Gains arising to Mauritius company from sale of Indian company’s shares are not taxable in India under Article 13 of India-Mauritius DTAA. Mauritius company is entitled to receive sale consideration without tax deduction. Mauritius company is required to file its return of income in India in respect of sale of shares of an Indian company, even though the transaction is not liable to tax in India.

Gains arising to Mauritius company from sale of Indian company’s shares are not taxable in India under Article 13 of India-Mauritius DTAA.
Mauritius company is entitled to receive sale consideration without tax deduction.
Mauritius company is required to file its return of income in India in respect of sale of shares of an Indian company, even though the transaction is not liable to tax in India.

•  The applicant, a company incorporated in Mauritius (MauCo), holds a valid Tax Residency Certificate (TRC) issued by the Mauritius Tax Authority. MauCo is a wholly-owned subsidiary of its UK parent company, Ardex UK.
•  MauCo held 50% shares in Ardex Endura (India) Pvt Ltd (ICO), which it proposed to sell to its German group company (Ardex Germany), at fair market value prevailing at the time of the proposed sale. The fact pattern is schematically depicted as under:
• MauCo was originally created in 1998 by another UK company (an unrelated party to Ardex group). MauCo had made substantial investments in the Indian company. In November 2001, the Ardex group took a decision to acquire MauCo with a view to expand its business. Over a period of time MauCo made significant investments in ICO.
•  With regard to proposed transaction, MauCo applied to AAR to deal with its eligibility to claim exemption in respect of proposed sale of shares of ICO and to also deal with its obligation to file return of Income in India.
•  Before AAR, Tax Authority claimed that MauCo was not eligible for India-Mauritius treaty as: n The source of all the funds of MauCo was its 100% parent in UK and the beneficial ownership of the shares vested in Ardex UK. n The decision to sell the shares in ICO was taken by Ardex UK and MauCo was bound to follow Ardex UK’s decision. n Ardex UK intended to take advantage of the beneficial capital gains provisions under the Mauritius DTAA by creating a subsidiary in Mauritius, a facade, to hold and sell the shares held indirectly in ICO. n On lifting the corporate veil, it becomes clear that Ardex UK had invested funds for purchase of ICO shares, and hence gains on the proposed transfer of the shares accrued to Ardex UK. Consequently, UK DTAA and not Mauritius DTAA would be applicable. 
•  Before AAR, MauCo put up the following contentions:
•  Allegation of the Tax Department that MauCo was created by Ardex group is not correct and justified, since it was created in 1998 by another UK holding company. It was only in November 2001, the Ardex group took a decision to acquire MauCo with a view to expand its business.
•  The decision to transfer ICO’s shares to Ardex Germany was taken by MauCo’s Board of Directors, and not by Ardex UK.
•  Investment in ICO was made by MauCo itself and not by its UK holding company. MauCo owned shares of ICO which was evident from the share certificates furnished. The investment in India was made legally and by following the required procedure.
• Since MauCo was a separate legal entity and the beneficial ownership of the shares vested in its hands. Accordingly, there was no justification to lift the corporate veil.
•  MauCo is a tax resident of Mauritius and the Mauritius DTAA would be applicable in the given case. The TRC constituted valid and sufficient evidence of residential status under the Mauritius DTAA. Decision of SC in the case of Azadi Bachao Andolan and AAR ruling in the case of E*Trade Mauritius2 supported claim of MauCo.

 AAR accepted the contentions of MauCo and held that it would not be liable to tax in India on account of transfer of shares of ICO to its German group company for following reasons:

•  It is true that the funds for acquisition of shares in ICO were provided by the principal, a UK company. However, the shareholding arrangement has not come about all of a sudden. The shares were first purchased in the year 2000, and the shareholding steadily increased in 2001, 2002 and 2009. This is not an arrangement which has come into existence all of a sudden. It is not clear how far the theory of beneficial ownership may be invoked to come to the conclusion that the holder of shares in ICO is the UK company.
•  Formation of a Mauritius subsidiary and the selling of shares held in the Indian company may be an arrangement to take advantage of the Mauritius DTAA. But this by itself cannot be viewed or characterised as objectionable treatyshopping. In view of the decision in the case of Azadi Bachao Andolan, treaty shopping itself is not taboo and further, this decision would stand in the way of further probe on this issue.
•  In the current case shares sold were held for a considerable length of time (i.e., more than 10 years), before they are sought to be sold by way of a regular commercial transaction. Hence it may not be possible to go into an enquiry as to who made the original investment for the acquisition of the shares and the consequences arising therefrom.
•  Even if it is a case of treaty shopping, in light of the SC decision in Azadi Bachao Andolan, no further enquiry on the question of treaty shopping is warranted or justified on the aspect of eligibility of beneficial capital gains provisions under the Mauritius DTAA. Further, the SC decision in the case of Mc Dowell3 did not deal with treaty shopping, only the SC in Azadi Bachao Andolan provided guidance in this regard.
•  Thus, capital gains arising on the proposed sale of shares by MauCo to Ardex Germany will not be chargeable to tax in India in view of the provisions of Article 13(4) of India Mauritius DTAA.
• MauCo is entitled to receive the sale proceeds without the deduction of tax at source, but, based on the AAR ruling in the case of VNU International [53 DTR (AAR) 189], MauCo is required to file its return of income in India in respect of the proposed transfer of shares.