The Double Tax Avoidance Agreement between India and Mauritius
The Double Tax Avoidance Agreement ( herein referred as “DTAA”) entered into between India and Mauritius provides for potential tax exemption to the foreign investors because of which Mauritius is considered as one of the preferred route for making investments into India, which exempts capital gains tax arising on sale of shares of an Indian company.
The Indian Revenue have in the past questioned the eligibility of capital gains tax exemption under the Tax Treaty on the ground that the Mauritian Company has no real commercial substance and it has been merely set-up for Treaty Shopping.
This approach has resulted in significant long-drawn litigation in a number of cases involving investments in India through Mauritius. Article 13(4) of the DTAA provides that the profits made by a resident of a contracting state from the alienation of shares shall be taxable only in that state. Besides this the Central Board of Direct Taxes (CBDT), in Circular No.789 dated 13.04.2000, has clarified that under Article 13(4) of the DTAA, a resident of one state shall mean any person who is liable to tax under the laws of that state.
In one of such renowned judicial case, the Supreme Court of India after perusing the Treaty provisions and the CBDT Circulars No. 682 dated 30 March 1994 and 789 dated 13 April, 2000, upheld the position that Mauritius Company can claim the Tax Treaty benefits if it has obtained a ‘Tax Residency Certificate’ (‘TRC’) from the Mauritian tax authorities.
Based on the ruling of the Supreme Court, entities holding a valid TRC should be eligible to claim Treaty benefits. However, the debate is not yet settled down despite the Apex Court ruling and the tax authorities have been examining investments from Mauritius and have sought to deny the Treaty benefits under the pretext of Treaty Shopping.
Recently, the Authority for Advance Rulings (‘AAR’) has reaffirmed that capital gains on sale of Indian shares held by a Mauritius resident company are liable to be taxed only in Mauritius, in the case of D B Zwirn Mauritius Trading No. 2 Ltd (‘D B Zwirn’). The applicant in this case sold its entire stake in Quippo Telecom Infrastructure to another Mauritius based Company. The conclusion of the AAR was based on the Supreme Court decision in the case of Azadi Bachao Andolan.
The Honorable Supreme Court in the case of Azadi Bachao Andolan, has held that the certificate of residence issued by Mauritius Revenue Authority constitutes a valid and sufficient evidence of residential status under India - Mauritius DTAA. In the case of E Trade Mauritius, and the Delhi ITAT in the case of Saraswati Holding Corporation, held the view that the gains arising out of alienation of shares of an Indian Company to a company who is a resident of Mauritius is liable to tax only in Mauritius in terms of Article 13(4) of the DTAA.
The relevant provision under Article 13(4) of the DTAA between India and Mauritius is extracted as under:
“Article 13- Capital gains:
4. Gains derived by a resident of a Contract State from the alienation of any property other than those mentioned in paragraphs (1),(2) and (3) of this article shall be taxable only in that State.”
The CBDT in Circular No. 682 dated 30.03.1994 has further clarified that under the DTAA, a resident of Mauritius having income from alienation of shares of Indian company shall be liable to tax only in Mauritius. The relevant extract of the Circular No.682, dated 30th March, 1994 is as under:
“Subject: Agreement for avoidance of double taxation with Mauritius – Clarification regarding.
3. Paragraph 4 deals with taxation of capital gains arising from the alienation of any property other than those mentioned in the preceding paragraphs and gives the right of taxation of capital gains only to that State of which the person deriving the capital gains is a resident. In terms of paragraph 4, capital gains derived by a resident of Mauritius by alienation of shares of companies shall be taxable only in Mauritius according to Mauritius tax law. Therefore, any resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius as per Mauritius tax law and will not have any capital gains tax liability in India.
4. Paragraph 5 defines “alienation” to mean the sale, exchange transfer or relinquishment of the property or the extinguishment of any right in it or its compulsory acquisition under any law in force in India or in Mauritius.”
A further clarification was issued by the CBDT regarding taxation of income from capital gains under the India-Mauritius DTAA through Circular No.789, dated 13th April, 2000.
Now the issue that arises for consideration is that if we go by the Income Tax Act the profit arising from the transfer of shares of Indian company is chargeable to capital gains tax under the Income-tax Act. However, the position of taxability of capital gains is otherwise under the provisions of DTAA between India and Mauritius. Article 13(4) of the DTAA confers the power of taxation of the gains derived by a resident of a contracting state from the alienation of specified property only in the state of residence i.e. in Mauritius. The fact that the capital asset is located in India is immaterial. The tax payer is entitled in law to seek the benefit under the DTAA if the provision therein is more advantageous than the corresponding provision in the domestic law. This well settled principle has been re-stated by the Supreme Court in the case of Union of India vs. Azadi Bachao Andolan, cited supra, in the following passage:
“A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a double taxation avoidance agreement. When that happens, the provisions of such an agreement, with respect of cases to which where they apply, would operate even if inconsistent with the provisions of the Income-tax Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the Legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections “subject to the provisions” of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income- tax Act in the matter of ascertainment of chargeability to income-tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC.
As we have pointed out, Circular No.789 is a circular within the meaning of section 90; therefore, it must have the legal consequences contemplated by sub- section(2) of section 90. In other words, the circular shall prevail even if inconsistent with the provisions of the Income-tax Act, 1961, in so far as assessees covered by the provisions of the DTAC are concerned.”
On the scope and validity of the Circular, in Azadi Bachao Andolan case, cited supra, it is said as under:
“As early as on March 30, 1994, the Central Board of Direct Taxes had issued Circular No. 682 (see  207 ITR (St.7)) in which it had been emphasized that any resident of Mauritius deriving income from alienation of shares of an Indian company would be liable to capital gains tax only in Mauritius as per Mauritius tax law and would not have any capital gains tax liability in India. This Circular was a clear enunciation of the provisions contained in the DTAC, which would have overriding effect over the provisions of sections 4 and 5 of the Income-tax Act, 1961 by virtue of section 90(1) of the Act....”
The treaty with India, which had underpinned the emergence of Mauritius as the dominant channel for FDI into India, has been under attack from Indian tax authorities as a result of alleged abuses by Indian-resident investors. After a series of high-profile court hearings, the status quo appeared to have been restored. However, rumblings from the Indian authorities with regard to the alleged 'abuses' are still continuing in 2011 and 2012 and it was announced in June 20122 that discussions between the two countries to amend the treaty are to commence soon.
# Circular No.682, dated 30th March, 1994, Paragraph 5 defines “alienation” to mean the sale, exchange transfer or relinquishment of the property or the extinguishment of any right in it or its compulsory acquisition under any law in force in India or in Mauritius.
# 263 ITR 2706
# AAR No. 862 of 2009
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