Supreme Court: Mauritius tax resident exempt from Indian capital gains tax

The Supreme Court ruled on 8th August 2016 that the applicant, a tax resident of Mauritius, was not liable to pay capital gains tax in India under Article 13(4) of the India-Mauritius Treaty. As a result, the issue of the 10% tax rate on long-term capital gains under Section 112(1) of the Income Tax Act, 1961 did not apply.

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Issues Involved:
1. Taxability of capital gains in India under Article 13(4) of the DTAA between India and Mauritius.
2. Applicability of the 10% tax rate on long-term capital gains under Section 112(1) of the Income Tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Taxability of Capital Gains in India under Article 13(4) of the DTAA between India and Mauritius:

The applicant, a tax resident of Mauritius, acquired shares in Tech Mahindra Limited (TML), India. The shares were later transferred to AT&T International, Inc., resulting in significant capital gains. The primary question was whether these gains were taxable in India under Article 13(4) of the DTAA between India and Mauritius.

The applicant argued that as a tax resident of Mauritius, it should benefit from the DTAA, which exempts capital gains realized by Mauritius residents in India. The applicant supported this with a tax residency certificate from Mauritius and referenced Circular No. 682 and Circular No. 789, which clarified that a TRC from Mauritius suffices to apply the DTAA benefits. The Supreme Court's ruling in UOI v. Azadi Bachao Andolan upheld the validity of Circular No. 789.

The Department of Revenue contended that the applicant was a nominee of the founder companies (M&M and BT) and was incorporated solely to facilitate a tax-neutral transfer of shares to AT&T. They argued that the real transaction was between TML and AT&T, and the applicant's incorporation lacked economic substance. They further claimed that the control and management of the applicant were situated in India, invoking Article 4(3) of the DTAA and Section 6(3)(c) of the Income-tax Act.

The applicant refuted these objections, asserting that it was set up for a legitimate commercial purpose and continued to hold shares in TML. It demonstrated that its Board of Directors, primarily based in Mauritius, managed its affairs independently. Key decisions, such as financial matters, dividend declarations, and share buybacks, were made in Mauritius. The applicant cited several legal precedents to support its claim that control and management were exercised from Mauritius.

The ruling concluded that the applicant successfully established that its control and management were situated in Mauritius. The Board meetings and decisions taken in Mauritius indicated that the company's affairs were managed from there. The Department of Revenue failed to provide substantial evidence to prove otherwise. Consequently, the applicant was not chargeable to tax in India under Article 13(4) of the India-Mauritius Treaty.

2. Applicability of the 10% Tax Rate on Long-Term Capital Gains under Section 112(1) of the Income Tax Act, 1961:

Given the ruling on the first issue, the second question regarding the applicability of the 10% tax rate on long-term capital gains under Section 112(1) did not arise. Since the applicant was not chargeable to tax in India under the DTAA, this issue became moot.

Conclusion:

The ruling pronounced on 8th August 2016 concluded that the applicant, a tax resident of Mauritius, was not chargeable to capital gains tax in India under Article 13(4) of the India-Mauritius Treaty. Consequently, the question of the 10% tax rate under Section 112(1) of the Income Tax Act did not arise.

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