Case nº A.A.R. No. 826 of 2009 of Authority for Advance Rulings, March 22, 2010 (case E* Trade Mauritius Ltd. Vs DIT (International Taxation))
| Judge | For Appellant: S.E. Dastur, Sr. Adv., Madhur Agarwal, Sanjay Sanghvi, Ronak Ajmera and Daksha Baxi, Advs. of Khaitan & Co. and For Respondents: G.C. Srivastava, Adv. |
| President | P.V. Reddi, J. (Chairman) and J. Khosla, Member |
| Resolution Date | March 22, 2010 |
Judgment:
P.V. Reddi, J. (Chairman), (New Delhi)
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This application for advance ruling has been filed by a non' resident company under Section 245Q(1) of the Income-tax Act (hereinafter referred as IT Act). The following facts are stated in the application:
1.1 The applicant, E*TRADE Mauritius Limited ('Applicant'), is a company incorporated in Mauritius, holding a Global Business Company Licence issued by the Financial Services Authority of Mauritius and is a tax resident of Mauritius. It has been issued a Tax Residency Certificate by the Mauritius Tax Authorities. The Applicant is a subsidiary of Converging Arrows Inc. USA which in turn is a subsidiary of E*TRADE Financial Corporation, USA.
1.2 The Applicant held equity shares in IL&FS Investsmart Limited ('Indian Company') which are listed on Stock Exchange in India. The Applicant had acquired these shares in the years 2005, 2006 and 2007. The shares were acquired by way of direct purchases as well as upon conversion of the Global Depository Receipts ("GDRs") as per the details set out in Exhibit 'A'. The Applicant has transferred 30,625,692 shares in the Indian Company to HSBC Violet Investment (Mauritius) Limited, a company organized under the laws of Mauritius, at Rs. 200/- per share on 29th September 2008 and realized long term capital gains there-on in India. A Share Purchase Agreement was entered into on 16th May, 2008.
1.3 Being a tax resident of Mauritius, the Applicant is governed by the provisions of the India-Mauritius DTAA in respect of its tax liability in India. As the provisions of the India-Mauritius DTAA are more beneficial, the provisions of that DTAA would be applicable, as specifically provided for in Section 90(2) of the IT Act. Further, during the period the Applicant held shares in the Indian Company, it did not have any Permanent Establishment ('PE') in India as defined in Article 5 of the India-Mauritius DTAA.
1.4 Upon sale of the said shares in the Indian Company, the Applicant had approached the Assistant Director of Income-tax, Mumbai to obtain the "nil" rate withholding tax certificate under Section 197 of the IT Act. The ADIT denied the request and determined that the capital gains tax of 21.11% would be applied to the total sale consideration of the shares without deduction for the cost of acquisition. Being aggrieved by it, the Applicant approached the Bombay High Court by way of a Writ Petition. The High Court, without going into the merits, directed the Applicant to approach the Director of Income-tax (International Taxation)("DIT") for a revision of the Certificate under Section 264 of the IT Act and also directed HSBC Violet Investment (Mauritius) Ltd. to deposit an amount of Rupees Twenty Four crores & fifty lakhs with the Court until the disposal of the revision petition by the DIT. On 1st January 2009, the DIT disposed of the revision petition. He concurred with the view of the ADIT that the transaction prima facie gave rise to a chargeable capital gains and upheld the denial of nil rate withholding Certificate. He computed the capital gains tax liability of Rs. 24,31,05,710/-. The summary proceedings regarding issuance of tax deduction Certificate thus ended with the issuance of the order of DIT.
1.5 The Applicant has now approached this Authority to determine whether by virtue of being a Mauritius resident, it is eligible to the benefits of the India-Mauritius DTAA and hence not subject to tax in India on the capital gains realized.
