Sale of a Capital Asset to a non-resident, even though the capital asset is situated in India, would be taxable in the other state: AAR

D.B.Zwirn Mauritius Trading v. Director of Income-tax, decided on 28^th March, 2011

AAR NO. 878 OF 2010

Assessment Year: 2009-10

Relevant Facts:

1. 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.

2. 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.

3. 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.

4. The applicant realized capital gain of Rs.2,98,67,010.

Questions for consideration:

1. 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?

2. 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?

3. 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.

Upholding the application of the assessee, the Hon’ble Authority held that:

Para 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.”

The decision is available here.