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Rejecting "treaty shopping" claims, India's High Court of Punjab and Haryana has ruled that India should not tax capital gains from the sale by Mauritian entities of shares held in an Indian company if they are proven resident in Mauritius.
The ruling was given in Serco BPO Private Limited v. Authority for Advance Rulings (Civil Writ Petition No. 11037 of 2014).
The case related to the sale of the shares of an Indian entity, Serco BPO Private Limited (SBPL), by two Mauritian-resident entities, namely Barclays (H&B) Mauritius Limited and Blackstone GPV Capital Partners (Mauritius) VB Limited.
SBPL argued that the sellers, being in possession of a Tax Residency Certificate (TRC) from the Mauritian Government, should not be liable to capital gains tax in India in view of Article 13(4) of the India-Mauritius tax treaty. Consequently, there should be no withholding tax at source under Section 195 of the Income Tax Act, 1961, it said.
Article 13(4) provides that the gains derived by a resident of a Contracting State from the alienation of any "property" shall be taxable only in that State. The word "property" includes shares in a company incorporated under the Companies Act, 1956.
The tax authority contended that the real beneficiaries of the transaction do not actually reside and carry on business for gain in Mauritius and therefore the entire transaction was nothing but a device for taking advantage of the tax treaty. The tax authority added that the TRC issued in favor of the two overseas entities was irrelevant.
The Court ruled that the TRC issued by the Mauritian authorities in favor of the Mauritian companies established that they are residents of Mauritius within the meaning of Article 1 of the tax treaty. The Court also rejected the tax authority's claim that the transaction through Mauritius amounted to treaty shopping.
In arriving at its conclusions, the Court relied on circulars 682 and 789 issued by the Central Board of Direct Taxes (CBDT) and a 2004 decision of the Indian Supreme Court in Union of India v. Azadi Bachao Andolan ((2004) 10 SCC 1).
In particular, clause 2 of the CBDT Circular No. 789 clarified that TRCs issued by the Mauritius authorities constitute sufficient evidence for accepting the status of residence as well as the beneficial ownership for applying the relevant provisions of the tax treaty.
The Court said: "A refusal to accept the validity of a certificate issued by the contracting States would be contrary to the convention and constitute an erosion of the faith and trust reposed by the contracting States in each other. It is for the Government of India to decide whether or not such a certificate ought to be accepted."
The Court ruled: "The entire sequence of events, namely, the Finance Bill, 2013; the clarification issued by the Finance Ministry regarding the TRC dated March 1, 2013; and the Finance Act, 2013 establish beyond doubt that the TRC issued by the Mauritius authorities must be accepted, provided of course it is established that it has been issued by the appropriate Mauritius authorities. As we mentioned earlier it is not disputed that the TRCs… were issued by the Mauritius authorities."
The Court reiterated observations made by the Supreme Court in Azadi Bachao Andolan, that "many developed countries tolerate or encourage treaty shopping, even if it is unintended, improper, or unjustified, for other non-tax reasons unless it leads to a significant loss of tax revenues. Several countries allow use of their treaty network to attract foreign enterprises and offshore activities. In developed countries, treaty shopping is often regarded as a tax incentive to attract scarce foreign capital or technology. The countries take a holistic view keeping in mind the fiscal necessity and political compulsions."
The Court continued: "The Supreme Court observed that it could not judge the legality of treating shopping merely because one section of thought considers it improper. We would only add that entering into a treaty and terms and conditions thereof are the sovereign functions involving important aspects of policy. Such decisions must be left to the policy makers who are best equipped and have been entrusted with the responsibility of negotiating the treaty to the greatest advantage and good of the country."
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