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
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
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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