Rajendra Nayak		Ganesh Pai

The Delhi Income-tax Appellate Tribunal (ITAT) has recently, in the case of Saraswati Holding Corporation (2009-TIOL-529-ITAT-DEL), adjudicated on the issue pertaining to the eligibility of the taxpayer, to claim the benefit of the capital gains tax provision under the India-Mauritius tax treaty.

The taxpayer in the case is a company incorporated in Mauritius that was granted a tax residency certificate (TRC) by the Mauritius tax authorities.

It was incorporated with the purpose of carrying on the business of dealing and making investments in shares and securities in India. Pursuant to this, the taxpayer derived income in the form of capital gains, which was disputed as income chargeable in India by the Indian Revenue authorities. Under the capital gains article of the treaty, the right to tax gains arising on the sale of shares is given exclusively to the state of residence of the alienator.

The Indian Revenue contended that the taxpayer is a resident of both India and

Mauritius, and since its place of effective management is situated in India, it should be regarded as a resident in India and be subject to capital gains tax in India. The taxpayer however, placed reliance on a beneficial administrative circular and the decision of the Supreme Court in the case of Azadi Bachao Andolan vs. Union of India (263 ITR 706), to support its claim.

The supreme court in the Azadi Bachao Andolan case, upholding the validity of a departmental circular, held that a TRC issued by Mauritius would be sufficient proof for a Mauritius company to be regarded as a resident of Mauritius and claim the benefits of the treaty. The taxpayer also submitted that the company is not effectively managed from India, as its directors and shareholders are not based in India.

Sustaining the taxpayer's contentions, the ITAT held that as the present case is squarely covered by the supreme court decision, capital gains arising to a taxpayer, which is incorporated in Mauritius and which holds a TRC of Mauritius, will not be taxable in India.

Rajendra Nayak (rajendra.nayak@in.ey.com) & Ganesh Pai (ganesh.pai@in.ey.com)