Legal vs Beneficial Ownership and Indo Mauritius DTAA

MOODY'S ANALYTICS INC., AAR,NEW DELHI NO.S 1186 TO 1189 OF 2011
           
 
ISSUES INVOLVED :-
 
1.      Whether the capital gains , if not taxable in Mauritius ,  would be taxable in India on the ground that there is no double taxation?
2.      Whether beneficial ownership is relevant for determining taxability of capital gains arising out of sale of shares when legal ownership of the said shares is with a company in Mauritius ?
 
 
DTAA INVOLVED :
 
INDIA MAURITIUS DTAA                                       
 
 
FACTS OF THE CASE:-
 
Brief facts of the case are that there are two kind of transactions for transfer of shares by two Mauritius based group companies detailed here under :
 
(a)    A Mauritius based company (CRL) transferred its 100% shareholding in an Indian Company (CRIL) to a Cyprus based company, being a sale by a Mauritian company of the shares held by it in an Indian company, to a Cyprus based company;
 
(b)   Another Mauritius based subsidiary (CMRL) of CRL transferred its 100% shareholding in an US based company (EI,Inc.) to another USA based company (MA,Inc.), being a sale by a Mauritian company of the shares held by it in a US based company, to another US based company. However the underlying assets of EI Inc., was 100% holding of EIL India , an Indian Company. 
 
(c)    CRL ,which is holding company of CMRL and CRIL, is 100% subsidiary of a company based in Jersey(CPL) with whom India does not have any DTAA.
 
The applicants in this case, CRL Mauritius and MA Inc. USA, contended that since in both cases transferor is a Mauritius based company ,as per Indo Mauritius   DTAA, the capital gains would be taxable in Mauritius only.
                                     
 
REVENUE'S CONTENTIONS :-
 
(a)    Chapter IX of the Income-tax Act deals with Double Taxation Relief. For the relief to be obtained, there must be a taxation. Taxation means actual taxation and not a mere power to tax or the possibility of taxation. It not possible to say that unless a person is actually taxed or sought to be taxed in both the contracting states, the provisions in this chapter are not attracted.
 
(b)   Since Mauritius, though has right to tax the capital gains, does not tax the same and hence there would be no double taxation if India taxes the capital gains.
 
(c)    That this was a clear case of devising of a scheme for avoidance of tax. It was pointed out that the beneficial owner of the shares was CPL Jersey and since there existed no convention between India and Jersey, the taxability of the transactions had to be tested on the anvil of the Income-tax Act. So tested, even according to the applicants, they were taxable under the Act as amended by the Finance Act of 2012. In the first case, it was the sale of the shares of an Indian Company by the Mauritius Company to a Cyprus Company and in the second case, though the sale was of the shares of a US Company by a Mauritian company to another US Company, the underlying assets were that of an Indian company. The transactions have been so arranged or designed as to avoid the transactions being taxed in India by invoking the India-Mauritius DTAC.  
 
(d)   That the beneficial ownership of the shares vested with CPL Jersey and that ownership should determine the applicatory law. India did not have a treaty with Jersey and hence on the application of the Income-tax Act, the capital gains are taxable in India. That there was no dispute that the gains were taxable under the Act.
 
(e)    That a Tax Residency certificate is not conclusive, though it is prima facie to be accepted. The position adopted by the Supreme Court in Azadi Bachao Andolan, has been modified to that extent by the decision in Vodafone.
 
 
ASSESSEE'S CONTENTIONS :-
 
(a)    That the two sellers being Mauritian companies, are entitled to claim the benefit of the India-Mauritius Double Taxation Avoidance Convention and going by section 90(2) of the Income-tax Act, the right to claim relief on the basis of the DTAC cannot be disputed. That even if by virtue of the amendments to the Income-tax Act brought about by the Finance Act, 2012, the transactions are held to be taxable in India, going by the DTAC, the transactions which give rise to capital gains, can be taxed only in Mauritius, in view of paragraph 4 of Article 13 of the India-Mauritius DTAC.
 
