Mauritius treaty residence protected share-sale gains from Indian tax; treaty override and Circular 789 controlled the result.

Capital gains realised by a Mauritius-incorporated company on sale of Indian shares were treated as not taxable in India under the Indo-Mauritius tax treaty, where the company held a valid tax residence certificate. The Tribunal followed the Supreme Court's ruling upholding CBDT Circular No. 789 and the treaty arrangement, holding that gains of a Mauritius resident from transfer of shares were not chargeable merely because the investments related to Indian securities. The contrary argument based on residence and management, and the earlier Delhi High Court view, could not override the binding Supreme Court position. The tax addition was therefore unsustainable.

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Issues: Whether capital gains arising to a Mauritius-incorporated company from sale of shares in India were taxable in India in view of the Indo-Mauritius Double Taxation Avoidance Agreement and CBDT Circular No. 789 dated 13.04.2000.

Analysis: The assessee was a Mauritius resident company holding a tax residence certificate and claimed that the gains from sale of investments in Indian shares were governed by the Indo-Mauritius tax treaty. The binding effect of the Supreme Court decision upholding Circular No. 789 and the validity of the treaty arrangement meant that gains of a Mauritius resident from transfer of shares were not chargeable to tax in India merely because the investment related to Indian securities. The Tribunal accepted that the later argument based on residence, management, and the earlier view of the Delhi High Court could not displace the Supreme Court's ruling governing the field.

Conclusion: The capital gains were not taxable in India and the addition made by the Assessing Officer was unsustainable.

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