The Government of India has entered into an agreement with the Government of Mauritius for avoidance of double taxation. It provides that income earned by resident of Mauritius by way of sale of shares of an Indian company shall be taxable in Mauritius only. To avail the benefit, the Mauritian Company has to prove that it is resident of Mauritius. CBDT has issued a circular that a Certificate of Residence issued by Mauritius will be sufficient evidence for accepting the status of residence as well as ownership for applying the provisions of the treaty.
The above circular was, however, declared invalid by the Delhi High Court (Shiv Kant Jha v. Union of India (2002) 256 ITR 563). But the Supreme Court reversed the decision and declared the circular as valid (Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706).
Thereafter, it was believed that the capital gains from sale of shares of an Indian company held by Mauritian company shall be taxable in Mauritius only provided the Mauritian company provides the Tax Residency Certificate (TRC).
However, the recent case of Aditya Birla Nuvo Limited v The Deputy Director of Income-tax in writ petition number 730 of 2009 is likely to upset the aforesaid legal position. Briefly, the facts are as under:
On 04.03.1995 Birla group formed Birla Communications Limited (now Idea Cellular Limited). Subsequently, Birla group entered into a joint venture agreement (JVA) with AT&T Corp, a company incorporated in USA under which Birla Communications Limited was to be the joint venture company (JVC) for carrying on wireless telecommunication services in India.
The JVA provided that only the parties to the JVA shall be entitled to hold 100% shares of the joint venture company (JVC). It was also provided in the JVA that the parties shall be liable to make payment for shares of JVC, although such shares may be purchased in the name of 100% subsidiary of such parties. JVA also provided that the parties shall have rights of management, right to vote, right of sale or alienation, etc..
Accordingly, AT&T Mauritius, 100% subsidiary of AT&T USA, subscribed to the shares of the JVC on behalf of AT&T USA and the shares were allotted in the name of AT&T Mauritius.
AT&T USA sold its holding in Indian company, which were held in the name of AT&T Mauritius, to the other two shareholders, i.e. Birla Group and Tata Group. Birla group made the payment to AT&T Mauritius without deduction of any tax at source on the basis of a Nil rate certificate issued by the Indian tax department under section 195(2).
Subsequently, the Income-tax Department issued a showcause notice calling Birla Group to show cause as to why it should not be assessed as representative assessee (agent) of AT&T USA.
The Birla Group contended that the capital gains arising on account of transfer of shares of Indian company are not taxable in India because AT&T Mauritius has got the TRC of Mauritius.
The Hon’ble Mumbai High Court vide its order dated 14.07.2011 rejected the plea of Birla Group, and observed that although AT&T Mauritius has filed TRC of Mauritius, however, the real owner of the shares of the Indian company was AT&T USA. On the basis of the fact that AT&T USA paid the amount for shares through Mauritius and got the shares allotted in the name of AT&T Mauritius, it cannot be said that the investments in India was made by the Mauritian company. Since the investments in India were made by AT&T USA and not by AT&T Mauritius, neither the CBDT circulars nor the DTAA between India and Mauritius are applicable.
The recent judgment of Mumbai High Court upsets the settled legal position, and very clearly implies that if the shares of the Indian company are effectively not owned by a Mauritian company, capital gains may be charged to tax in India despite a Certificate of Residency issued by Mauritius Government.
H.P.Agrawal (Author is a Sr. Partner in S.S. Kothari Mehta & Co.)