Mauritius treaty relief for share sale denied Indian capital gains tax, but return filing obligation still applied

Treaty-shopping allegations did not justify disregarding a Mauritius resident company or denying India-Mauritius Treaty relief where the shares were held for a substantial period and the transfer was a bona fide commercial sale at market value; the capital gains were therefore not taxable in India. Because the gains were not chargeable to Indian tax, no withholding tax was required on the sale proceeds. The Authority nevertheless held that a return of income in India was still required in respect of the proposed transfer, following its later rulings on the filing obligation despite treaty protection on capital gains.

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Issues: (i) whether capital gains arising from the proposed sale of shares by a Mauritius resident company to a German group company were chargeable to tax in India under the India-Mauritius Tax Treaty; (ii) whether the sale proceeds could be received without deduction of tax at source; and (iii) whether the applicant was required to file a return of income in India in respect of the proposed transfer.

Issue (i): whether capital gains arising from the proposed sale of shares by a Mauritius resident company to a German group company were chargeable to tax in India under the India-Mauritius Tax Treaty.

Analysis: The applicant was treated as a resident of Mauritius and held the Indian shares in its own name. The arrangement was examined in the light of the plea that the real beneficial ownership lay with the UK parent and that the Mauritius entity was created to obtain treaty benefits. The holding of shares was long-standing, the transaction was a regular commercial sale at market value, and the reasoning in the governing treaty-shopping precedent was applied to decline a further probe into the original source of funds or to disregard the Mauritius entity.

Conclusion: The capital gains were not chargeable to tax in India under Article 13(4) of the India-Mauritius Tax Treaty.

Issue (ii): whether the sale proceeds could be received without deduction of tax at source.

Analysis: Once the capital gains on the proposed transfer were held not taxable in India under the applicable treaty, no Indian withholding obligation survived in relation to the sale proceeds.

Conclusion: The applicant was entitled to receive the sale proceeds without deduction of tax at source.

Issue (iii): whether the applicant was required to file a return of income in India in respect of the proposed transfer.

Analysis: The transfer concerned shares of an Indian company and, apart from the treaty relief on capital gains, the transaction fell within the scope of income that would otherwise be taxable under the Income-tax Act. The Authority followed its later rulings on the filing obligation and declined to accept the contrary submission based on the cited earlier ruling.

Conclusion: The applicant was required to file a return of income in India in respect of the proposed transfer.

Final Conclusion: The ruling granted treaty protection against Indian capital gains tax and withholding on the proposed share sale, but upheld the filing obligation in India for the transaction.

Ratio Decidendi: Treaty-shopping allegations alone do not justify disregarding a Mauritius resident company or denying treaty benefits where the shares are held for a substantial period and the transaction is a bona fide commercial sale; however, an Indian return filing obligation may still arise for the underlying transfer.

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