Gains arising from sale of shares of an Indian company held by Mauritius Tax Resident are not taxable in India under the India-Mauritius DTAA. ? Provisions of General Anti-Avoidance Rules (GAAR), introduced by the Finance Act 2012, are effective from 1st April 2013 and will apply as and when they come in force, notwithstanding the current ruling, to the proposed transaction.

Provisions of General Anti-Avoidance Rules (GAAR), introduced by the Finance Act 2012, are effective from 1st April 2013 and will apply as and when they come in force, notwithstanding the current ruling, to the proposed transaction.

• The applicant is a company incorporated in Mauritius (FCO) and holds a valid Tax Residency Certificate (TRC) issued by the Mauritius Tax Authority. FCO is a wholly-owned subsidiary of another Mauritius company (FCO1).
• FCO was set up to invest in growing sectors in India. The funds were pooled from various individual and institutional investors from different parts of the world by FCO1 and invested in the share capital of FCO. The capital was invested by FCO in units and shares of various Indian companies with the sole intention of generating long-term capital appreciation. FCO was registered as a Foreign Venture Capital Investor and had a licence from the Securities Exchange Board of India.
• Out of its investments, FCO proposed to sell shares of an Indian company. The issue before the AAR was whether such gains were exempt in view of the India-Mauritius treaty.
• It was the Tax Department’s contention that FCO’s primary motive was to route investments through Mauritius in order to evade tax in India. Further, treaty benefit would be available only if capital gains were taxable in Mauritius, which was not so in the given fact pattern.

AAR ruling:

• The argument of the Tax Department that it is a case of routing investments through Mauritius to evade capital gains tax in India is not acceptable in light of the SC decision in Azadi Bachao Andolan, where SC held that even if it is a case of treaty shopping, no further inquiry is warranted or justified on the aspect of eligibility of the beneficial capital gains provisions under the Mauritius DTAA provided the Mauritius investor holds a valid TRC.
• The argument that unless capital gain is taxable in Mauritius, the Mauritius DTAA is not acceptable by virtue of the binding decision of the SC in Azadi Bachao Andolan, which had rejected this contention while granting treaty benefits to the taxpayer.
• The Finance Act, 2012 introduced Chapter X-A i.e., GAAR provisions and TRC requirement in the Income-tax Act with effective from 1st April 2013. As the same is not effective till date, it cannot be made applicable at this stage in the current case. However, once GAAR provisions become effective, it will be open to the Tax Department to consider applicability of GAAR provisions, notwithstanding the ruling.