The agreement on double tax evasion between India and Mauritius (i.e. “DTAA”) provides for a possible tax exemption for foreign investors, under which Mauritius is considered one of the preferred ways of investing in India, which exempts capital gains tax from the sale of shares of an Indian company. In the past, Indian revenues have called into question the granting of capital gains tax exemption under the tax treaty, on the grounds that the Mauritian company has no real commercial substance and was created solely for the purchase of contracts. This approach has resulted in lengthy and significant litigation in a number of cases where investments have been made in India through Mauritius. Article 13, paragraph 4, of the DBA provides that profits made by a resident of a contracting state as a result of the disposal of the shares are taxable only in that state. In addition, in some 789 of 13.04.2000, the Central Direct Taxes Council (CBDT) specified that under Article 13, paragraph 4 of the DBAA, each resident of a state designates any person taxable under the laws of that state. In one of these prestigious court proceedings, the Supreme Court of India confirmed, following the provisions of the Treaty and CIRCULARs CBDT No. 682 of 30 March 1994 and 789 of 13 April 2000, that it could benefit from the benefits of the tax contract if it had obtained a “Certificate of Residence” (TRC) from the Mauritian tax authorities. On the basis of the Supreme Court decision, organizations with a valid CRT should be entitled to contractual benefits. However, despite the Apex court ruling, the debate is not yet closed and the tax authorities have examined the investments in Mauritius and have tried to deny the benefits of the contract under the pretext of contract shopping. Recently, the Authority for Advance Rulings (`AAR`) confirmed that capital gains from the sale of Indian shares held by a Mauritius-based company could only be taxed in Mauritius, in the case of D B Zwirn Mauritius Trading No.
2 Ltd (herein: D B Zwirn). In this case, the applicant sold its entire interest in Quippo Telecom Infrastructure to another Company based in Mauritius. The AAR`s conclusion was based on the Supreme Court`s decision in the Azadi Bachao Andolan case. The Court of Honour in the Azadi Bachao Andolan case ruled that the certificate of residence issued by the Mauricie Revenue Authority constituted valid and sufficient proof of resident status in India -Mauritius DTAA. In the case of E Trade Mauritius and Delhi ITAT in the case of Saraswati Holding Corporation, the profits from the disposal of shares of an Indian company to a company established in Mauritius are taxable only in Mauritius, pursuant to Article 13, paragraph 4, A.D. The corresponding provision in Article 13, paragraph 4, of the DBAA between India and Mauritius is, as under “Article 13- Capital gains: 1………. 2. …………
3. …………… 4. Profits made by a resident of a contracting state as a result of the disposal of property other than those covered in paragraphs 1.2 and 3 are taxable only in that state.” CBDT, in Circular 682 of 30.03.1994, also specified that under the DBAA, a resident of Mauritius who has income from the disposal of indian corporate shares is taxable only in Mauritius. The corresponding excerpt from Circular 682 of 30 March 1994 reads: “Subject: Agreements to avoid double taxation with Mauritius – clarification with regard to. 1……. 2…. 3.
Paragraph 4 deals with the taxation of capital gains resulting from the disposal of assets other than those covered in the previous paragraphs and gives the right to tax capital income only on the state whose resident is the person who pays the capital gains.