Authority for Advance Ruling ("AAR") has recently in
the case of Mahindra-BT Investment ("Applicant"), a
company incorporated in Mauritius, held that transfer of shares of
an Indian company to a USA company is not liable to tax in India
under the beneficial provisions of India-Mauritius Treaty. In this
ruling, the AAR has dealt with the issue of residential status of
the Applicant, which is guided by place where the control and
management of affairs of the applicant exists. Treaty benefit is
only available to a tax resident of the contracting states.
In the present case, the Revenue Authorities argued that the
control and management of the applicant was situated in India,
since the sole purpose of existence of the Applicant was
"transferring the shares" of TML (i.e. the Indian Co.) to
AT&T (i.e. the US Co.), the real transaction is between TML and
AT&T and hence the control and management of the applicant
should be treated as in India.
The Applicant argued that the board meeting wherein the business
decisions were taken were held in Mauritius and hence the place of
control and management of affairs of the applicant is situated in
AAR wan convinced with the arguments of the applicant and held
that since the place of control and management of affairs of the
applicant is situated in Mauritius, the applicant is resident of
Mauritius, eligible to claim the beneficial provisions of Article
13(4) of the India-Mauritius Tax Treaty, granting exemption from
capital gain tax.
Though an AAR is only binding on the applicant, persuasive value
can be drawn from the same. Where a foreign company is able to
establish that major business decisions, such as decisions on
financial matters; approving of financial budgets and statements;
decision on declaration of dividends; decision on buyback of
shares; appointment of tax advisor, etc are taken outside India,
its residential status shall remain outside India.
Further, interestingly, as per this ruling even a Special
Purpose Vehicle ("SPV") merely earning Dividend and
Interest income shall be construed as an entity having commercial
purpose. Revenue authorities in this case argued that the
Incorporation of the applicant was solely to hold the shares of TML
to facilitate a tax neutral transfer. This ruling of AAR has laid a
striking principal that a SPV which is established without any
economic substance, shall be construed as having commercial
purpose, where the future transfer of shares by the SPV is linked
to the happening of a future event / business target etc.
Though the India-Mauritius Tax Treaty has been amended, by way
of the 2016 Protocol permitting source taxation in respect of gains
arising from transfer of shares of an Indian company, this ruling
is relevant for grandfathered investments made before 1 April
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