Bombay HC: Holding a Mauritius TRC Enough to Claim Tax Exemption on Capital Gains
Introduction
In a landmark decision, the Bombay High Court has held that a Mauritius-resident company is entitled to claim tax treaty benefit under the India–Mauritius Double Taxation Avoidance Agreement (DTAA) for capital gains from the sale of shares in an Indian company. The case is important because it reinforces the protection accorded by treaty-residence certificates and makes clear that tax authorities cannot lightly deny treaty benefits merely because a foreign-owned structure is used.
Facts of the Case
Here are the key facts in simple terms:
- The petitioner, Bid Services Division (Mauritius) Limited (BSDM), is a company incorporated in Mauritius in August 2005. It is a wholly owned subsidiary of a South African company (Bidvest group). BSDM held a Mauritius Tax Residency Certificate (TRC) and did not have a permanent establishment in India.
- A major infrastructure project in India – the modernisation of Mumbai airport – was awarded through a consortium. BSDM was part of that consortium and, through a shareholders’ agreement in April 2006, it subscribed to 27% of the share capital of Mumbai International Airport Ltd. (MIAL).
- Between 2006 and 2012, BSDM acquired shares in stages to build up its 27% stake in MIAL.
- In March 2011, BSDM agreed to sell half of that stake (13.5% of MIAL) to GVK Airport Holdings Pvt. Ltd. (GAHPL) via a Share Purchase Agreement (SPA). The consideration was initially USD 287.22 million, later revised to USD 231 million. BSDM also secured a certificate under Section 197 of the Income Tax Act (“nil” withholding tax certificate) permitting the payment without tax deduction at source.
- BSDM applied to the AAR under Section 245Q of the Indian Income Tax Act for a ruling on whether the capital gains arising from the sale would be taxable in India, given the India–Mauritius DTAA (specifically Article 13(4)).
- The AAR, in its ruling dated 10 February 2020, denied the benefit of the India-Mauritius treaty on the ground that BSDM was a device/interposed entity for tax avoidance. It held that only the India–South Africa DTAA applied and India had the right to tax the gain. The AAR said BSDM lacked commercial substance, was interposed late in the bidding process, and had no independent technical/managerial capacity.
Discussion: What the Court Held & Why
Treaty Residence and TRC
BSDM held a Mauritius TRC certifying it was a tax resident of Mauritius, and it filed its corporate returns there. Under Circular No 789 (1994) and Circular No 682 (2000) issued by the Central Board of Direct Taxes (CBDT), such a TRC is sufficient evidence of residence and beneficial ownership for treaty purposes.
The Court emphasised that in the absence of fraud or clear evidence of sham device, the TRC should be respected and the treaty benefits cannot be denied merely because a foreign entity is the investor.
Commercial Substance / Device for Tax Avoidance
The AAR’s main argument was that BSDM was set up merely to take advantage of the DTAA (a “shell”) and thus treaty benefit must be denied. The Court reviewed this and held the following:
- BSDM was part of the consortium from early stages (though the incorporation date was August 2005, just before the bidding process) and the project structure (Request for Proposal, shareholders’ agreement, OMDA) was accepted by the Airports Authority of India (AAI) and the Government of India via its Ministry of Civil Aviation.
- AAI and GOI did not object to BSDM’s inclusion; the facts were brought on record in the bid. So the argument that BSDM was “interposed” solely for tax avoidance was weakened.
- The Court referred to the Supreme Court’s ruling in Vodafone International Holdings B.V. v. Union of India, which reaffirmed the separate entity principle (a subsidiary and its parent are distinct tax entities) and held that legitimate corporate structuring cannot be disregarded just because tax advantage ensues.
- The Court held that unless the Revenue brings cogent evidence that the structure was created solely to evade tax or had no business purpose, treaty benefits should not be denied. The mere fact of foreign ownership or even routing via tax-efficient jurisdiction is not enough.
Applicability of Treaty Article and Limitation of Benefits (LOB) Clause
The India–Mauritius DTAA gives the right to tax capital gains on disposal of shares in an Indian company to only the Mauritius resident when the shares were acquired prior to 1 April 2017 (because post that date the treaty was amended with source taxation for certain shares).
In this case, the entire investment and sale were prior to 1 April 2017, so the grandfathering rule applied. Also the LOB clause (aimed at preventing “treaty shopping”) in the updated treaty applies only for investments made after 1 April 2017; it did not apply here.
Key Takeaways from the Court’s Reasoning
- Holding a valid TRC of Mauritius is strong proof of residence and beneficial ownership unless the tax authority can show fraud/malpractice.
- Corporate structures using special purpose vehicles (SPVs) in tax-efficient jurisdictions are not inherently suspect; business purpose and substance matter.
- The burden of proving that the structure was purely for tax avoidance lies with the Revenue, not with the taxpayer.
- The fact that tax advantage flows from the treaty does not automatically invalidate the structure.
- Treaty benefits cannot be denied on mere suspicion or because a foreign holding company is used.
Conclusion
In summary, the Bombay High Court quashed the AAR’s ruling dated 10 February 2020 that had denied treaty relief to BSDM. It found that the AAR had overlooked key facts such as the valid TRC, government/AAI’s acceptance of the consortium structure, and absence of convincing evidence of abuse of the structure. Accordingly, the Court restored BSDM’s entitlement to the benefit of Article 13(4) of the India–Mauritius DTAA for the capital gains arising from the sale of shares in MIAL.
For practitioners, this judgment is a strong reminder that treaty benefits under India’s DTAAs (particularly with Mauritius) cannot be denied lightly: the residence certificate, beneficial ownership and commercial substance are key, and anti-avoidance arguments require solid evidence. In layman terms: if you invest using a foreign structure that is legitimately setup, has business rationale, and follows rules, then you may enjoy the treaty benefit — you are not automatically stripped of them just because you take advantage of a tax-efficient route.
