Authority for Advance Ruling ("AAR") in the case of Shinsei Investment Ltd. ('the Assessee") dealt with the issue of availing benefit under the India-Mauritius Double Taxation Avoidance Agreement (DTAA) from capital gains arising on transfer of shares of Indian companies. The Assessee is a company incorporated in Mauritius and a wholly owned subsidiary of a Japanese company. Further, the Assessee owns major equity in two companies incorporated in India.
During the relevant assessment year, the Assessee proposed to sell its entire shareholding (75%) in the said Indian companies to a third party in Japan. The Assessee's parent company was a party to the Share Purchase Agreement ("SPA") in its capacity as sponsor and in order to comply with mutual fund regulations. As per the terms of the SPA the said parent company had various rights and responsibilities as a sponsor.
Based on the above facts, the Assessee filed an application with the AAR to determine if capital gains will be taxable in India. As per Article 13 of the DTAA, capital gain arising from alienation of a specified property are taxable only in the state of residence. However, the tax department placing reliance on Aditya Birla Nuvo Ltd 342 ITR 308, argued that the Assessee had merely given its name to the SPA and the effective control of the transaction was with the parent company and accordingly, the beneficial provisions of DTAA were not applicable to the transaction.
After considering both submissions, the AAR observed that the Assessee's parent company was a part of the SPA merely in its capacity as a sponsor and in order to comply with mutual fund regulations. Accordingly, it could not be said that the Assessee was a 'permitted transferee'. Further, the shares proposed to be sold were subscribed by the Assessee in its own name and the bank statements filed show that the Assessee had paid for such subscription. Therefore, the AAR allowed the Assessee benefit under Article 13 of the DTAA and held that capital gain arising to the Assessee will not be taxable in India. Further, the AAR also concluded that since income is not taxable in India, the Assessee will not be required to file income tax return in India or will not be liable to tax under the provisions of section 115JB of the Act.
Nangia's Take
Interestingly distinguishing the present case from the High Court ruling in the case of Aditya Nuvo, deciding favorably, the AAR duly noted that the Assessee had funded the investment and the involvement of Parent company was mainly due to the statutory requirement under the regulations, and concluded that the Assessee earned capital gains in its own right and hence is eligible for the DTAA benefit. Though the DTAA 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 2017 and the investments made between 1 April 2017 to 31 March 2019, which qualify for transition tax @ 50%.
[Source: AAR No 1017 of 2010]
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