Mauritius treaty residence and allocation of taxing rights shape exemption for interest, capital gains, and residual income.

For treaty purposes, a company incorporated in Mauritius was treated as resident in Mauritius where its effective management, board meetings, records, banking and compliance were centred there, and foreign investor links did not defeat treaty entitlement. Interest from approved debt transactions was exempt in India only where the underlying transaction had specific governmental approval and only to the extent allowed by Indian tax law. Capital gains on transfer of shares in Indian companies were not taxable in India once Mauritius residence was accepted. Residual income, including income from mutual fund units not covered by specific treaty articles, fell under the residuary treaty rule and was taxable only in Mauritius, not in India.

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Issues: (i) whether the applicant was resident in Mauritius and entitled to treaty benefits under the India-Mauritius double taxation avoidance agreement; (ii) whether interest arising from approved debt transactions was exempt in India under the treaty; (iii) whether capital gains from transfer of shares in Indian companies were taxable in India; and (iv) whether residual income such as income from units of mutual funds was taxable only in Mauritius under the treaty.

Issue (i): whether the applicant was resident in Mauritius and entitled to treaty benefits under the India-Mauritius double taxation avoidance agreement

Analysis: Residence for treaty purposes depended on article 4, including the deeming rule for a company having residence in both Contracting States by reference to the place of effective management. The Authority applied its earlier reasoning that a company incorporated in Mauritius, with its management arrangements, directors' meetings, records, banking and regulatory compliance centred there, was to be treated as resident in Mauritius for treaty purposes. The fact that the company was linked to foreign investors did not displace that conclusion. The preliminary objection that the arrangement was prima facie designed for tax avoidance was also rejected.

Conclusion: The applicant was held to be resident in Mauritius and entitled to the treaty benefits.

Issue (ii): whether interest arising from approved debt transactions was exempt in India under the treaty

Analysis: Article 11(4) granted exemption only where the interest arose from a debt transaction approved by the Government and only to the extent exemption was available under Indian tax law. The Authority read the conditions harmoniously and held that general policy approval was not enough unless the transaction itself was specifically approved by the competent governmental authority. The exemption was therefore limited by the domestic law exemption applicable to such interest in the hands of a non-resident.

Conclusion: The interest was held exempt in India only to the extent permitted by Indian tax law and where the underlying transaction was approved by the Government.

Issue (iii): whether capital gains from transfer of shares in Indian companies were taxable in India

Analysis: Under article 13 of the treaty, capital gains arising from the transfer of securities were governed by the treaty allocation of taxing rights. Once the applicant was treated as a Mauritius resident for treaty purposes, the gains from such transfers were outside Indian taxation under the relevant treaty rule as applied by the Authority.

Conclusion: The capital gains were held not taxable in India.

Issue (iv): whether residual income such as income from units of mutual funds was taxable only in Mauritius under the treaty

Analysis: Income not specifically covered by the earlier distributive articles fell within the residuary article 22. The Authority accepted that income from units of mutual funds, to the extent it was neither dividend, interest, capital gains nor business income, was governed by that residuary allocation and was taxable only in the State of residence.

Conclusion: Such residual income, including income from units of mutual funds, was held not liable to tax in India.

Final Conclusion: The ruling substantially accepted the applicant's treaty-based claims, upheld Mauritius residence for treaty purposes, restricted interest exemption to the limits of Indian law and governmental approval, and otherwise confirmed non-taxability in India for the specified capital gains and residual income.

Ratio Decidendi: For treaty purposes, a company is resident in the Contracting State where its effective management is situated, and treaty exemptions for interest arising from approved debt transactions operate only to the extent contemplated by the treaty and the corresponding domestic tax law.

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