29 January 2016
Global Tax Alert
India private ruling
authority holds
transfer of Indian
subsidiary shares is
not a tax avoidance
transaction
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Executive summary
In Dow AgroSciences Agricultural Products Ltd. (Applicant),1 India’s private
ruling authority held that the transfer of Indian company (Ind Co) shares from its
Mauritian parent company to a Singaporean group entity (Sing Co) pursuant to
a reorganization plan was not a tax avoidance transaction, based on the holding
period of the shares and the reorganization objective of the group structure.
Accordingly, it was held that capital gains on the transfer would be exempt from
Indian tax under Article 13(4) of the India-Mauritius Income Tax Treaty (Treaty).
Detailed discussion
Background
The Applicant is a member of a large multinational enterprise group (Group)
and a tax resident in Mauritius. The Applicant held 99.99% of the Ind Co shares
which were acquired in various tranches over a 10-year period from 1995
to 2005. Under the Group’s geographical locations, the Applicant and Ind Co
belonged to the European region and the India, Middle East and Africa (IMEA)
region, respectively. However, in 2010, the IMEA region entities were realigned
with other regions, and Ind Co became a part of the Asia-Pacific region. To
achieve the objective of operational excellence, better control and administrative
convenience, it was proposed that the Applicant contribute the Ind Co shares to
Sing Co, a member of the Group.
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Global Tax Alert
The private ruling was issued to determine whether:
•The share transfer was a scheme to avoid Indian taxes.
•The Applicant had a permanent establishment (PE) in India.
•Income arising from the share transfer was taxable in India.
The private ruling authority ruled in favor of the Applicant on
all the issues as set forth below.
The arrangement was not a tax avoidance
transaction
•The first share acquisition was made approximately 20 years
ago for a substantial cost; accordingly, such acquisition
cannot amount to a scheme to avoid Indian taxes.
•Since the Applicant has been operating in Mauritius for more
than 10 years, it cannot be regarded as a shell company.
•The Applicant obtained the pre-approval from Indian
government authorities for investment purposes.
•The proposed transaction was for a sound business
consideration since the need for realignment of the Group
arose due to the 2010 realignment of the IMEA group.
•Setting up a Mauritius company to potentially invoke
benefits under the Treaty will not itself make it a tax
avoidance arrangement.
There was no PE in India
•The Applicant neither had an office, employees, agents
nor any activities in India. Further nothing on record to
demonstrate that the Applicant had a PE in India.
Transfer of Ind Co shares is not taxable in India
•The transaction is not a deceptive device to avoid taxes in
India.
•The shares of Ind Co were held for a very long period of
time covering 10 to 20 years. The objective of acquiring Ind
Co shares was to hold them as investments. Accordingly,
the shares were classified as capital assets, and as a
consequence, gains from the share transfer would result
in capital gains.
•Article 13(4) of the Treaty provides exclusive resident
country taxation on gains arising from the alienation of
property in India other than specifically stated in the Treaty.
Since the Applicant has no PE in India, the Applicant’s
share disposition should be taxable only in Mauritius.
•The Indian tax authority’s contention that Ind Co was to
be treated as a PE of the Applicant’s US parent company
and, therefore, the gains on the transfer should be treated
as taxable in the hands of Applicant’s US parent under
Article 13(2) has no legal ground.
Other matters
•In absence of a PE in India, Minimum Alternate Tax
provisions do not apply to the Applicant.
•As the transfer of Ind Co’s shares is not taxable in India,
neither transfer pricing nor withholding tax provisions are
applicable.
•The Applicant was not required to file a return of income in
the absence of any taxable income.
Implications
The ruling reiterates that as long as strong commercial
reasons exist for undertaking a transaction, it cannot be
questioned merely on the ground that the investment is
routed through a favorable treaty jurisdiction. It also gives
insights on relevant factors to be considered in justifying
substance in a share transfer arrangement. The ruling
further clarifies that in absence of taxable income, the
transfer pricing and withholding provisions do not apply.
Interestingly, the ruling authority has differentiated its earlier
ruling in the case of Castleton Investments2 and held that in
the absence of any liability to tax, there is also no tax return
filing obligation in India.
Endnotes
1.TS-15-AAR-2016.
2.In Castleton investment (AAR No. 999 of 2010), the authority held that the obligation to file return of income does not
disappear merely because a person is entitled to claim the benefits of a DTAA.
Global Tax Alert
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (India), Mumbai
• Sudhir Kapadia
+91 22 6192 0900
Ernst & Young LLP (India), Hyderabad
• Jayesh Sanghvi
+91 40 6736 2078
Ernst & Young LLP, Indian Tax Desk, New York
• Riad Joseph
• Amit Gouri
• Sameep Uchil
+1 212 773 4496
+1 212 773 7096
+1 212 773 4862
Ernst & Young LLP, Indian Tax Desk, San Jose
• Neeraj Khubchandani
+1 408 947 5600
Ernst & Young LLP, Indian Tax Desk, Chicago
• Romit Patel
+1 312 879 2526
Ernst & Young LLP, Asia Pacific Business Group, New York
• Chris Finnerty
• Kaz Parsch
• Bee-Khun Yap
+1 212 773 7479
+1 212 773 7201
+1 212 773 1816
Ernst & Young Asia Pacific Business Group, Houston
• Trang Scott +1 713 751 5775 [email protected]
[email protected]
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