Treaty residence prevails for share sale gains, leaving India without capital gains tax or withholding liability

A Mauritius resident holding a valid Tax Residency Certificate was treated as taxable only in Mauritius on gains from the sale of shares in an Indian company under Article 13(4) of the India-Mauritius DTAA. The ruling relied on CBDT circulars and the principle that, where the treaty is more beneficial than the Income-tax Act, the treaty prevails to the extent of any inconsistency. On that basis, Indian capital gains tax did not apply and no withholding obligation arose under section 195.

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Issues: Whether the applicant's gains from sale of shares of an Indian company were taxable in India or only in Mauritius under Article 13(4) of the India-Mauritius DTAA, and whether any withholding obligation arose under section 195 of the Income-tax Act, 1961.

Analysis: The applicant was a Mauritius resident holding a valid Tax Residency Certificate. Article 13(4) of the DTAA provides that gains derived by a resident of a Contracting State from the alienation of property other than that covered by the earlier paragraphs are taxable only in that State. The CBDT circulars relied upon clarified that a Mauritius resident deriving capital gains from alienation of shares of an Indian company is taxable only in Mauritius. The ruling applied the settled principle that where the DTAA is more beneficial than the domestic law, the treaty prevails to the extent of inconsistency. On that basis, the transfer of shares was held not to attract Indian capital gains tax, and the consequential withholding question did not survive against that conclusion.

Conclusion: The gains from the transfer of shares were held not taxable in India and were taxable only in Mauritius under the DTAA, with no Indian withholding tax liability arising on that basis.

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