D.B.Zwirn Mauritius Trading Vs. Director of Income-tax(international Taxation)-ii, New Delhi - Court Judgment

(By Mr. V.K.Shridhar)

The applicant, D.B. Zwirn Mauritius Trading No. 3 Ltd. is a company incorporated in Mauritius and was issued a Tax Residence Certificate by the Mauritius Tax Authorities. It is engaged in the business of investments in different sectors. The applicant held 5,33,333 equity shares of Quippo Telecom Infrastructure Limited, an Indian company. These were acquired on 19th September, 2007, for a consideration of Rs.2,13,33,320. On 10th November, 2009, the applicant entered into a share purchase agreement to sell these 5,33,333 shares to Geraldton Finance Limited, a Mauritius based company, for a consideration of Rs.5,59.99,965. The applicant realized capital gain of Rs.2,98.67.010.

2. The Applicant has approached this Authority to determine whether by virtue of being a Mauritius resident, it is eligible to the benefits of the India-Mauritius DTAA and hence not subject to tax in India on the capital gains realized. It has sought the ruling of this Authority on the following questions:

1. Whether the application filed by the Applicant before the Authority of Advance Ruling is maintainable under section 245N of the Income-tax Act, 1961?

2. Whether the Applicant, in relation to the transaction involving sale of shares as explained in the statement of facts, is liable to capital gains tax in Mauritius in terms of Article 13(4) of the Double Taxation Avoidance Agreement (DTAA) between India and Mauritius?

3. Whether the transaction of sale of shares of an Indian company as per Share Purchase Agreement dated November 10, 2009 attracts capital gain tax liability in terms of provisions of Income Tax Act 1961 and Double Taxation Avoidance Agreement between India and Mauritius?

4. Whether, in respect of the transaction of sale of shares explained in statement of facts, there is any withholding tax liability under section 195 of the Income-tax Act, 1961.

Question No.1 was unnecessary and therefore deleted at the time of passing order under section 245R (2) of the Act.

3. The Learned Advocate submits that the applicant is holding a Tax Residence Certificate issued by the Mauritius Revenue Authority. It is filing tax returns as Mauritian resident and is entitled to claim benefits provided under the DTAA between India and Mauritius. Article 13(4) of the DTAA provides that the profits made by a resident of a contracting state from the alienation of shares shall be taxable only in that state. The Central Board of Direct Taxes (CBDT), in Circular No.789 dated 13.04.2000, has clarified that under Article 13(4) of the DTAA, a resident of one state shall mean any person who is liable to tax under the laws of that state. In the case of Azadi Bachao Andolan reported in 263 ITR 3

706, the Honorable Supreme Court has held that the certificate of residence issued by Mauritius Revenue Authority constitutes a valid and sufficient evidence of residential status under India - Mauritius DTAA. The CBDT in Circular No. 682 dated 30.03.1994 has further clarified that under the DTAA, a resident of Mauritius having income from alienation of shares of Indian company shall be liable to tax only in Mauritius. In the case of E*Trade Mauritius, AAR No. 862 of 2009, and, the Delhi ITAT in the case of Saraswati Holding Corporation, 2009-TIOL-529-ITAT-DEL, held the view that the gains arising out of alienation of shares of an Indian Company to a company who is a resident of Mauritius is liable to tax only in Mauritius in terms of Article 13(4) of the DTAA.

4. The department has not felt it necessary to represent its case nor taken steps to file any written submissions despite allowing adequate opportunity. It appears to us that they have nothing to say in this matter.

5. The relevant provision under Article 13(4) of the DTAA between India and Mauritius is extracted as under:

“Article 13- Capital gains:

1. ……….

2. …………

3. ……………

4. Gains derived by a resident of a Contract State from the alienation of any property other than those mentioned in paragraphs (1),(2) and (3) of this article shall be taxable only in that State.”

6. The applicant seeks to fortify its claim for non-liability to pay Indian income-tax on the strength of the Tax Residency Certificate issued by the Mauritius Revenue Authority. The applicant has placed reliance on the two Circulars issued by the CBDT. The relevant extract of the Circular No.682, dated 30th March, 1994 is as under:

“Subject: Agreement for avoidance of double taxation with

Mauritius– Clarification regarding.

1…….

2…..

3. Paragraph 4 deals with taxation of capital gains arising from the alienation of any property other than those mentioned in the preceding paragraphs and gives the right of taxation of capital gains only to that State of which the person deriving the capital gains is a resident. In terms of paragraph 4, capital gains derived by a resident of Mauritius by alienation of shares of companies shall be taxable only in Mauritius according to Mauritius tax law. Therefore, any resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius as per Mauritius tax law and will not have any capital gains tax liability in India.

