant was not liable under section 115JB of the ITA.