In the past, there has been a lot of litigation in India on whether the Mauritius treaty benefit is available investors from different countries (generally United States, United Kingdom, etc.) making investments in India through a Mauritius holding company or a Special Purpose Vehicle. In this article, we have tried to summarize the important judicial trends on the controversies revolving around India-Mauritius Treaty:
I. CBDT Circulars
A. Circular 682, dated March 30, 1994
Capital gains derived by a Mauritius resident by alienation of shares of companies shall be taxable only in Mauritius according to Mauritius tax law and will not have any capital gains tax liability in India
B. Circular 789, dated April 14, 2000
A certificate of residence issued by the Mauritius tax authorities would constitute sufficient evidence for accepting the status of residence, as well as beneficial ownership, for applying the provisions of the DTAA accordingly
C. The Finance Ministry issued a clarification vide press release dated 01-03-2013 stating that TRC produced by a resident of a contracting state will be accepted as evidence that he is resident of that state and the Indian Income tax authorities will not go behind the TRC and question his resident status
II. Supreme Court ruling in case of Azadi Bachao Andolan (263 ITR 706)
The Hon'ble SC in case of Azadi Bachao Andolan (supra) upheld the validity of circular 789 dtd 14 April 2000 and held as under:
- Section 90 of the Act enables and empowers the Central Government to issue notifications for implementation of the terms of a DTAA.
- Even if it accepted, that the powers exercised by the Central Government under Section 90 of the Act are delegated powers of legislation, there is no reason why a delegatee of legislative power in all cases does not have power to grant exemption.
- Interpretation given to Section 90 of the Act, a Central Act, by several High Courts without dissent has been uniformly followed, several transactions have been entered into based upon the said exposition of the law, several tax treaties have been entered into with different foreign Governments based upon this law, hence, the doctrine of "Stare Decisis" (consistency) should be applied. Hence, Circular No. 789 is rightfully a 'circular' within the meaning of Section 90 of the Act.
III. Key rulings on availability of Mauritius and other treaty benefit
1. Serco BPO Private Ltd (379 ITR 256)(2015) (Punjab & Haryana High Court)
- Serco BPO contemplated to acquire shares of SKR BPO (Indian Company) from Barclays and Blackstone Mauritius (Mauritius Company)
- Sought ruling from AAR on withholding tax on capital gains.
- AAR declined to give a ruling on the basis that the transaction was designed for avoidance of tax.
- Serco BPO filed writ petition before Punjab & Haryana High Court
- Rejected AAR observation that it was a prima facie case of the transaction/arrangement being designed for avoidance of income tax in India
- Dismissed that the real beneficiaries do not actually reside/carry on business in Mauritius & that it is a clear case of 'treaty shopping
- CBDT Circular no. 789 clarifies that 'Certificates of Residence' issued constitute sufficient evidence for accepting the status of residence
- Relying on Apex Court verdict in Azadi Bachao Andolan on the issue of "treaty shopping", held that entering into a treaty and terms and conditions are sovereign functions and hence such decisions must be left to the policy makers who are best equipped
- Reversed AAR ruling & held no capital gain tax payable in India.
2. JSH Mauritius (297 CTR 275)(2017)(Bombay High Court)
- Taxpayer incorporated in Mauritius, is engaged in the business of investment and financing activities. Taxpayer invested in shares of Tata Industries Limited ('TIL') in June 1996 after obtaining Government approval.
- Taxpayer transferred these shares to Tata Sons Limited ('TSL') in June 2009 and the entire sale proceeds were invested in another Tata group Company (Tata Power Limited) in July 2009.
- Revenue took stand that Taxpayer was a shell Company and capital gain arising in this transaction was taxable in India. AAR rejected Revenue's stand and held that Taxpayer was eligible for India-Mauritius Treaty benefit and Capital gain arising to taxpayer was not taxable in India.
- Aggrieved, Revenue filed present Writ Petition before Bombay HC. Bombay HC while dismissing the Writ, held as under:
- The HC held that it would not act as an appellate authority unless the AAR's appreciation of facts and findings were perverse or if the provisions of law were incorrectly construed. The HC concluded that the AAR had considered all relevant aspects of the matter in arriving at a just conclusion and that the Treaty had also been rightly interpreted.
- The HC noted that the long period of holding TIL shares and reinvesting the proceeds in another Indian company suggested the bona fide of the Taxpayer. It further held that since the AAR did not rule that the Taxpayer is a 'fly-by-night' company, alleging prima facie tax avoidance at a later stage was unwarranted.
