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AAR Hold up Right to Take Advantage of Tax Treaty

22 Nov 2011

The Authority for Advance Rulings has delivered an important ruling in the case of Ardex Investments Mauritius Ltd on the chargeability of gains arising from transfer of shares of an Indian company held by a Mauritian Company. The AAR has ruled that such gains would not be chargeable to tax in India as per the provisions of the Double Taxation Avoidance Agreement between India and Mauritius. Taxand India examines the facts of the case and how it is likely to impact on Mauritian MNCs based in India.

Facts of the case
Ardex Investments Mauritius Ltd was a tax resident of Mauritius holding a valid Tax Residency Certificate. The only asset held by the applicant was the equity shares of Ardex Endura (India) Pvt Ltd a limited company incorporated in India. The applicant proposed to sell its holding in Ardex India to a German entity of the applicant's group. The sale was proposed to be carried out at the prevailing market value of the shares, which resulted in capital gains for the applicant.The applicant applied to the AAR seeking a ruling on taxability in India on the proposed transfer of shares of Ardex India.

Questions before the AAR

  • Whether capital gains on sale of shares of Ardex India would be chargeable to tax in India having regard to Article 13 of the Tax Treaty between India and Mauritius?
  • Whether there is any withholding tax obligation under section 195 of the Income Tax Act, 1961 ("the Act")?
  • Whether the applicant is obliged to file a return of income in India in respect of the proposed transfer of shares of Ardex India?

Taxand India discusses the Revenue and Applicant's contentions and looks at the ruling of the AAR

Taxand's Take

This is a reaffirmation of the position under the India-Mauritius Tax Treaty that capital gains arising to a resident of Mauritius from transfer of shares in an Indian company would not be chargeable to tax in India. The AAR has also noted that the principles laid down by the SC that treaty shopping is not a taboo and taking advantage of a Tax Treaty by itself cannot be objected to. Since the ruling is binding only on the applicant, the outcome of this ruling could encourage other Mauritius holding companies to secure a ruling in their cases as well. Yet, the findings of the Supreme Court in the Vodafone case as they relate to the Azadi Bachao Andolan case will be keenly awaited and will have to be considered by taxpayer's position under the Direct Tax Code. With the proposed introduction of General Anti Avoidance Rules it will be interesting to see whether the ratio of the SC ruling in Azadi Bachao Andolan would hold good under the DTC as well, and similarly, whether this and other rulings issued by the AAR would continue to be binding on the Revenue.

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M Deepak


Taxand's Take Author