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TRI-PRO ADMINISTRATORS LTD
Level 2
Alexander House,
35,
Cybercity - Ebène,
Republic of Mauritius.
Tel: (230) 464-0889/ 464-9088
Fax: (230) 467-8858
Email: services@tri-pro.mu |
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| LATEST NEWS |
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| AAR Ruling: Capital gains on sale of Indian Companies shares by Mauritius Company to German Company not chargeable to tax in view of Article 13.4 of the India-Mauritius Tax Treaty |
Ardex Investments Mauritius Ltd (the Applicant) was a tax resident of Mauritius and the Tax Residency Certificate produced in this behalf has to be accepted view of the decision in Azadi Bachao Andolan (263 ITR 706). The Applicant, a company incorporated in Mauritius, was dealing with the shares it held in Ardex Endura (India) Pvt Ltd (Ardex India) and selling them to Ardex Beteiligungs –GmbH Germany (Ardex Germany).
The Applicant proposes to sell its entire stake constituting 50% of the equity share capital of Ardex India, to Ardex Germany at fair market value prevailing at the time of the proposed sale.
The Applicant wanted an advance ruling on the following questions:
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“Whether on the stated facts and in law, the capital gains on the proposed sale of shares of Ardex India by the Applicant to Ardex Germany would be chargeable to Income-tax in India in the hands of the Applicant, having regard to the provisions of paragraph 4 of Article 13 of the India-Mauritius Tax Treaty?”
- “Whether on the stated facts and in law, the Applicant would be entitled to receive the sale proceeds of shares of Ardex India, without deduction of income-tax at source?”
- “Whether on the stated facts and in law, the Applicant would be required to file a return of income in India in respect of the proposed transfer of shares of Ardex India?”
After the application was allowed under section 245R(2) of the Act, a report was forwarded by the Tax Revenue to Authority for Advance Rulings (AAR). In that report, the Tax Revenue pointed out that on a perusal of the details, it is noticed that the applicant is a wholly owned subsidiary of Ardex Holdings U.K. Ltd. There was no income of any type for the year or the immediate previous year for the applicant company. The only asset was the investment in Indian company. Prima-facie it appeared that the sole purpose for which the applicant company was brought into existence was to hold the shares of the Indian company on behalf of the parent company, Ardex Holdings UK Ltd. The source of all the funds of the applicant was the holding company. It was further put forward that the decision for selling the shares of the Indian company held by the applicant, was taken by the holding company. The applicant as a subsidiary, was expected to follow that decision in full. Reason for the creation of the applicant was that the holding company wanted to take advantage of the Indo-Mauritius Treaty offering exemption to capital gains arising from the proposed transfer. The applicant was created as an entity for this very purpose. In the circumstances, the veil had to be pierced. On so piercing the veil, it was clear that it was Ardex UK that had invested funds in the purchase of the shares and hence the gain on the transfer of shares in question accrued to Ardex UK and was governed by the India-United Kingdom Treaty. Under Article 14 of that Treaty, the capital gain was to be taxed under the provisions of the domestic law.
It is thus seen that the main stand of the Tax Revenue is that the Applicant in Mauritius, was simply created as a facade to made investment in India by a company in the UK and this was with the obvious intention of avoiding the liability to be taxed under the India United Kingdom Treaty and to take advantage of the India Mauritius Treaty. The funds for purchase having proceeded from the principal in the UK, the beneficial ownership of the shares vested with the company in the UK and that the shares are sought to be sold to a subsidiary in Germany, by the principal in UK and that the treaty that governed was the one between India and the UK.
On behalf of the Applicant, it is contended that the Applicant was a tax resident of Mauritius and the Tax Residency Certificate produced in this behalf has to be accepted view of the decision in Azadi Bachao Andolan (263 ITR 706). The Applicant, a company incorporated in Mauritius, was dealing with the shares it held in an Indian company and selling them to another company in Germany. Article 13 of the Treaty between India and Mauritius applied. According to paragraph 4 of the treaty, the capital gains derived by a resident of Mauritius from the alienation of shares would be taxable only in Mauritius and not in India in the absence of the applicant having a Permanent Establishment in India. The Applicant had no place of business or an activity in India.
Therefore, the gains that may arise to the Applicant, was liable to be taxed in Mauritius and not in India. The ruling in E-trade Mauritius Ltd. (324 ITR 1) rendered by the AAR is relied on.
The AAR rules On Question No.1 that the capital gains on the proposed sale of shares by the Applicant to Ardex Germany is not chargeable to tax on capital gains in India in view of Article 13.4 of the India-Mauritius Tax Treaty.
On question No.2 we rule that the applicant would be entitled to receive the sale proceeds without the deduction of tax at source.
Question no. 3 relates to whether the applicant would be required to file a return of income in India in respect of the proposed transfer of shares of Ardex Endura (India) Pvt. Ltd. Since the shares to be transferred are the shares of an Indian company which would otherwise have been taxable under the provisions of the Income-tax Act, we rule that the applicant is bound to file a return of income in India in respect of the income from the proposed transfer of the shares.
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