India tax: Tribunal rules on benefits under Mauritius treaty

The Delhi Tribunal ruled on 10 July 2009, in the case of DDIT v. M/s Saraswati Holding Corporation Inc., that a taxpayer would be entitled to the benefits of the India-Mauritius tax treaty provided the taxpayer holds a valid tax residence certificate (see also article in this issue discussing the impact of the new draft Direct Taxes Code on India's tax treaties).

Treaty benefits are available to persons who are resident of India or Mauritius. Accordingly, the taxpayer claimed that capital gains derived from the sale of investments were not taxable in India because the taxpayer is a Mauritius-incorporated company and possesses a valid tax residence certificate. Article 13 of the treaty provides that gains derived by a resident of Mauritius from the sale of shares of an Indian company are exempt from tax in India and are taxable only in Mauritius (which does not levy tax on capital gains).


Facts of the case

The taxpayer was engaged in the business of making investments in shares and securities. The taxpayer sold certain shares in the Indian capital markets and derived both short and long-term capital gains on the sale. The taxpayer filed its return of income and claimed the exemption from capital gains tax in India under article 13(4) of the treaty and on the basis of its tax residence certificate issued by Mauritius authorities.

The taxpayer also relied on two circulars issued by the Indian Central Board of Direct Taxes (CBDT) in the context of the tax treatment of capital gains under the India-Mauritius treaty. Circular No. 682, issued in 1994, clarified that a resident of Mauritius deriving income from the alienation of shares of an Indian company will be liable to capital gains tax only in Mauritius and will not have any capital gains tax liability in India. Circular No. 789, issued in 2000, clarified that a certificate of residence issued by the Mauritius tax authorities will constitute sufficient evidence for accepting residence status, as well as beneficial ownership, for purposes of applying the treaty.

The Indian tax authorities intended to deny treaty benefits to the taxpayer on the grounds that its effective management and control was exercised in India. The authorities placed reliance on the Delhi High Court decision in Shiva Kant Jha v. Azadi Bachao Andolan, which quashed Circular No. 789 because the circular was outside the scope of the provisions in the Indian tax law. The authorities also relied on a circular issued in 2003, Circular No. 1, which provides that where a person is a resident both of India and Mauritius, it can be treated as a resident of India if the effective management is in India. On this basis, the tax authorities contended that the taxpayer would be liable to capital gains tax in India.

The taxpayer refuted the tax authorities' management and control argument by noting that the Tribunal had ruled in 2008 in another case involving the taxpayer that its control and management was not wholly in India because investment decisions were taken only by directors who were resident in Mauritius or the U.S. Therefore, the taxpayer's directors were not based in India and accordingly it was not effectively managed from India.

Further, the taxpayer pointed out that the Delhi High Court's ruling in Shiva Kant Jha was reversed by the Indian Supreme Court in UOI v. Azadi Bachao Andolan. The Supreme Court upheld the validity of the above circulars and confirmed that residents of Mauritius would not be liable to tax in respect of capital gains derived in India. The court also held that an attempt by a resident of a third country to take advantage of the provisions of the treaty is not illegal and that the CBDT circulars are binding on the tax authorities.


Decision

The Tribunal concluded that the taxpayer was not liable to capital gains tax in India and reaffirmed the principle laid down by the Indian Supreme Court in Azadi Bachao Andolan that a taxpayer can claim the benefits of the treaty on the basis of a valid tax residence certificate.