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Section 6(3) of the Act; Article 13 of India Mauritius DTAA – since Mauritius company had commercial purpose and the nature of decisions taken by the Board of Directors in Mauritius showed that the control and management was not situated wholly in India, it qualified as treaty resident of Mauritius – Consequently capital gain from transfer of shares of Indian company was exempt under Article 13 of the DTAA.
Facts:
The Taxpayer, a Mauritius company, was held by another Mauritius company (Mau Holding Co) and a UK company (UK Co). The Taxpayer’s board of Directors (BoD) comprised five directors, of which three directors were resident in Mauritius, one was a resident of the UK and one was a resident of India. The Taxpayer’s control and management was exercised by its BoD whose meetings were conducted in and chaired from Mauritius. The Taxpayer acquired certain shares (approximately 8.12%) in I Co, an Indian listed company through the stock exchange. I Co was a joint venture between Taxpayer, other promoters (Indian company and a UK company).
Taxpayer entered into an option agreement (Agreement) with a US Company (US Co), I Co and other promoters, as per which US Co was granted options over the Taxpayer’s shares in ICo representing 8.12 % of the total share capital, if US Co provided a certain level of business to I Co, which was set as a milestone.
In the year under consideration, US Co achieved the specified milestone and exercised its option to purchase shares of I Co from the Taxpayer in March 2010.
The Taxpayer approached the AAR to adjudicate on the issue of whether capital gains arising to the Taxpayer on transfer of I Co’s shares were exempt from tax in India under the capital gains article of the DTAA.
Held:
•The purpose of the arrangement was to motivate US Co, to give a certain level of business to I Co, by giving US Co an opportunity to acquire shares of ICo. Such conditions are not unusual or abnormal in the business agreement. Thus, contention that the Taxpayer had no commercial purpose but to transfer shares to US Co, and the real transaction was between I Co and US Co, was rejected by AAR.
•For a company to be treated as being resident in India as per the then applicable S. 6(3) the control or management was required to be wholly situated in India.
•However, in the facts of the case, having regard to the facts of the case, control and management of the Taxpayer was situated wholly in Mauritius.
- The minutes of the BoD meetings reflected that decisions related to financial matters, such as budgets, dividend declaration, buy-back of shares, approval of the Agreement etc., were taken by the BoD in Mauritius.
- The SC’s rulings, in the cases of Nandlal Gandalal and V.V.R.N.M. Subbayya Chettiar , support that the expression “control and management” means de facto control and management, and not merely the right or power to control and manage. The BoD also included representatives from UK Co. The board meetings and the nature of decisions taken clearly indicate that control and management of the affairs of the Taxpayer, particularly financial affairs, were situated only in Mauritius.
- No additional facts were submitted to substantiate that any important affairs of the Taxpayer, for the purpose of the Act, were being controlled or managed from India.
•Thus Taxpayer was a resident of Mauritius, and, accordingly in terms of Article 13(4), the capital gains arising to the Taxpayer was not taxable in India.
