India - Mauritius Treaty

When a subsidiary of a US company in Mauritius disposes of the shares held in an Indian company which Double Taxation Avoidance Agreement (DTAA) will be applied to ascertain the taxability of capital gains?

The Authority of Advance Rulings (AAR) negatived the contention of the Revenue that the US DTAA and not the Mauritius DTAA will be applicable. The AAR held that the facts that the source of funds for the purchase of shares is traceable to the US company or that the US company had played a role in suggesting or negotiating the sale or that the consideration received ultimately goes to the parent company in the form of dividends or the diminution of capital, do not lead to a legal inference that the US company in reality owned the shares and/ or the recipient of capital gains arising from transfer of shares is the US company but not the subsidiary. 

The fact that (i) the subsidiary has its own corporate personality and is a separate legal entity cannot be overlooked (ii) the holding company exercises acts of control over its subsidiary does not in the absence of compelling reasons dilute the separate legal identity of the subsidiary and that (iii) the attempted distinction between legal and beneficial ownership cannot be sustained on any reasonable basis. Consequently, the gains made by the Applicant were not chargeable to capital gains tax in India by virtue of the India-Mauritius DTAA.