(b)   That the Tax Residency Certificates are liable to be accepted and in the light of the observations in the decision of the Supreme Court in Azadi Bachao Andolan(263 ITR 706), the transactions have to be accepted and even if no capital gain is actually taxed or is chargeable to tax in Mauritius, the jurisdiction to tax under the DTAC will still be with Mauritius and hence the authorities under the Income-tax Act cannot tax the transactions.
 
(c)    That the transactions are legally permissible ones between legal entities and that there is not even a case of round-tripping suggested. Taking advantage of a DTAC, even if it is such a case, is not taboo or objectionable as held in Azadi Bachao Andolan. Here, the transactions were sale of shares of an Indian company by a Mauritian company to a Cyprus company and the sale of shares of a US Company by a Mauritius company to another US Company. However one may stretch it, it cannot be said that a scheme for avoidance of tax has been devised.
 
(d)   That the test of beneficial ownership can not been applied in such circumstances and the legal ownership of the shares vested in the company that held it. The fact that the owner company is a 100% subsidiary of another company will not alter the legal ownership. Every corporation is an independent legal entity.
 
 
HELD:-
 
Authority of Advance Ruling discussed the relevant articles of the Income Tax Act and DTAA between India and Mauritius and observed & held as under:-
 
(a)    That the argument of revenue on the concept that there is no double taxation  cannot be accepted in view of the clear pronouncement on the question in Azadi Bachao Andolan, that what is relevant in the context of the DTAC, is not whether the income is actually taxed in Mauritius but whether in terms of the DTAC, it can be taxed in Mauritius. The contention raised on behalf of the Revenue has necessarily to be raised before the Supreme Court and cannot be entertained by this Authority which is bound by the decision in Azadi Bachao Andolan. Suffice it to say that it is for the Revenue to raise its questions in challenge to the reasoning in Azadi Bachao Andolan, if it wants to persist in this line of argument, before the Supreme Court. The arguments are of no avail before this Authority.
 
(b)   That the theory of beneficial ownership has not prevailed over the apparent legal ownership. Company law also recognized the recorded owner of the shares and not the person on whose behalf it may have been held (even if, possible). Hence this attempt of counsel for the Revenue must also fail.
 
(c)    That the applicant ,MA Inc US, is justified in its view that capital gains arising on the sale of shares of EI Inc., US  by CMRL, Mauritius  to the applicant would not be chargeable to tax in India in the hands of CMRL.
 
(d)   That the applicant, CRL Mauritius, is justified in its view that capital gains arising on sale of shares of Indian Company by applicant to Cyprus based company will not be chargeable to tax in India in the hands of the applicant, as per the provisions of paragraph 4 of Article 13 of the Double Taxation Avoidance Agreement entered into between India and Mauritius.
 
 
Comments:-
 
The Revenue contended in this case that for relief to be obtained, there must be taxation and since capital gains is not taxable in Mauritius, the same would be taxable in India. But this argument has long been decided by various courts including Hon'ble Supreme Court in the case of Azadi Bachao Andolan , that what is relevant in the context of DTAA is that which contracting state has right to tax it and not whether the income is actually taxed in that Contracting State which has right to tax it. Hence once as per DTAA , Mauritius has got the right to tax the capital gains arising to companies resident therein, the same would not be taxable in India. AAR in an other recent ruling in the case of Dynamic India Fund-I, Held : "Revenue's argument that unless the capital gain is actually taxed in Mauritius, the DTAC would not apply in the context of section 90(1) and section 90(2) of the Act, though attractive, cannot be entertained in view of the decision of the Supreme Court in Union of India v. Azadi Bachao Andolan (263 ITR 706)."
 
 
Further it was contended by the revenue that beneficial ownership of the shares vested with a company based in Jersey. Hence it would be beneficial ownership that should determine applicatory law. Since with Jersey, India does not have any DTAA and hence  provisions of Income Tax would be applicable and capital gains would be taxable in India. However assessee contended that legal ownership of the shares vested in the company that held it. Even if company is 100% subsidiary of another company will not alter legal ownership and every corporation is an independent legal entity.
 
