Article 13 of India-Mauritius DTAA – Additional consideration received for delay in making open offer, being an integral part of share transfer is a part and parcel of sale consideration, is covered by Capital Gains Article of the DTAA . Such payment does not constitute interest income in absence of a debtor- creditor relationship.
Facts
The Taxpayer, a company incorporated in Mauritius held the shares of an Indian Company (ICo). The Taxpayer transferred ICo’s shares to a Mauritius Company (FCo) under a scheme of open offer.
Together with the consideration for sale of shares, the Taxpayer also received additional consideration for delay in processing of open offer by FCo. As per the letter of open offer, it was clear that the initial offer price of the shares for transfer of each share was increased due to the delay in making the open offer. The Tax authority contended that such consideration was received for delay in making payment. Hence, it represented interest and was not part of sale consideration for the open offer. Accordingly, such additional payment would qualify as interest under the India-Mauritius DTAA and liable to source taxation in India.
However, the Taxpayer argued that as FCo had not provided any loan to Taxpayer, additional consideration cannot be said to be received in respect of any monies borrowed or for use of money. In absence of a debtorcreditor relationship between the Taxpayer and FCo, such additional consideration cannot be treated as interest.
Held
It is a fact that the regulatory authority i.e., SEBI, had approved the transaction. Further, since the transaction could not be completed in time due to certain reasons, FCo revised the offer price. The Taxpayer had no control over the decisions of FCo. Business decisions are governed by their own rules and laws and if considering the time factor, FCo agreed to increase the share price, it has to be taken as part of sale.
The Taxpayer owned shares of ICo and in response to the open offer by FCo, the Taxpayer agreed to sell the shares of ICo. It was a pure and simple case of selling of shares by the Taxpayer. The Taxpayer did not enter into any negotiations with FCo and transferred shares as per a scheme approved by SEBI.
Further, there was no debtor-creditor relationship between the Taxpayer and FCo. The Taxpayer had not advanced any sum to FCo and has not received any interest for the delayed repayment of principal amount. Reliance in this regard was placed on the Tribunal decision in the case of Genesis Indian Investment Company (ITA /2878/Mum/2006 dated 14th August 2013) wherein it was held that where the interest is received for delay in processing of buy back of shares in open offer after announcement of the intention of acquiring shares, such additional amount shall form part of consideration towards shares tendered in open offer.
Thus, the additional consideration received is part and parcel of total consideration and cannot be segregated under the head ‘original sales consideration’ and ‘penal interest’. Such additional consideration is not taxable in India by virtue of Article 13 of India-Mauritius DTAA .
