India-Mauritius treaty relief for share sale gains accepted; valid residency certificate blocked Indian withholding tax.

A valid Mauritian tax residency certificate had to be accepted as proof of residence for the India-Mauritius tax treaty and the CBDT circulars, so the transferor companies were treated as Mauritius residents for treaty purposes. On that basis, gains from the sale of shares fell within the treaty rule taxing such gains only in the State of residence, because the shares did not fall within the treaty's specified exceptions. The Court held that actual payment of tax in Mauritius was not required, that treaty benefit was not denied by a general anti-avoidance objection on the facts found, and that no Indian tax was chargeable on the gains. As a result, the purchaser had no obligation to deduct tax at source under section 195.

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Issues: (i) Whether the Mauritian tax residency certificates issued to the transferor companies were binding for purposes of the India-Mauritius tax treaty and the CBDT circulars. (ii) Whether capital gains from the sale of shares by Mauritian residents were taxable only in Mauritius, with the result that the purchaser was not required to deduct tax at source under the Income-tax Act, 1961.

Issue (i): Whether the Mauritian tax residency certificates issued to the transferor companies were binding for purposes of the India-Mauritius tax treaty and the CBDT circulars.

Analysis: The treaty applied to residents of either contracting State. The certificates issued by the Mauritian revenue authority established residence in Mauritius, and Circular No. 789 of 2000 treated such certificates as sufficient evidence of residence and beneficial ownership for applying the treaty. The Court also relied on the binding nature of CBDT circulars under section 119 and on the later governmental clarification that the tax residency certificate issued by a contracting State would be accepted and not questioned by Indian authorities.

Conclusion: The residence certificates were valid and had to be accepted, and the transferor companies were residents of Mauritius for treaty purposes.

Issue (ii): Whether capital gains from the sale of shares by Mauritian residents were taxable only in Mauritius, with the result that the purchaser was not required to deduct tax at source under the Income-tax Act, 1961.

Analysis: Article 13 of the treaty allocated gains from alienation of property other than the specified categories to the State of residence. Since the shares did not fall within the special categories, the gains were taxable only in Mauritius. The Court held that actual payment of tax in Mauritius was irrelevant; liability to taxation was enough. It further held that treaty shopping was not prohibited in the absence of an express limitation clause, and that the anti-avoidance objection could not defeat the treaty benefit on the facts found. Once the gains were not chargeable to tax in India, the obligation to withhold tax under section 195 did not arise.

Conclusion: The capital gains were not taxable in India, and the purchaser was not liable to deduct tax at source.

Final Conclusion: The impugned advance ruling was set aside and the questions referred were answered in favour of the assessee, holding that no capital gains tax was payable in India on the share sale and no withholding obligation arose.

Ratio Decidendi: Under the India-Mauritius treaty, a valid tax residency certificate issued by the Mauritian authorities must be accepted as proof of residence, and gains from alienation of shares by such residents are taxable only in Mauritius unless the treaty itself expressly provides otherwise; therefore, Indian withholding under section 195 does not arise where the underlying gains are not chargeable to tax in India.

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