22 September 2016 Global Tax Alert India s Authority of Advance Rulings grants capital gains tax exemption under India Mauritius Treaty EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: www.ey.com/taxalerts Executive summary Shinsei Investment Ltd. (the Taxpayer), a Mauritian Company, requested a ruling from the Authority of Advance Rulings (AAR) 1 on the application of a capital gains exemption under the India-Mauritius Income Tax Treaty (the Treaty) on a transfer of shares of Indian companies. The AAR favorably ruled that the Taxpayer was eligible for the capital gains exemption under the Treaty. In addition, because of the exemption, the Taxpayer was neither required to file an income tax return of income in India nor was it subject to the minimum alternate tax (MAT) provision under the Indian Tax Laws (ITL). Detailed discussion Background The Taxpayer is a wholly owned subsidiary of Parent Co, a Japanese bank. The Taxpayer owns shares of two Indian companies: (1) a 75% interest in an asset management company (AMCo) and (2) a 99.99% interest in a trustee company (TrustCo). AMCo and TrustCo are the asset management and trustee of a mutual fund in India. The Parent Co is a sponsor and settlor of the mutual fund.
2 Global Tax Alert The Taxpayer is a Mauritian company holding a valid tax residency certificate (TRC) from the Mauritian Tax Authorities. It has neither a Permanent Account Number nor a permanent establishment in India. In the fiscal year ended 31 March 2010, a Share Purchase Agreement (SPA) was entered into between the Taxpayer, Parent Co, AMCo, TrustCo and the purchaser for the transfer of shares of both Indian companies, and the Taxpayer applied the capital gains exemption under the Treaty. The Indian Tax Authority (ITA) disagreed with the Taxpayer s position. The Taxpayer requested a ruling from the AAR for its eligibility for a capital gains exemption in India under the Treaty, obligations to withhold taxes, return filing in India and application of MAT to the Taxpayer. ITA contentions before the AAR 1. The investments in the Indian companies are in effect, made by Parent Co rather than the Taxpayer. Accordingly, the India-Mauritius Treaty s capital gain exemption does not apply and the gain on disposition is fully taxable in India. 2. Parent Co, and not the Taxpayer, has been effectively controlling the transaction and it holds all rights and obligations related to the sale transaction, which was indicated in various clauses in the SPA. 3. The Taxpayer is introduced in the transaction of sale as a permitted transferee 2 by Parent Co without possessing any rights and obligations to the sale, and the inclusion of the Parent Co in the SPA is not justifiable in the case of a simple sale of shares of the Indian companies. 4. The ITA relied on the Bombay High Court (HC Ruling) ruling in which the High Court (HC) denied application of capital gains exemption under the Treaty where the transferor, a Mauritius Company, was treated as a permitted transferee selling shares on behalf of its parent US Company. Taxpayer s contention before the AAR 1. The Taxpayer holds a valid Mauritius TRC and accordingly, capital gains arising to it from transfer of shares located in India will be taxable only in Mauritius under the Treaty, pursuant to the Administrative Circulars and a decision of the Supreme Court. 2. The differentiating factors between the present transaction and the Bombay HC Ruling referred to by the ITA are as follows: i. Unlike in the HC Ruling where the Mauritius Company was merely a permitted transferee, the Taxpayer acquired Indian companies shares in its own name and the funds used to purchase the shares were from the Taxpayer s own account. ii. The Taxpayer was acknowledged as the beneficial and real owner of the shares pursuant to the SPA; whereas the US parent company in the HC Ruling was the owner of the Indian shares and all rights of the Indian shares absolutely vested in the US parent company. iii. In the HC Ruling case, under the Joint Venture Agreement, the entire obligation rested with the US parent company and that the Mauritian company was a mere representative of the US parent company indicating that the investments were routed through the Mauritian company merely to qualify for the treaty benefits. However, the current case lacks these factors. The AAR s Ruling 1. The AAR rejected the ITA s claim of treating the Taxpayer as a permitted transferee. The AAR observed that the Parent Co was a party to the SPA only because it was the sponsor and settler of the mutual fund in India, complying with the requirements of mutual fund regulations. The mutual fund regulations also subject the Parent Co to certain requirements and responsibilities until the shares are sold. The SPA s provisions related to the Parent Co are solely for purposes of complying with these rules. 2. Accordingly, the AAR ruled that capital gains are taxable only in Mauritius under the Treaty since the Taxpayer possesses a valid TRC. 3. Because of the capital gains tax exemption, the Taxpayer is neither required to file an income tax return in India nor subject to the MAT.
Global Tax Alert 3 Implications One of the major issues that distinguished its favorable holding from the HC Ruling is that the Parent Co s involvement is mainly due to the statutory requirement under the regulations, which does not affect the Taxpayer s true rights as the shareholders of the Indian companies. While the Treaty has been amended by the 2016 Protocol, granting taxation rights to India on gains arising from a share transfer of an Indian company, this ruling is relevant to grandfathered investments made before 1 April 2017, and those made between 1 April 2017 to 31 March 2019, that qualify for 50% tax relief from source taxation in India. Endnotes 1. Certain taxpayers can obtain binding rulings from the AAR on a question of law or fact arising out of any transaction/ proposed transactions that are relevant for the determination of the taxpayer s tax liability. 2. The ITA asserted that the Taxpayer was only a nominee shareholder while effective control of the transaction was with the parent company.
4 Global Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (India), Mumbai Sudhir Kapadia +91 22 6192 0900 sudhir.kapadia@in.ey.com Ernst & Young LLP (India), Hyderabad Jayesh Sanghvi +91 40 6736 2078 jayesh.sanghvi@in.ey.com Ernst & Young LLP, Indian Tax Desk, New York Riad Joseph +1 212 773 4496 riad.joseph1@ey.com Amit Gouri +1 212 773 7096 amit.gouri1@ey.com Sameep Uchil +1 212 773 4862 sameep.uchil@ey.com Ernst & Young LLP, Indian Tax Desk, Chicago Romit Patel +1 312 879 2526 romit.patel1@ey.com Ernst & Young LLP, Asia Pacific Business Group, New York Chris Finnerty +1 212 773 7479 chris.finnerty@ey.com Kaz Parsch +1 212 773 7201 kazuyo.parsch@ey.com Bee Khun Yap +1 212 773 1816 bee-khun.yap@ey.com Ernst & Young LLP, Asia Pacific Business Group, Houston Trang Martin +1 713 751 5775 trang.martin@ey.com
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