4. Paragraph 5 defines “alienation” to mean the sale, exchange transfer or relinquishment of the property or the extinguishment of any right in it or its compulsory acquisition under any law in force in India or in Mauritius.”

7. Then there is further clarification issued by the CBDT regarding taxation of income from capital gains under the India-Mauritius DTAA through Circular No.789, dated 13th April, 2000. The relevant extract of the circular is as under:

“Subject: Clarification regarding taxation of income from dividends and capital gains under the Indo-Mauritius Double Tax Avoidance Convention (DTAC) – Regarding

The provisions of the Indo-Mauritius DTAC of 1983 apply to “residents” of both India and Mauritius. Article 4 of the DTAC defines a resident of one State to mean “any person who, under the laws of that State is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.” Foreign institutional investors and other investment funds, etc., which are operating from Mauritius are invariably incorporated in that country. These entities are “liable to tax” under the Mauritius Tax Law and are, therefore, to be considered as residents of Mauritius in accordance with the DTAC.

2. Prior to 1st June, 1997, dividends distributed by domestic companies were taxable in the hands of the shareholder and tax was deductible at source under the Income-tax Act, 1961. Under the DTAC, tax was deductible at source on the gross dividend paid out at the rate of 5% or 15% depending upon the extent of shareholding of the Mauritius resident. Under the Income-tax Act, 1961, tax was deductible at source at the rates specified under section 115A, etc. Doubts have been raised regarding the taxation of dividends in the hands of investors from Mauritius. It is hereby clarified that wherever a certificate of residence is issued by the Mauritian authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the DTAC accordingly.

3. The test of residence mentioned above would also apply in respect of income from capital gains on sale of shares. Accordingly, FIIs, etc. which are resident in Mauritius should not be taxable in India on income from capital gains arising in India on sale of shares as per paragraph 4 of article 13.”

8. The issue that arises for consideration is that if we go by the I.T.Act the profit arising from the transfer of shares of Indian company is chargeable to capital gains tax under the Income-tax Act. However, the position of taxability of capital gains is otherwise under the provisions of DTAA between India and Mauritius. Article 13(4) of the DTAA confers the power of taxation of the gains derived by a resident of a contracting state from the alienation of specified property only in the state of residence i.e. in Mauritius. The fact that the capital asset is located in India is immaterial. The tax payer is entitled in law to seek the benefit under the DTAA if the provision therein is more advantageous than the corresponding provision in the domestic law. This well settled principle has been re-stated by the Supreme Court in the case of Union of India vs. Azadi Bachao Andolan, cited supra, in the following passage:

“A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect of cases to which where they apply, would operate even if inconsistent with the provisions of the Income-tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the Legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections “subject to the provisions” of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income-tax Act in the matter of ascertainment of chargeability to income-tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC.

3.1 The contention of the respondents which weighed with the High Court, viz., that the impugned Circular No.789 (see [2000] 243 ITR (St.)57) is inconsistent with the provisions of the Act, is a total non sequitur. As we have pointed out, Circular No.789 is a circular within the meaning of section 90; therefore, it must have the legal consequences contemplated by sub-section(2) of section 90. In other words, the circular shall prevail even if inconsistent with the provisions of the Income-tax Act, 1961, in so far as assessees covered by the provisions of the DTAC are concerned.”

On the scope and validity of the Circular in Azadi Bachao Andolan case cited supra, it is said as under:

“As early as on March 30, 1994, the Central Board of Direct Taxes had issued Circular No. 682 (see [1994] 207 ITR (St.7)) in which it had been emphasized that any resident of Mauritius deriving income from alienation of shares of an Indian company would be liable to capital gains tax only in Mauritius as per Mauritius tax law and would not have any capital gains tax liability in India. This Circular was a clear enunciation of the provisions contained in the DTAC, which would have overriding effect over the provisions of sections 4 and 5 of the Income-tax Act, 1961 by virtue of section 90(1) of the Act….”

9. On the facts presented by the applicant and in the light of legal position discussed, the applicant is not liable to pay capital gains tax in India in respect of the transfer of shares held in Quippo Telecom Infrastructure Limited (Indian Company) to Geraldton Finance Limited, a Mauritius based company having regard to the provisions of India-Mauritius DTAA. All the questions are answered in the affirmative.

Accordingly ruling is given and pronounced on 28th Day of March, 2011.