Background:
Armstrong World Industries Mauritius Multiconsult Ltd (Armstrong Mauritius) is a wholly owned subsidiary of Armstrong World Industries Limited United Kingdom (Armstrong UK). Armstrong UK in turn is a fully owned subsidiary of Armstrong USA. The Armstrong Mauritius was incorporated in Mauritius in the year 1999. It is a tax resident of Mauritius.
Armstrong World Industries India (Pvt.) Limited (Armstrong India) was incorporated in India in the year 1999 as a wholly owned subsidiary of Inarco Ltd., an Indian company. Inarco Limited was engaged in the business of production of textile machine parts and floorings. Armstrong UK, through the applicant, was holding 50% of the share capital in Inarco Limited. Pursuant to a scheme of amalgamation, approved by the High Court of Bombay, the flooring business of Inarco Limited was transferred to Armstrong-India. In consideration of that transfer of business, Inarco Limited was allotted 3,60,000 shares of the value of Rs. 10/- each in Armstrong India. Subsequently, Inarco Limited transferred to Armstrong Mauritius 36,00,000 shares of Rs. 10 each of Armstrong India. This resulted in Armstrong Mauritius holding 99.97% of the share capital of Armstrong India. The other 0.03% of the shares therein are held by Armstrong UK.
A diagrammatic representation of the existing structure is provided below:
Armstrong-India proposed to buy-back 90,025 shares from Armstrong Mauritius out of the 3,60,000 shares held by it, which would result a capital gains in the hands of the applicant. The applicant has sought ruling on whether such capital gains would be chargeable to tax in India.
Applicant’s contentions:
- The proposed buyback is for commercial reasons and it was a justified step
- Relying on Section 90(2) of the Act, it is entitled to claim the benefit of the India Mauritius Double Taxation Avoidance Convention (DTAC) between India and Mauritius and going by paragraph 4 of Article 13 of the said DTAC, the capital gains can be taxed only in Mauritius.
- Alternatively, the buyback was not a transfer for the purpose of section 45 of the Act since it was excluded from the operation of section 45 of the Act by section 47 (iv) of the Act.
Revenue’s contentions:
- The applicant had no other business, that it was a shell company created in Mauritius to acquire the shares in the Indian company, that the investment was made from USA or atleast from UK and hence the DTAC with one of those countries applied and hence the applicant could not claim the benefit of the India Mauritius DTAC merely relying on the Tax Residency Certificate.
- The whole scheme was one designed for non-payment of capital gains tax in India.
- With regard to applicability of section 47(iv), ruling rendered by this Authority In re RST (AAR No. 1067 of 2011) [2012] 19 taxmann.com 215 requires reconsideration. It held that the interpretation of section 47(iv) as taken in above case is not in consonance with legislative intent. It held that section 47(iv) has to be read as conferring benefit in following three situations:
(a) When parent company holds the whole of the share capital of its subsidiary;
(b) When nominee holds the whole of the share capital of its subsidiary; and
(c) When parent company and nominee together hold the whole of the share capital of its subsidiary.
HELD:
- The applicant was incorporated in Mauritius and the investment made through it for acquiring shares of the Indian company might be to take advantage of the Indian Mauritius DTAC. But that by itself is no ground to discard the claim of the applicant for benefit under the India Mauritius DTAC as laid down by the Supreme Court in UOI v. Azadi Bachao Andolan.
- Once it is held that the applicant is entitled to invoke the India Mauritius DTAC, then it is clear that Article 13 of the said DTAC is attracted and therefore, the capital gains could be taxed in Mauritius alone.
- Following the above ruling [In re RST (AAR No. 1067 of 2011)], it ruled in favour of revenue that the transaction of buy-back would not be exempt from tax under section 47(iv).
A.A.R. NO. 1044 OF 2011