Court rules Mauritius resident not liable for Indian capital gains tax under India-Mauritius treaty

The court ruled on March 28, 2011, that the applicant, a Mauritius resident, was not liable to pay capital gains tax in India on the sale of shares of an Indian company to a Mauritius-based entity. This decision was based on the provisions of the India-Mauritius Double Taxation Avoidance Agreement, which stipulates that gains from the alienation of shares by a resident of one contracting state are taxable only in that state. The court upheld previous rulings and interpretations, confirming that the applicant was not subject to capital gains tax in India.

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Issues:
1. Maintainability of the application under section 245N of the Income-tax Act, 1961.
2. Liability to capital gains tax in Mauritius under Article 13(4) of the India-Mauritius DTAA.
3. Tax liability on the transaction of sale of shares under the Income Tax Act 1961 and India-Mauritius DTAA.
4. Withholding tax liability under section 195 of the Income-tax Act, 1961.

Analysis:

Issue 1:
The applicant sought a ruling on the maintainability of the application under section 245N of the Income-tax Act, 1961. The question was deemed unnecessary and deleted at the time of passing the order under section 245R (2) of the Act.

Issue 2:
Regarding the liability to capital gains tax in Mauritius under Article 13(4) of the India-Mauritius DTAA, the applicant, a Mauritius resident, held a Tax Residence Certificate issued by the Mauritius Revenue Authority. The DTAA provides that gains derived by a resident of a contracting state from the alienation of shares shall be taxable only in that state. The CBDT Circulars clarified that a resident of Mauritius deriving income from the alienation of shares of an Indian company would be liable to tax only in Mauritius. Previous rulings supported this interpretation, emphasizing that gains from the alienation of shares to a Mauritius resident are taxable only in Mauritius.

Issue 3:
In terms of the transaction of sale of shares under the Income Tax Act 1961 and India-Mauritius DTAA, the applicant was not liable to pay capital gains tax in India on the transfer of shares to a Mauritius-based company. The DTAA provisions prevailed over domestic law, allowing the taxpayer to benefit from the more advantageous provision. Legal precedents and Circulars supported the applicant's position, leading to a ruling that no capital gains tax was payable in India.

Issue 4:
Regarding the withholding tax liability under section 195 of the Income-tax Act, 1961, the department did not present its case, indicating no opposition to the applicant's claims. Consequently, no withholding tax liability was established in relation to the transaction of sale of shares as per the Share Purchase Agreement dated November 10, 2009.

In conclusion, the ruling delivered on March 28, 2011, affirmed that the applicant, as a Mauritius resident, was not liable to pay capital gains tax in India on the sale of shares of an Indian company to a Mauritius-based entity, in accordance with the provisions of the India-Mauritius DTAA.

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