Residency proof enough for Mauritius treaty benefit: HC

April 6, 2023 

The court also set aside the ruling of the Authority of Advance Rulings (AAR) that had denied the benefit under the DTAA and remanded a matter back to the authority to reconsider the plea of the taxpayer.

In a decision that is expected to provide more certainty to investors, the Bombay High Court has held that capital gains on investments made before April 1, 2017 are eligible for tax waiver under the India-Mauritius double taxation avoidance agreement (DTAA), if a valid tax residency certificate (TRC) was produced. The tax waiver is not available to investments made after the cut-off date, owing to treaty re-negotiated in May 2016.

The court also set aside the ruling of the Authority of Advance Rulings (AAR) that had denied the benefit under the DTAA and remanded a matter back to the authority to reconsider the plea of the taxpayer.

Experts welcomed the ruling and said it reiterates the settled principle that the TRC issued by other tax jurisdictions is sufficient evidence to show residence and beneficial interest or ownership. “The Delhi High Court had also pronounced a similar decision in 2022 in the Blackstone Capital Partners (Singapore) versus Assistant Commissioner of Income Tax,” PwC said in a recent report, adding that the Limitation of Benefits clause, under the protocol amending the DTAA, has been made effective for investments only from April 1, 2017, and investments effected prior to that would be grandfathered.

S Vasudevan, executive partner, Lakshmikumaran & Sridharan Attorneys, noted that the AAR ruling in 2020 had stirred up a hornet’s nest and had also given impetus to a fresh wave of enquiries by the tax department. “Hopefully, we are heading to the climax of this never-ending saga,” he said, adding that it also reinforces the law laid down by the Supreme Court in many cases.

The issue before the court was whether gains arising from the transaction from sale of shares would be liable to tax in India having regard to provision of Article 13(4) of the India-Mauritius DTAA. The Article states that gains from the sale or transfer of any property will only be taxable in the country of which the seller is a resident.

In a recent ruling, the Bombay High Court held that the AAR had failed to take enough notice of circular numbers 682 of 1994 and 789 of 2000 and the press release dated March 1, 2013 which clearly suggests that the TRC is sufficient evidence for accepting the residence and beneficial ownership for the purposes of the DTAA. It also took a note of the principles laid down by the Supreme Court in Azadi Bachao Andolan and Vodafone International Holding where it was held that the TRC would be conclusive evidence, if there is no fraud or illegal activity.

“In our view, the logic that petitioner was brought in for ease of doing business or for operational reasons and to provide supportive business environment appears to find favour with the aforesaid observations of the Hon’ble apex court,” said the Court.

The case pertains to Bid Services Division (Mauritius) that was incorporated in Mauritius on August 23, 2005, which was a wholly owned subsidiary of South Africa based Bid Services Division (Proprietory) and the ultimate holding company was also in South Africa — Bidvest Group Limited. The petitioner is holder of Category-I Global Business Licence issued by Mauritius as well as a valid TRC.

Airports Authority of India had issued an invitation to Register Expression of Interest in February, 2004 and GVK-SA consortium consisting of GVK Industries and SA Airport Operators (a joint venture include Bidvest Group) filed their EoI in July 2004 for both the Mumbai and Delhi airports. AAI had issued a request for proposal on April 2005.

Bidvest Group informed the AAI in September 2005 that it would hold 27% share capital of the joint venture company if the consortium was selected as the successful bidder. In the bid submitted in September 2005, the bid agreement also provided the option to change the consortium partner. The shareholding pattern of the consortium was also submitted where the taxpayer was shown as bidder and shareholder. Subsequently, the consortium (where the taxpayer was a member) was selected as the successful bidder for modernisation and development of Mumbai Airport. Subsequently, Mumbai International Airport was incorporated on 2 March 2006. The taxpayer’s investment of 27% in MIAL was made in five tranches between 2006 to 2012.

In March 2011, the taxpayer entered into a share purchase agreement to sell 13.5% of its stake to GVK Airport Holdings. On subsequent transfer of shares, the taxpayer had approached the AAR to determine the capital gains tax chargeability of the sale of shares transaction under the DTAA. The AAR through its order February 10, 2020, held that the taxpayer was incorporated only two weeks before the submission of the bid by the consortium, and neither had financial nor management capabilities, of its own.

It also held that the taxpayer was a shell company without any tangible assets, employees, office space and said there was no economic rationale or substance to claim benefits under DTAA. It held the transaction to be taxable and not eligible for the benefit of Article 13(4) of the DTAA. The petitioner then decided to file an appeal against the ruling.

[The Financial Express]