Case Law Details
Authority for Advance Ruling (AAR) in the case of D.B.Zwirn Mauritius (AAR No. 879 of 2011) (Judgment date: 28 March 2011) dealt with the issue of tax ability of capital gains on sale of shares by a Mauritian entity under the Income-tax Act, 1961 (the Act) or India-Mauritius tax treaty (the tax treaty). The AAR held that the applicant, holding tax residence certificate, was eligible for the tax treaty benefits. Accordingly, under Article 13(4) of the tax treaty the taxpayer is not liable to pay capital gains tax in India in respect of the transfer of shares held in an Indian company.
The AAR while coming to the conclusion relied on CBDT Circular No. 682 and 789, dated 30 March 1994 and 13 April 2000 respectively and the Supreme Court decision in the case of Union of India v. Azadi Bacho Andolan [2003] 263 ITR 706 (SC).
Facts of the case
• The applicant, a company incorporated in Mauritius, an investment company was holding a tax residence certificate issued by the Mauritius Revenue Authorities.
• The applicant bought shares of an Indian company in 2007 for a consideration of INR 245 million. The taxpayer sold these shares to another Mauritian company and realised capital gain of INR 347 million.
• The Applicant approached AAR to determine whether as a Mauritius resident, it is eligible to the benefits of the tax treaty and hence not subject to tax in India on the capital gains realized on sale of shares.
Taxpayer’s contentions
• The applicant contended that it is holding a tax residence certificate issued by the Mauritius Revenue Authority and is filing tax returns as Mauritian resident. Therefore, it is entitled to claim benefits provided under the tax treaty.
• As per the provisions of Article 13(4) of the tax treaty the capital gains arising from the sale of shares of an Indian company would be taxable only in Mauritius and not in India. The applicant relied on CBDT circulars and various other judicial precedents (Note-1) including Supreme Court ruling in the case of Azadi Bacho Andolan and contended that the applicant was entitled to the benefits provided by the tax treaty.
AAR ruling
• The AAR observed that the profit arising from the transfer of shares of an Indian company is chargeable to capital gains tax under the Act. However, Article 13(4) of the tax treaty confers the power of taxation of the capital gains derived by a resident of Mauritius from the alienation of specified property only in Mauritius. Therefore, the fact that the capital asset is located in India is immaterial. Further, under the Act the applicant is entitled to seek the benefit under the tax treaty if the provision therein is more advantageous than the corresponding provision in the domestic Act.
• The AAR relied on the CBDT Circulars and the Supreme Court decision in the case of Azadi Bachao Andolan and held that the taxpayer was eligible for the tax treaty benefits and accordingly, the applicant is not liable to pay capital gains tax in India in respect of the transfer of shares held in an Indian company as per Article 13(4) of the tax treaty.
Our Comments
The AAR has reiterated the principles laid down by the Supreme Court in the case of Azadi Bachao Andolan that a Mauritian tax resident holding tax residence certificate is eligible for the tax treaty benefits.
Even though the decision of the AAR is legally binding only on the parties involved in the particular case, the ruling would have a persuasive value in a similar litigation before the Indian tax authorities and courts.
Note -1
- E*Trade Mauritius Ltd. [2010] 324 ITR 1 (AAR)
- DDIT v. M/s Saraswati Holding Corpn. Inc. [2009-TIOL-529-ITAT-DEL]
