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3 August 2017 |
Introduction Recently, the Hon’ble Bombay High Court (HC) upheld the decision of the Authority for Advance Rulings (AAR) wherein a Mauritian entity was entitled to avail the beneficial provisions of the India Mauritius Tax Treaty (Treaty) in relation to capital gains arising from the sale of shares of an Indian company. The HC has followed the ruling of the Apex Court in the landmark case of Union of India v. Azadi Bachao Andolan [[2003] 132 Taxman 373 (SC)]. Facts JSH (Mauritius) Limited (Taxpayer), is a company incorporated in Mauritius engaged in the business of investment and financing activities, having no permanent establishment or business presence in India. It held a valid Category 1 Global Business Company License (GBL-1) and a Tax Residency Certificate (TRC) issued by Mauritian authorities. The Taxpayer held shares of Tata Industries Limited (TIL), an Indian company, for a period of 13 years and in June 2009, it transferred the TIL shares owned by it to Tata Sons Limited (TSL). The sale proceeds from the TIL shares were re-invested in a group company of TIL. The Taxpayer had approached the AAR to ascertain whether it was entitled to beneficial provisions (namely, Article 13(4)) of the Treaty in relation to sale of TIL shares in order to be exempt from paying any capital gains tax in India. The AAR ruled in favour of the Taxpayer and observed that it was not a ‘shell company’ and held that the transaction was not designed to avoid tax. Aggrieved by the decision of the AAR, the Income Tax Department (Revenue) filed the present writ petition before the HC. Importantly, the Revenue filed the writ petition after a delay of 8 (eight) months from the date of the AAR’s order. Revenue’s Case before HC The Revenue put forth the following key contentions to argue that the Taxpayer should be taxed in India in relation to capital gains arising from the sale of TIL shares:
Taxpayer’s Case before the HC The following key arguments were advanced by the Taxpayer before the HC:
Decision of the HC Dismissing the Revenue’s writ petition, the HC decided in favour of the Taxpayer. The HC held that it would not act as an appellate authority unless the AAR’s appreciation of facts and findings were perverse or if the provisions of law were incorrectly construed. The HC concluded that the AAR had considered all relevant aspects of the matter in arriving at a just conclusion and that the Treaty had also been rightly interpreted. The HC noted that the long period of holding TIL shares and reinvesting the proceeds in another Indian company suggested the bona fide of the Taxpayer. It further held that since the AAR did not rule that the Taxpayer is a ‘fly-by-night’ company, alleging prima facie tax avoidance at a later stage was unwarranted. Interestingly, the HC did not rule on the delay of 8 months on the Revenue’s part, in filing the writ petition challenging the AAR ruling, albeit, the Revenue had argued that “some time was lost due to administrative exigency.” Comment In the pre-General Anti Avoidance Rule and pre-Treaty amendment era, this decision of the HC is in line with several previous decisions of various courts where treaty eligibility of a Mauritius company has been upheld based on a valid TRC, absent any Indian business presence, fraud or façade. Having said that, it is interesting to note the factual details that the Revenue highlighted during the course of its arguments to contend that the Taxpayer was a ‘shell company’ – for instance, the investment proposal to the Indian regulator, expenses incurred by the Taxpayer, directors appointed on the Board etc. From a structuring perspective, it would be useful to evaluate such factual details to ensure that both from a commercial and tax perspective, the eligibility to Treaty benefits is not undermined in any way. |