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The applicant has formulated the following questions for seeking advance ruling:
(i) Whether on the stated facts and in law, the Applicant, a tax resident of Mauritius, is exempt from payment of capital gains tax in India under the Double Taxation Avoidance Agreement (or "DTAA") between India and Mauritius ("India-Mauritius DTAA") in respect of the transfer of 30,625,692 shares in IL & FS Investmart Ltd. an Indian Company to HSBC Violet Investments (Mauritius) Limited?
(ii) If the answer to question (i) is in negative, whether on stated facts and in law, the Applicant will be liable to pay tax on long term capital gains at 10% under the proviso to Section 112(1) of the Income-tax Act, 1961 ("IT Act")?
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The contentious issue that arises for consideration is whether the profit arising from the transfer of shares of Indian company is chargeable to Capital Gains tax under the I.T. Act. The answer is plain. If we go by the I.T. Act, the profits arising from the transfer of share are liable to be taxed under the head Capital Gains at the appropriate rate. However, the position of taxability of Capital Gains is otherwise under the provisions of DTAA (Tax Treaty between India & Mauritius). To be more specific, Article 13, Paragraph 4 of the DTAA confers the power of taxation of the gains derived by a resident of a contracting State from the alienation of specified property only in the State of residence i.e. in Mauritius. The fact that the capital asset is located in India is immaterial. In most of the Treaties, we find that the situs or location of the capital asset determines the competence of the State to tax the capital gain. Yet, there is no doubt that the tax payer is entitled in law to seek the benefit under the DTAA if the provision therein is more advantageous than the corresponding provision in the domestic law. This well settled principle has been re-stated by the Supreme Court in the case of Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706(SC) - a case which will be referred to hereinafter extensively. For the proposition which we have just now stated, the following passage in the said decision would suffice:
A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that Section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect of cases to which where they apply, would operate even if inconsistent with the provisions of the Income-tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the Legislature to make a departure from the general principle of chargeability to tax under Section 4 and the general principle of ascertainment of total income under Section 5 of the Act, then there was no purpose in making those sections "subject to the provisions" of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under Section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income-tax Act in the matter of ascertainment of chargeability to income-tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC.
3.1 The contention of the respondents which weighed with the High Court, viz., that the impugned Circular No. 789 (see [2000] 243 ITR (St.)57) is inconsistent with the provisions of the Act, is a total non sequitur. As we have pointed out, Circular No. 789 is a circular within the meaning of Section 90; therefore, it must have the legal consequences contemplated by Sub-section (2) of Section 90. In other words, the circular shall prevail even if inconsistent with the provisions of the Income-tax Act, 1961, in so far as assessees covered by the provisions of the DTAC are concerned."
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Now, let us see the relevant provision in the DTAA i.e. Article 13:
Article 13- Capital gains:
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Gains from the alienation of immovable property, as defined in paragraph (2) of article 6, may be taxed in the Contracting State in which such property is situated
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Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in that other State.
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Notwithstanding the provisions of paragraph (2) of this article, gains from the alienation of ships and aircraft operated in international traffic and movable property pertaining to the operation of such ships and aircraft, shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.
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Gains derived by a resident of a Contract State from the alienation of any property other than those mentioned in paragraphs (1), (2) and (3) of this article shall be taxable only in that State.
4.1 Obviously and undisputedly, Paragraph 4 of Article 13 governs because the property alienated - being shares in the company, does not fall under any of the preceding three paras. The applicant seeks to fortify its claim for non-liability to pay Indian income-tax on the strength of the Tax Residency Certificate issued by the Mauritius Revenue Authority.
4.2 Thus far, there is no problem. The controversy has arisen on account of the stand taken by the Revenue. The stand of the Revenue is that there is scope and sufficient reason to infer that the capital gain from the transaction arises in the hands of the US entity which holds the applicant company. In other words, the beneficial ownership vests with the US company which according to the department has played a crucial role in the entire transaction. Though the legal ownership ostensibly resides with the applicant, the real and beneficial owner of the capital gains is the US Company which controls the applicant and the applicant company is merely a façade made use of by the US holding Company to avoid capital gains tax in India. It is...
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