AAR held that, as things stand now, it is legal ownership that would be relevant , notwithstanding beneficial ownership of shares may be lying with a company resident of any other country. Hence capital gain would not be taxable under Indo-Mauritius if holding company is incorporated in Mauritius even if ultimate holding company is incorporated in Jersey. In another similar case the AAR held as follows:
 
"It is true that the funds for acquisition of shares in the Indian company were provided by the principal, a company incorporated in the UK. The shares in the Indian company were first acquired in the year 2000. Subsequently, further shares were acquired in the years 2001, 2002, and 2009. These shares are sought to be transferred by the applicant company to another subsidiary of the group, incorporated in Germany. It is not clear how far the theory of beneficial ownership could be invoked to come to a conclusion that the holder of the shares in the Indian company in this case would be the company in UK. The first shares were purchased almost 10 years before the application and the shareholding was steadily increased. This is not an arrangement come to all of a sudden. May be, the formation of this subsidiary in Mauritius was with an eye on the Indian-Mauritius Treaty. At worst, it might be an attempt to take an advantage of a Treaty. But, that, by itself, cannot be viewed or characterized as objectionable treaty-shopping. Based on that theory canvassed for by the revenue, it would be difficult to come to the conclusion that the proposed transaction would be governed by the India-UK Treaty. One may take note of the steps taken to bring about the transaction in question to ascertain whether there was a scheme devised for avoidance of tax. But in a case of this nature, where the shares were held for a considerable length of time, before they are sought to be sold by way of a regular commercial transaction, it may not be possible to go into an enquiry on who made the original investment for the acquisition of the shares and the consequences arising therefrom. The contention of the revenue is that it would be the Treaty between the India and the UK that would apply and not the Treaty between India and Mauritius in view of the beneficial ownership of the shares vesting in the company in the UK. At worst, it could be said to be the case of the Treaty shopping. Even then, in the light of the decision of the Supreme Court in Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 /132 Taxman 373, no further enquiry on the question is warranted or justified. This is not a case of so-called gift or transfer without consideration of shares that is contemplated, but a sale at market rate.
 
Therefore, capital gains on the proposed sale of shares by the applicant to German-company is not chargeable to tax on capital gains in India in view of article 13.4 of the India-Mauritius Tax Treaty. The applicant would be entitled to receive the sale proceeds without the deduction of tax at source.
 
However, since the shares to be transferred are the shares of an Indian company which would otherwise have been taxable under the provisions of the Act, the applicant is bound to file a return of income in India in respect of the income from the proposed transfer of the shares." (In the case of Ardex Investments Mauritius Ltd.)"
 
Similar views were given by AAR in the case of  D.B. Zwirn Mauritius Trading No. 2 Ltd., wherein it was held  : "If one goes by the Act, the profit arising from the transfer of shares of an Indian company is chargeable to capital gains tax under the Act. However, the position of taxability of capital gains is otherwise under the provisions of the DTAA between India and Mauritius. Article 13(4) of the DTAA confers the power of taxation of the gains derived by a resident of a contracting State from the alienation of specified property only in the State of its residence, i.e.,in Mauritius, and the fact that the capital asset is located in India is immaterial. The taxpayer is entitled, in law, to seek the benefit under the DTAA if the provision therein is more advantageous than the corresponding provision in the domestic law. 
 
On the facts presented by the applicant, it is not liable to pay capital gains tax in India in respect of the transfer of shares held in the Indian company to a Mauritius based company, having regard to the provisions of the India-Mauritius DTAA."
 
Further , after amendments to the Income Tax Act brought out by Finance Act 2012, even if said transactions are held to be taxable in India, the provisions of Indo Mauritius DTAA would be applicable and capital gains arising to company based in Mauritius would be taxable in Mauritius only. 


 

 

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