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Capital Gains Tax: India-Mauritius Tax Treaty

20 Jul 2011

The Supreme Court in the case of Azadi Bachao Andolan had laid out that pursuant to the Tax Treaty between India and Mauritius, and administrative circulars issued clarifying the test for Mauritius tax residency for the purpose of securing Treaty benefits, specifically in context of income from capital gains, as long as a Mauritius entity held a valid tax residency certificate, it was eligible for Treaty benefits, ie exemption from tax in India on any gains arising from the transfer of shares held in an Indian entity. Taxand India looks at a recent ruling from the Bombay High Court that supersedes this judgement.

The decision of the Bombay High Court seems to suggest that capital gains tax
benefit under the India-Mauritius tax treaty is not an open and shut case and is subsequent to the Supreme Court ruling.

For the full article, and facts of the case, please click here.

Taxand's Take

At first brush the ruling would suggest that the taxpayers could not succeed due to the construct of the JVA and SHA, and that the Supreme Court ruling in the case of Azadi Bachao Andolan appears to be appropriately distinguished.

A closer reading indicates otherwise. Even in absence of JVAs and SHAs, or even if these are executed by a Mauritius entity itself, it would be difficult to walk away from a conclusion that a Mauritius holding / investment entity ultimately operates and exercises control on its Indian shareholding under the direction, and for the ultimate benefit, of its non-Mauritius parent. If that be so, this judgment provides a basis for the Revenue to 'distinguish' the Supreme Court ruling and generally seek to tax gains accruing to Mauritius investment vehicles.

The onus now seems to be placed on the tax payer for obtaining withholding orders, in connection with the level and nature of information / disclosure / documentation to be submitted. Where tax payers normally expected that their obligation on tax liability in respect of income of the non-resident would get extinguished on payment of appropriate Revenue directed withholding tax, the same cannot be necessarily expected going forward.

All in all, though the observations of the Court are in respect of a writ jurisdiction, and this is not a final ruling on merits, they will have a significant impact on how the Revenue now proceeds on similar matters. This is a significant set-back for tax payers in general.

Your Taxand contacts for further queries are:
Frank D'souza
T. +91 124 339 5010

Jignesh Shah
T. +91 124 339 5010

Gaurav Tijoriwalla
T. +91 124 339 5010

Taxand's Take Author