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India: Bombay High Court upholds availability of benefits under the India-Mauritius tax treaty

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Bombay High Court upholds availability of benefits

In a recent decision of the Bombay High Court, the availability of the capital gains exemption in India under the India-Mauritius tax treaty was upheld.

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Rakesh Dharawat

Hariharan Gangadharan,

In a recent decision of the Bombay High Court, the availability of the capital gains exemption in India under the India-Mauritius tax treaty was upheld.

The gains arose from a transaction that was concluded in 2009 (i.e. before the 2016 protocol that eliminated the capital gains exemption). The taxpayer had approached the Authority for Advance Rulings (AAR) for a ruling on the taxability of the gains in India, and obtained a ruling that the gains were not taxable in view of the exemption under the India-Mauritius treaty.

The ruling of the AAR was challenged by the commissioner before the Bombay High Court on the ground that the Mauritius taxpayer was a shell company, and allowing it to avail of treaty benefits would amount to justifying treaty shopping. In support of this contention, the following arguments were highlighted:

  • The Mauritius transferor had never nominated anyone on the board of the Indian company;

  • The beneficial owner of the Indian company was not the Mauritius transferor but the ultimate Bermuda parent company;

  • The Mauritius transferor did not incur any utility expenditure or staff salaries; and

  • Income and expenses shown in the financial statement of the Mauritius transferor apart from profit arising on sale of shares of the Indian company consisted only of interest paid/received from group companies.

The Bombay High Court, however, felt that on facts, the bona fides of the taxpayer could not be assailed. Specifically, the fact that the Mauritius taxpayer had held on to the shares of the Indian company for more than 13 years was relied upon by the court. Despite challenges from the tax authorities, this decision joins a long line of Indian judicial pronouncements where the availability of benefits under the India-Mauritius treaty has been upheld.

Stay of tax demand when an appeal is pending before first appellate authority

In February 2016, the Central Board of Direct Taxes (CBDT) made it mandatory for the tax authorities to grant a stay of tax demands during the pendency of the first appeal, as long as the taxpayer paid 15% of the disputed demand. In July 2017, the CBDT revised this amount from 15% to 20%.

India-Mauritius treaty not included in the list of covered tax agreements for the MLI

On July 5 2017, Mauritius signed the Multilateral Instrument (MLI). However, Mauritius did not notify its tax treaty with India as a covered agreement in its tentative list. Accordingly, the current tax treaty between India and Mauritius will not be affected by the MLI.

However, Mauritius has reiterated its commitment to implementing the BEPS minimum standards into its entire tax treaty network by the end of 2018 and has committed to modify its remaining treaties through bilateral negotiations.

Rakesh Dharawat (rakesh.dharawat@dhruvaadvisors.com) and Hariharan Gangadharan (hariharan.gangadharan@dhruvaadvisors.com)

Dhruva Advisors

Tel: +91 22 6108 1000

Website: www.dhruvaadvisors.com

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