India-Mauritius DTAA treaty relief upheld for pre-2017 share investments despite treaty shopping allegations

A Mauritius resident holding a valid Tax Residency Certificate was entitled to treaty relief under Article 13(4) of the India-Mauritius DTAA for capital gains from shares acquired before 01.04.2017. The Tribunal noted that CBDT circulars and the Finance Ministry press release recognise the TRC as sufficient proof of residence and preserve grandfathering for pre-01.04.2017 investments. It further stated that treaty benefits cannot be denied merely on allegations of treaty shopping, shell structure, or lack of commercial substance when the limitation of benefits clause applies only prospectively and no fraud or illegality is shown. The capital gains were therefore not taxable in India.

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Issues: Whether the assessee, a Mauritius resident holding a valid Tax Residency Certificate, was entitled to treaty relief under Article 13(4) of the India-Mauritius DTAA so that the capital gains arising from sale of shares acquired before 01.04.2017 could not be taxed in India.

Analysis: The assessee had invested in the Indian company in 2011 and 2012, well before the amended protocol to the India-Mauritius DTAA became effective from 01.04.2017. The Tribunal noted the CBDT circulars and the Finance Ministry press release stating that a Mauritius Tax Residency Certificate is sufficient evidence of residence and that investments made before 01.04.2017 are grandfathered. It further relied on the settled position that, in the absence of fraud or illegal activity, treaty benefits cannot be denied merely on allegations of treaty shopping, shell structure, or lack of commercial substance, particularly when the relevant limitation of benefits clause applies only prospectively to post-01.04.2017 investments.

Conclusion: The assessee was held entitled to the benefit of Article 13(4), and the capital gains on sale of the pre-01.04.2017 investment were not taxable in India.

Ratio Decidendi: Where a Mauritius resident holds a valid TRC and the shares were acquired before the grandfathering cutoff date under the amended India-Mauritius DTAA, treaty benefit under Article 13(4) cannot be denied merely on allegations of treaty shopping or shell structure absent proof of fraud or illegality.

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