3. Aditya Birla Nuvo Ltd (342 ITR 308) (2011) (Bombay High Court)
- Aditya Birla Nuvo Ltd, an Indian company ("ABNL") would acquire shares of Idea from AT&T Mauritius. After this, Tata Industries Ltd ("TIL") would, acquire entire shareholding of AT&T Mauritius from New Singular Wireless Services Inc ("NCWS")
- JVA allowed shares in Idea to be held by AT&T-US and Birla group either in their own name or through a 'permitted transferee', who would be 100% subsidiary of the JV partners
- Rights and obligations in Idea shares to vest with JV partners
- AT&T Mauritius held the shares of Idea as permitted transferee
- ABNL obtained a nil withholding tax order for the above transaction from the Assessing Officer (AO)
- Later, in the case of transfer by NCWS, AO issued notice to tax ABNL in the view that NCWS is the beneficial owner of Idea shares and not AT&T Mauritius. Notice also issued to TIL as an assesse-in-default for failure to withhold taxes
- Writ petition filed by ABNL against the notice before Bombay High Court
- Shares in Idea allotted to AT&T Mauritius as a permitted transferee of NCWS under the terms of JVA and the SA. AT&T Mauritius has no rights in the shares of Idea
- HC disregarded the nil withholding certificate on the basis that present facts of case have been suppressed, further allowed parallel assessments of ABNL and NCWS
- The Bombay High Court held that capital gains arising from the sale of shares in Idea by its Mauritius shareholder AT&T Mauritius are not protected by the India-Mauritius DTAA. Also held that these gains can be assessed in the hands of ABNL and TIL as representative assesses of NCWS
- We believe, against this order, ABNL has filed SLP in the Supreme Court.
4. Sanofi Pasteur Holding SA (354 ITR 316) (2013) (Andhra Pradesh High Court)
- Merieux Alliance, France and Groupe Industriel Marcel Dassault, France ("the taxpayers") owned shares of ShanH, which in turn held shares in Shantha (Indian Company)
- The taxpayers transferred the shares of ShanH to Sanofi Pasteur Holding SA ("Sanofi"), a French resident third-party buyer
- AAR held the sale to be taxable in India under the Act as well as under the India-France DTAA
- The AP High Court overruled the order of the AAR and held that ShanH has commercial substance as it was incorporated to serve as an investment vehicle, i.e. foreign direct investment in India by investing in Shantha
IV. Other decisions of AAR on Mauritius treaty benefit are as under:
Once residency of Mauritius Company has been established, the gains arising from transfer of shares of an Indian Company would not be taxable in India, which is also supported by the following judicial precedents
- D.B. Zwirn Mauritius Trading (AAR No. 878 and 879 of 2010) (2011)
- E*Trade Mauritius Ltd. (AAR No. 826 of 2009) (2010)
- Praxair Pacific Limited (AAR/ 855/ 2009) (2010)
- DLJMB Mauritius Investment Company vs. CIT (228 ITR 268) (1997)
- Ardex Investments Mauritius Ltd., In Re (AAR No.866 of 2010) (2011)
- Dow Agro Sciences Agricultural Products Ltd (AAR No. 1123 of 2011) (2016)
- Mahindra Investment Company (Mauritius) Ltd (AAR No. 991 of 2010) (2012)
- Shinsei Investment Limited (AAR No. 1017 of 2010) (2016)
V. Recent AAR rulings
5. Recently the AAR has given a positive ruling in case of AB Holdings Mauritius II (AAR No.1129/2011), and has reaffirmed the view taken by various courts, wherein it was held that once residency of Mauritius Company has been established, the gains arising from transfer of shares of an Indian Company would not be taxable in India.
Contrary to the above, in another case of AB Mauritius (AAR No.1128/2011), AAR in peculiar facts, has not given the benefit of India – Mauritius to the Applicant and held that the proposed transaction of acquisition of shares was colourable devise and an impermissible tax avoidance arrangement for deriving treaty benefit.
We understand that many important issues/points raised before the AAR, have not been considered by the AAR. Also, we understand that the said ruling has been challenged before the High Court.
VI. Amendments to India-Mauritius Treaty
After prolonged negotiations, India and Mauritius have agreed to revise the tax treaty. W.e.f 10th May 2016, the amended Article 13 on Capital Gains on acquisition and sale of shares for the India Mauritius Treaty is as under:
Acquisition of shares prior to 1st April 2017
- As per Article 13(4) of the India-Mauritius DTAA, capital gains on sale of shares of Indian company is taxable only in Mauritius. In other words, the capital gains are not taxable in India.
- Capital gains on sale of investment made before 1 April 2017 have been grandfathered and will not be subject to capital gains taxation in India (Press Release issued by the Ministry of Finance dated 10 May 2016)
Acquisition of shares post 1st April 2017
- Capital gains on sale of shares acquired on/after 1 April 2017 and transferred prior to 31 March 2019, taxed at 50% of applicable rates subject to Limitation of Benefit (LOB) clause below:
- Mauritius Company not to be a shell/ conduit company
- A company is not shell/conduit company if
?• Listed in recognized stock exchange in Mauritius, or
- Expenditure '>' or '=' MUR 1.5m or INR 2.7m for immediately preceding 12 months from the date of gain
- Post 1 April 2019, taxable at full rate (as applicable)
The revised treaty also provided for the limitation of benefits with an aim to make available treaty benefits only to those companies that have substance in Mauritius and not to sham transactions.
VII. Key points arising out of various decisions:
These rulings/decisions once again lay emphasis on the fact that place of decision making and authority of board is an important aspect to claim tax treaty benefit and merely obtaining a tax residency certificate may not be sufficient. The tax treaty benefit has been denied where it is established that the taxpayer has structured the transaction with sole view to take advantage of treaty provisions.
India has recently introduced General Anti-Avoidance Rules (GAAR) which are applicable from 1 April 2017 with grandfathering provisions up to 31 March 2017. GAAR confers additional powers to the Indian Revenue Authorities to examine these kinds of structures and verify the substance of form test. It also vests vast powers to the Indian tax authorities.