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In Re : M/s Mahindra-BT Investment Company (Mauritius) Limited

2016 (9) TMI 347 - AUTHORITY FOR ADVANCE RULINGS NEW DELHI

Chargeability to capital gains tax in India - Applicant, a tax resident of Mauritius - DTAA between India and Mauritius - transfer of 9,870,912 shares of an Indian Company - Held that:- We perused the minutes of proceedings of the Board meetings held in Mauritius relating to buyback of shares, final closing for sale of shares held in TML, appointment of KPMG India Private Limited as tax advisor, approval of financial statements, dividend declaration and distribution etc. We also noted that the B .....

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ement and not merely the right or power to control and manage. The word ‘affairs’ means the affairs of a HUF which are capable of being controlled and managed by the family as such. In the case of VVRNM Subbayya Chethiyar also the apex court held that the word ‘affairs’ must mean affairs which are relevant for the purpose of the Income-tax Act and which have some relation to income. On the basis of facts mentioned above, it cannot be said that the control and management of the affairs of the app .....

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applicant holding the shares and transferring the same at a later stage as per the options agreement and on fulfillment of conditions by AT & T as per the agreement. Therefore, we are unable to agree with the objections raised by the Department of Revenue and hold that the applicant is not chargeable to tax in India under Article 13(4) of India-Mauritius Treaty. - A.A.R. No 991 of 2010 - Dated:- 8-8-2016 - Mr. V.S. Sirpurkar, Mr. A.K. Tewary and Mr. R.S. Shukla, JJ. For The Applicant : Mr. .....

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dom) hold 57% and 43% stakes respectively in MBTM. The Applicant s Board of Directors comprises of three directors resident in Mauritius, one director resident in the United Kingdom and one director resident in India. The control and management of the affairs of the Applicant is exercised by the Board of directors of the applicant whose meetings are conducted in and chaired from Mauritius. The applicant had acquired 9,931,638 shares (representing about 8.12% - holding) in Tech Mahindra Limited, .....

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Option Agreement, AT&T was given an option to purchase up to 9,931,638 equity shares of TML held by the applicant on achieving certain milestones stipulated in the Option Agreement. AT&T achieved the milestones and decided to exercise the options. The applicant consequently transferred 98,70,912 shares of TML to AT&T at USD 3,5022 per share on 22 March 2010 and realized long-term capital gain of INR 900,127,390.52. This gave rise to the issue of taxability of gains because the applic .....

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& T). (iii) 9th May 2005 MBTM, the applicant, incorporated in Mauritius. (iv) 10th of May 2005 MBTM, AT&T, M&M, BT & TML, enter into an option agreement which provided that AT&T will be granted options over the shares representing 8.12% of enlarged fully diluted shares of TML on achieving certain specified milestones. (v) 23rd of June 2005 Shares subscription agreement entered between MBTM and TML. As per the said agreement, MBTM agreed to subscribe and to invest in TML on p .....

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resident of Mauritius, is not chargeable to capital gains tax in India under Article 13(4) of the DTAA between India and Mauritius in respect of transfer of 9,870,912 shares of an Indian Company, to AT&T International, Inc. a corporation, organized and existing under the laws of Delaware, United States of America. (ii) In the event of the answer to question (i) being in the negative, i.e., if the applicant is chargeable to capital gains tax in India, whether the Applicant will be chargeable .....

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shares to be allotted, for a consideration of USD 1,000. Thus the obligation of Tech Mahindra was shifted to the applicant and the result reached by providing for the applicant to part with the shares to whom Tech Mahindra had an outstanding obligation to issue shares which would have stood in the way of a public issue. The matter went before the Bombay High Court which took note of a communication dated 7th May, 2013 from SEBI to the Director of Income-tax and noted that the agreement entered i .....

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mentioned that it is a tax resident of Mauritius, holding a tax residency certificate issued by the Mauritian tax authorities and the control and management of its affairs is situated in Mauritius. It has referred to the provisions of the India-Mauritius DTAA which provided exemptions on capital gains realized by Mauritius residents in India. It has also referred to Circular No.682 dated 30th March, 1994 and Circular No.789 dated 13th April, 2000 clarifying that whenever a TRC is issued by the .....

