By Dhishat B. Mehta | Bhaumik Goda
Chartered Accountants
11. [2020] 116
taxmann.com 878 (AAR-N. Del.) Tiger Global
International II Holdings, In re Date of order: 26th
March, 2020
Article 13 of
India-Mauritius DTAA; section 245R of the Act – As gain on sale of shares by a
Mauritius company in a Singapore company which derived substantial value from
assets in India was, prima facie, designed for avoidance of tax, applications
were to be rejected under clause (iii) to proviso to section 245R(2) of
the Act
FACTS
The applicants were
three Mauritius companies (Mau Cos), which were tax resident of Mauritius. They
were member companies of a private equity fund based in USA. Mau Cos
collectively invested in shares of a Singapore Company (Sing Co). Sing Co, in
turn, invested in multiple Indian companies. Sing Co derived substantial value
from assets located in India. All investments were made prior to 31st
March, 2017. The Mau Cos transferred their shares in Sing Co to an unrelated
Luxembourg buyer pursuant to contracts executed outside India.
Before executing
the transfer of shares, the applicants applied to tax authorities for nil
withholding certificate u/s 197. The applications were rejected on the ground
that the applicants did not qualify for benefit under the India-Mauritius DTAA.
The applicants
subsequently approached the AAR to determine the chargeability of share
transfer transaction to income tax in India. The tax authorities objected to
the admission of the application.
HELD
Pending
proceedings
- Proceedings relating to
issue of nil withholding certificate are concluded when the certificate was
issued by the tax authority.
- Even if the tax withholding
certificate was applicable for the entire financial year and could have been
modified, it could not be given effect to after the transaction was closed and
payment was made.
- Accordingly, there was no
pending proceeding on the date of making the application to the AAR.
Application
before AAR was concerned only with chargeability to tax and question of
determination of FMV did not arise
- The applications pertained
only to determination of taxability of transfer of shares.
- Tax authority can undertake
valuation of shares and computation of capital gains arising from shares only
after the transaction is found to be exigible to tax. Therefore, the
application cannot be rejected on this ground.
Prima facie avoidance
of tax
- At the stage of admission
of the application before the AAR, there is no requirement to conclusively
establish tax avoidance; rather, it only needs to be demonstrated that prime
facie the transaction was designed for avoidance of tax.
- The following factors
established that the control and management of the Mau Cos was not in
Mauritius:
• Authorisation to operate bank account above
US $250,000 was with Mr. C who was not a Director of the Mau Co but was the
ultimate owner of the PE Fund.
• Since the applicants were located in
Mauritius, logically a Mauritius resident should have been authorised to sign
cheques and operate bank accounts. However, the applicants could not justify
why Mr. C was authorised to do so.
• Since Mr. C was the beneficial owner of the parent
company of the applicants and also the sole director of the ultimate holding
company, the authorisation given to him was not coincidental. This fact
established that the funds were controlled by Mr. C.
• Further, Mr. S (US resident general counsel
of the PE fund) was present in all the Board meetings where decisions on
investment and sale of securities were taken. Despite this, decisions in
respect of any transaction over US $250,000 were taken by Mr. C. This suggested
that notwithstanding that decisions were undertaken by the Board of Directors
of the applicants, these were ultimately under the control of Mr. C because of
his power to operate bank accounts.
• Thus, the real management and control of the
applicants was not with the Board of Directors, but with Mr. C who was the
beneficial owner of the group. The Mau Cos were only pass-through entities set
up to avail the benefits of the India-Mauritius DTAA.
- Hence, prima facie, the transaction
was designed for avoidance of tax and, accordingly, it could not be admitted.
Applicability
of India-Mauritius DTAA
• The Mau Cos derived gains from transfer of
shares of the Sing Co and not those of the I Cos. The India-Mauritius DTAA
(post-2016 amendment), as also Circular No. 682 dated 30th March,
1994 suggest that the intent of the DTAA is only to protect gains from transfer
of shares of an Indian company and not transfer of shares of a Singapore
company. Exemption from capital gains tax on sale of shares of a company not
resident in India was never intended under the original or the amended DTAA
between India and Mauritius.
