Authority for Advance Ruling ("AAR") has recently in the case of Mahindra-BT Investment ("Applicant"), a company incorporated in Mauritius, held that transfer of shares of an Indian company to a USA company is not liable to tax in India under the beneficial provisions of India-Mauritius Treaty. In this ruling, the AAR has dealt with the issue of residential status of the Applicant, which is guided by place where the control and management of affairs of the applicant exists. Treaty benefit is only available to a tax resident of the contracting states.
In the present case, the Revenue Authorities argued that the control and management of the applicant was situated in India, since the sole purpose of existence of the Applicant was "transferring the shares" of TML (i.e. the Indian Co.) to AT&T (i.e. the US Co.), the real transaction is between TML and AT&T and hence the control and management of the applicant should be treated as in India.
The Applicant argued that the board meeting wherein the business decisions were taken were held in Mauritius and hence the place of control and management of affairs of the applicant is situated in Mauritius.
AAR wan convinced with the arguments of the applicant and held that since the place of control and management of affairs of the applicant is situated in Mauritius, the applicant is resident of Mauritius, eligible to claim the beneficial provisions of Article 13(4) of the India-Mauritius Tax Treaty, granting exemption from capital gain tax.
Nangia's Take
Though an AAR is only binding on the applicant, persuasive value can be drawn from the same. Where a foreign company is able to establish that major business decisions, such as decisions on financial matters; approving of financial budgets and statements; decision on declaration of dividends; decision on buyback of shares; appointment of tax advisor, etc are taken outside India, its residential status shall remain outside India.
Further, interestingly, as per this ruling even a Special Purpose Vehicle ("SPV") merely earning Dividend and Interest income shall be construed as an entity having commercial purpose. Revenue authorities in this case argued that the Incorporation of the applicant was solely to hold the shares of TML to facilitate a tax neutral transfer. This ruling of AAR has laid a striking principal that a SPV which is established without any economic substance, shall be construed as having commercial purpose, where the future transfer of shares by the SPV is linked to the happening of a future event / business target etc.
Though the India-Mauritius Tax Treaty has been amended, by way of the 2016 Protocol permitting source taxation in respect of gains arising from transfer of shares of an Indian company, this ruling is relevant for grandfathered investments made before 1 April 2017.
Source: [TS-479-AAR-2016]
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