Whether gains on the sale of equity shares and Compulsorily Convertible Debentures are exempt from income tax in India by virtue of DTAA with Mauritius? And whether gains arising on the sale of CCDs are interest within the meaning of Section 2(28A) of the Income Tax Act, 1961 and taxable under Article 11 of India-Mauritius DTAA?

Last updated: 09 August 2014

Court :
Delhi high Court

Brief :
Zaheer Mauritius - Petitioner Versus - Director of Income Tax - Respondent

Citation :
The petitioner is a company incorporated under the laws of Mauritius and is a tax resident of Mauritius, engaged in business of investment into Indian companies engaged in construction and development business in India. The petitioner entered into a Securities Subscription Agreement and a Shareholder’s Agreementwith Vatika Ltd an Indian Company and the JV Company whichprovided for a call and put option of equity shares and CCDs.Vatika partly exercised the call option and purchased equity shares and CCDs from the petitioner.The petitioner filed an application under Section 197 of the Act before the Income Tax Officer requesting for a ‘nil’ withholding tax certificate to receive the total consideration from Vatika for transfer of equity shares and CCDs without deduction of tax. The ITO held that the entire gain on the transfer of equity shares and CCDs would be treated as interest and tax at the rate of 20% should be withheld.Petitioner filed an application before the AAR for advance ruling which held that it is taxable. Delhi High Court held that as per facts of the case, gains on the sale of equity shares and CCDs are exempt by virtue of DTAA with Mauritius.