Treaty benefits for Mauritius resident upheld, but transfer pricing rules still applied to the share transfer.

A Mauritius resident company with a valid tax residency certificate and commercial investment substance was held entitled to India-Mauritius treaty benefits, so capital gains on transfer of shares were not taxable in India under Article 13. Because the income was not chargeable to tax in India under the treaty, no withholding obligation arose under section 195. The transaction, however, remained an international transaction between associated enterprises, so the transfer pricing provisions in sections 92 to 92F applied and had to be benchmarked at arm's length. The parties also accepted that section 115JB did not apply to the foreign company in this context.

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Issues: (i) Whether the Applicant was entitled to the benefits of the India-Mauritius tax treaty and whether the capital gains arising on transfer of shares to the group company were taxable in India under Article 13; (ii) whether any obligation to withhold tax arose under section 195; (iii) whether the transfer pricing provisions in Chapter X applied to the transaction; and (iv) whether section 115JB applied to the Applicant.

Issue (i): Whether the Applicant was entitled to the benefits of the India-Mauritius tax treaty and whether the capital gains arising on transfer of shares to the group company were taxable in India under Article 13.

Analysis: The Applicant was a tax resident of Mauritius, held a valid tax residency certificate and global business licence, and had invested through banking channels on the basis of board approvals. The restructuring and transfer of shares were found to be part of a long-term business reorganisation and not a colourable device or a mere treaty-shopping arrangement. The allegations of benami holding, lack of substance, or absence of independent decision-making were rejected on the facts. In those circumstances, the treaty benefit could not be denied.

Conclusion: The Applicant was entitled to the benefits of the India-Mauritius tax treaty and the capital gains from the transfer were not taxable in India under Article 13.

Issue (ii): Whether any obligation to withhold tax arose under section 195.

Analysis: Section 195 applies only where the sum payable is chargeable to tax under the Act. Since the capital gains were held not chargeable to tax in India under the treaty, the withholding obligation did not arise.

Conclusion: No obligation to withhold tax under section 195 arose.

Issue (iii): Whether the transfer pricing provisions in Chapter X applied to the transaction.

Analysis: The applicability of section 92 does not depend on whether the income is chargeable to tax under the Act. Once the transaction was an international transaction between associated enterprises, it had to be benchmarked at arm's length, and the treaty exemption did not exclude Chapter X.

Conclusion: The transfer pricing provisions in sections 92 to 92F applied to the transaction.

Issue (iv): Whether section 115JB applied to the Applicant.

Analysis: The parties were in agreement that, in view of the retrospective amendment and the CBDT clarification, the provision did not apply to foreign companies in the present context.

Conclusion: Section 115JB did not apply.

Final Conclusion: The treaty benefit and non-taxability of the capital gains were upheld, withholding under section 195 was negated, transfer pricing provisions were held applicable, and section 115JB was held inapplicable.

Ratio Decidendi: A Mauritius resident company possessing a valid tax residency certificate and acting as a genuine investment holding entity cannot be denied treaty benefits on mere allegations of conduit structure or treaty shopping, but Chapter X transfer pricing provisions still apply to an international transaction irrespective of treaty-based non-taxability.

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