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AAR Rules on 6 Tax Issues Impacting Multinationals

 AAR Rules on 6 Tax Issues Impacting Multinationals
27 Aug 2012

The Authority for Advance Ruling (AAR) has made several significant rulings on tax matters in India in recent weeks.Taxand India provides insight into each case and the impact on businesses based in India, Mauritius and Singapore.


MAT provisions and transfer pricing (TP) rules apply to foreign companies. These rules apply even if a company's income is not taxable in India. This AAR ruling was based on Castleton Investment Limited (CIL), a company which is a tax resident in Mauritius, but which holds shares in Glaxo Smithkline Pharmaceuticals (GSPL); a listed Indian Company. This ruling deviates from some of the earlier AAR rulings which have stated that if income is not taxable in India, under the Double Taxation Avoidance Agreement (DTAA), then machinery provisions such as TP rules and MAT provisions will not apply.

AAR upheld exemption from capital gains on share buybacks. The Applicant in this ruling was a company incorporated in Mauritius, however it was a wholly owned subsidiary of Armstrong World UK, which in turn was owned by Armstrong USA. The Revenue Authorities contended that the investment into India was made by the UK or US and hence provisions of the India - Mauritius Tax Treaty could not be applied. However the AAR ruled that there was not substanial evidence to claim that the Applicant had devised a scheme to avoid tax.

AAR upholds the principle of 'legal ownership' over 'beneficial ownership'. In this case the Applicant company was based in Mauritius, but had acquired the entire share capital of an Indian company. Subsequently, a separate entity was then incorporated in Jersey as the ultimate holding company, after acquiring all the Mauritius company shares. The Revenue Authorities contended that this was a scheme for avoiding taxes, however the AAR ruled in favour of the Applicant company, partly as shares of the US company were held by a Mauritius resident.


AAR observes that a 'gift' of shares by a company is not permissable. The Applicant in this case was an investment company incorporated in Singapore. OGPL Singpore held 99.61% stake in the share capital of OGPL India and, as part of restructing, OGPL Singapore transferred its stake in a company called Bharath Wind Farm Limited to OGPL India, without any consideration. The Revenue Auhtorities contended that OGPL Singpore was a shell company and was acting as a conduit to transfer money. The AAR declined to make a ruling in this case, instead offering various observations.


AAR rule in favour of Amazon regarding meaning of 'manufacturing'. Amazon Seller Services Private Limited filed the application before the AAR seeking a ruling on the applicability of excise duty. Amazon stated they were not manufacturing products and the activities in their warehouse would not involve altering the primary packaging or orignal labelling of goods. The AAR ruled in favour of Amazon, which is significant as it reduces the historic confusion surrounding the concept of manufacturing. This ruling will provide precedent for multinationals who use warehousing in India.

High Court rules subsidiary company cannot be barred from application before AAR, if a similar matter with the holding company is pending before the Appellate Tribunal (CESTAT). This judgment is important as it would bring relief to several eligible taxpayers and opens up avenues for advance determination of their tax ability to a proposed transaction.

Discover more at Taxand India

Taxand's Take

The AAR was set up in 1961 under the Income Tax Act to provide the facility of ascertaining the tax liability of a non resident, to plan their income tax affairs well in advance and to avoid litigation. Therefore any ruling made by the AAR will have an impact on multinationals wishing to do business in India and it is important, with the high volume of cases, for companies to keep informed of what these are, and what they entail.

Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010

Taxand's Take Author