AAR Re-Characterizes Capital Gains from Sale of Equity Shares, Denies Exemption Under India-Mauritius Tax Treaty

Whether gains arising to the applicant on sale of shares and CCDs of Indian Company are exempt from capital gains tax in India under Article 13(4) of the India-Mauritius tax treaty. The AAR has held that the income from sale of CCDs by the applicant is taxable in India as ‘Interest' under Section 2(28A) of the Act and Article 11 of the tax treaty. However, as far as equity shares are concerned, the AAR held that the capital gains exemption on sale of equity shares is not available under India-Mauritius tax treaty. To deny such benefit, the AAR has treated the Indian holding and subsidiary as one and the same and treated the entire transaction as sham. However, the AAR did not rule that the equity shares are to be treated as debt. Also, the AAR did not rule that equity shares should be clubbed with the debt transaction to tax it as interest. The AAR has disregarded the corporate form of an Indian subsidiary company as an independent juridical person to treat the parent and subsidiary company as one and the same. It is pertinent to note that Supreme Court in the case of Vodafone had held that the corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colorable or artificial device