Article 13(4) of India-Mauritius Double Taxation Avoidance Agreement (DTAA ) -Transfer of shares of an Indian company (ICo) by the applicant to its Singapore group entity (SCo) upon re-organisation, not a tax avoidant transaction
Facts
The Applicant is part of a large MNE group (Group) and a company resident and incorporated in Mauritius. The Applicant held majority (nearly 99.99%) of the shares of Indian Co (ICo) which was acquired by it in various tranches over a period of 10 years from 1995 to 2005.
The Group had presence all over the world and was divided into various regions based on their geographical locations. The Applicant belonged to the European region, while ICo belonged to the India, Middle East and Africa (IMEA) region. In the past, the IMEA region was dismantled and entities were realigned with other regions as per the geographical convenience. As a result of this realignment, ICo became a part of the focused Asia-Pacific region.
In order to achieve the objective of operational excellence, better control and administrative convenience, it was proposed to realign the holding of ICo and shift it to an entity in the Asia- Pacific region. Accordingly, it was proposed that Applicant would transfer the shares of ICo to its group entity in Singapore i.e., SCo.
Issues before the AAR were as follows:
Whether the entire arrangement of transfer of ICo’s shares in favor of SCo was a scheme to avoid taxes in India?
Whether the Applicant had a Permanent Establishment (PE) in India?
Whether income arising from such a transfer was taxable in India?
Held
On the issue of whether the arrangement was a tax avoidance transaction For the following reasons, it was held that the transaction of transfer ICo’s shares to SCo by the Applicant was not a tax avoidance transaction –
The Applicant had acquired shares of ICo in various tranches over a 10 year period. Such share acquisition which was carried out around 20 years ago for a substantial cost cannot amount to a scheme to avoid payment of taxes in India. ? T he Applicant had been operating for more than 10 years in Mauritius and hence, it cannot be said to be a shell company. Investment in ICo’s shares was carried out with prior approval of the Department of Industrial Policy and Promotion and Reserve Bank of India. In these circumstances, it cannot be said that shares were acquired with a view to sell them in future.
The need for realignment of the Group arose upon dismantling of the IMEA group in 2010. As a result, and in order to ensure better control, ICO’s holding was shifted to Asia-Pacific region. SCo was an upcoming entity in the Asia-Pacific region and, hence, it was proposed to realign the holding of shares of ICo from the Applicant to SCo. Additionally, all the shares of ICo were acquired five years prior to the present proposed re-organisation of the group. Hence, the proposed transaction is for sound business consideration.
On the issue of PE
It was a stated fact that the Applicant did not have an office or employees or agents in India. Neither did it have any activities in India. A tax residency certificate from Mauritius was also furnished by the Applicant. Further nothing was brought on record to show that Applicant had a PE in India. Therefore, it was held that the Applicant does not have a PE in India. On the taxability of transfer of shares of ICo
Considering the accounting treatment, intention, as also quantum of the transaction, the equity shares held by the Applicant in ICo should be considered as capital asset and not stock-in-trade.
The shares of ICo were held for a very long period of time (10-20 years). The objective of acquiring ICo’s shares as stated by the Applicant was not to trade in them but to hold them as investments. In fact, there was no trading in ICo’s shares by the Applicant, except for the proposed transfer. Hence, the shares of ICo would constitute capital asset in the hands of Applicant. Consequently gains from transfer of shares of ICo would result in capital gains in the hands of the Applicant. Such capital gains are taxable in India under the provisions of the Act
Gains on transfer of ICo’s shares would be covered by Article 13(4) of the DTAA which exempts gains from tax in India.