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only activity is acquisition of shares of TML and holding the same for transferring to AT&T as per the Option Agreement. (ii) The Incorporation of MBTM was without any economic substance with sole purpose to hold the shares to facilitate a tax neutral transfer of shares as mandated in clause 14.4 of the Option Agreement. (iii) The shareholders agreement dated 25.6.2005 confirms the above mentioned fact. (iv) Clause 27 of the Shareholder Agreement says that MBTM will cease to exist on execut .....

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ge of India-Mauritius Treaty whereas the control and management of the affairs of the applicant remained in India. The Department has referred to Article 4(3) of the Treaty saying that the applicant is taxable in India for its transaction to transfer the shares to AT&T. The Department has also referred to Section 6(3)(c) of the Income-tax Act saying that the control and management of the applicant is situated only in India and, therefore, Article 4(3) of the Treaty should apply. 7. The appli .....

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ion to transfer them to AT & T or anyone else. The applicant has further submitted that: a) The Applicant has been managed independently by its Board of Directors constituted in Mauritius. b) A majority of the directors of the Applicant have been resident outside India. Even during the relevant year, out of the 5(five) directors constituting the board of the Applicant, only 1 (one) was resident in India and the remaining 4 (four) directors were non-residents of India (one of them being a res .....

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has had its bank account in Mauritius and all the Applicant s banking transactions have been conducted through that bank account. h) The Applicant has regularly made its statutory filings and returns as required by the Companies Act, 2001 in Mauritius with Mauritian Registrar of Companies; i) The Applicant has filed its tax returns in Mauritius as required under the Mauritius domestic law; and j) All Annual Meetings of the shareholders of the Applicant have been held in Mauritius. 8. In its rej .....

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trol of the Option Agreement were taken in Mauritius by the applicant s Board of Directors which included representatives of BT Holdings Limited, a company resident in UK which hold 43% of share capital in the applicant. The applicant has relied on the ruling of the Hon ble Supreme Court in the case of Erin Estate v/s CIT 34 ITR 1 wherein it was held that the Act of approval of the budget itself was an act of exercising the right of control and management of a company. They have also relied on t .....

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nd place where it keeps house and does business to determine the place of control and management of the affairs of a company. The Hon ble Bombay HC categorically cautioned against confusing the act of doing business with the central control and management of that business. It observed that mere doing of business in one jurisdiction cannot constitute having controlling and directing power in that jurisdiction. Further, the Hon ble Bombay HC observed that as a rule, the direction, management and c .....

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way of dividends on the shares held and interest income on the deposits kept with the bank. 9. We have considered the arguments of the applicant and the Department. At the outset we may observe that the Revenue s emphasis on the fact that the applicant was not set up for a commercial purpose and was holding shares only for ultimately transferring the same to AT & T is misplaced. The facts show that it was in order to motivate AT & T to give business to TML, it was agreed commercially be .....

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icant company in view of reliance of the Department on Article 4(3) of the DTAA which provides that a resident of both the contracting states shall be deemed to be the resident of the contracting state in which its place of effective management is situated. As regards section 6(3) of the Income-tax Act we note that a foreign company can be a resident in India only if during the year, control and management of its affairs is situated wholly in India. Therefore, the main issue to be examined is wh .....

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ividends: The Board resolution of the applicant dated 27 May 2010. d) Decision on buyback of shares after considering the financial solvency test under Mauritius law: The Board resolution of the applicant dated 22 November 2006 and 11 May 2007. e) Decisions in respect of shares in question including - (i) The approving of the Option Agreement (The Board resolution of the applicant dated 9 May 2005). (ii) The signing of the Option Agreement (iii) The amendment of Option Agreement (The Board resol .....

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e of decisions taken in such meetings clearly indicate that control and management of affairs of the company, particularly all financial affairs were situated only in Mauritius. We have also gone through the cases cited by the applicant and have noticed that decision of the apex court in Erin Estate (supra) and VVRNM Subbayya Chethiyar (supra) support the applicant s case. We further note that the Hon ble Supreme Court held in the case of CIT V. Nandlal Gandalal 40 ITR 1 (SC) that the expression .....

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