Treaty relief for Mauritius resident share sale prevented Indian capital gains tax and withholding obligation.
A Mauritius resident holding a valid tax residence certificate was entitled to treaty relief under Article 13(4) of the India-Mauritius DTAA, so capital gains from the sale of shares of an Indian company were taxable only in Mauritius and not in India. The CBDT circulars confirmed that a residence certificate was sufficient evidence of treaty residence, and the more beneficial treaty position prevailed over domestic law under section 90 of the Income-tax Act, 1961. As the gain was not chargeable to tax in India, no withholding obligation arose under section 195 on the share transfer.
Issues: (i) Whether capital gains arising to a Mauritius resident from the sale of shares of an Indian company were taxable in India in view of Article 13(4) of the India-Mauritius DTAA and the CBDT circulars. (ii) Whether, on such transaction, there was any withholding tax liability under section 195 of the Income-tax Act, 1961.
Issue (i): Whether capital gains arising to a Mauritius resident from the sale of shares of an Indian company were taxable in India in view of Article 13(4) of the India-Mauritius DTAA and the CBDT circulars.
Analysis: The applicant was a resident of Mauritius and held a Tax Residence Certificate issued by the Mauritius tax authorities. Article 13(4) of the India-Mauritius DTAA allocates taxing rights over gains from alienation of property other than those covered by the preceding paragraphs to the State of residence. The circulars issued by the CBDT clarified that a Mauritius resident deriving capital gains from alienation of shares of an Indian company would be taxable only in Mauritius and that a residence certificate would be sufficient evidence of residence for treaty purposes. The treaty provisions, being more beneficial, override the corresponding domestic law by virtue of section 90 of the Income-tax Act, 1961.
Conclusion: The capital gains from the transfer of shares were not taxable in India and were taxable only in Mauritius; this issue was answered in favour of the applicant.
Issue (ii): Whether, on such transaction, there was any withholding tax liability under section 195 of the Income-tax Act, 1961.
Analysis: Since the underlying capital gains were held not chargeable to tax in India under the applicable treaty, no Indian tax liability arose on the transaction for which withholding could be required. The withholding obligation depended on taxability in India.
Conclusion: There was no withholding tax liability under section 195; this issue was answered in favour of the applicant.
Final Conclusion: The treaty benefit under the India-Mauritius DTAA prevailed over the domestic charging provision, resulting in no Indian capital gains tax or withholding obligation on the impugned share transfer.
Ratio Decidendi: Where a valid tax residency certificate establishes residence in Mauritius, capital gains from alienation of shares are taxable only in Mauritius under Article 13(4) of the India-Mauritius DTAA, and the treaty position prevails over inconsistent domestic tax provisions by virtue of section 90 of the Income-tax Act, 1961.