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Mahindra-BT Investment Company (Mauritius) Limited - (Authority for Advance Rulings) (08 Aug 2016)

Applicant is not chargeable to capital gains tax in India as control and management of affairs of company, particularly all financial affairs were situated only in Mauritius


Direct Taxation

Applicant had acquired 9,931,638 shares (representing about 8.12% – holding) in Tech Mahindra Limited, India (“TML”) which is listed on Bombay stock exchange and National Stock Exchange in India. AT&T International, Inc. (“AT&T”), earlier known as SBC International Inc., TML, Mahindra & Mahindra Limited (”M&M”), British Telecommunications plc (“BT”) and Applicant entered into an Option Agreement. Pursuant to Option Agreement, AT&T was given an option to purchase up to 9,931,638 equity shares of TML held by applicant on achieving certain milestones stipulated in Option Agreement. AT&T achieved milestones and decided to exercise options. Applicant consequently transferred 98,70,912 shares of TML to AT&T at USD 3,5022 per share on 22nd March 2010 and realized long-term capital gain. This gave rise to issue of taxability of gains because Applicant has transferred shares to AT&T.

In order to motivate AT & T to give business to TML, it was agreed commercially between TML and AT & T that, latter would be offered an opportunity to become a shareholder of TML only when AT & T had given a certain level of business to TML for which certain milestones were set. It was only after such milestones were achieved that, option was exercised. There was nothing unusual or abnormal about such conditions in Option Agreement. Article 4(3) of DTAA provides that a resident of both contracting states shall be deemed to be resident of contracting state in which its place of effective management is situated. As per Section 6(3) of Income-tax Act, a foreign company can be a resident in India only if during the year, control and management of its affairs is situated wholly in India.

Minutes of proceedings of Board meetings held in Mauritius relating to buyback of shares, final closing for sale of shares held in TML, appointment of KPMG India Private Limited as tax advisor, approval of financial statements, dividend declaration and distribution etc. Board of Directors included representatives of BT Holdings Limited, a UK company, holdings 43% of shares. These Board meetings and nature of decisions taken in such meetings clearly indicate that, control and management of affairs of company, particularly all financial affairs were situated only in Mauritius.

Supreme Court held in case of CIT V. Nandlal Gandalal that, expression ‘control and management’ means de facto control and management and not merely right or power to control and manage. In case of VVRNM Subbayya Chethiyar also Apex court held that the word ‘affairs’ must mean affairs which are relevant for purpose of Income-tax Act and which have some relation to income. On basis of facts mentioned above, it cannot be said that, control and management of affairs of Applicant company were wholly situated in India. Department of Revenue had not given any substantial evidence to show that any important affairs of Company relevant for purpose of Income-tax Act were being controlled from India. There was nothing wrong in Applicant holding shares and transferring same at a later stage as per options agreement and on fulfillment of conditions by AT & T as per agreement. Therefore, Applicant is not chargeable to capital gains tax in India under Article 13 (4) of India-Mauritius Treaty.


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