Beneficial ownership requirement not in-built in Capital Gains Article


Historically, the Indo-Mauritius tax treaty has exempted capital gains arising to Mauritian investors from sale of shares of Indian companies, from being taxed in India. As a result, many investors used to structure their investments in India through entities incorporated in Mauritius, to claim this treaty benefit. This prompted the Indian tax authorities to renegotiate its tax treaty with Mauritius (and other countries), to, inter alia, acquire the right to tax capital gains arising from sale of shares of Indian companies and to introduce a limitation of benefits (“LOB”) clause, which excluded any shell/conduit company to claim certain benefits under the Indo-Mauritius tax treaty.

Even prior to such amendments, courts have denied the capital gain exemption under the Indo-Mauritius tax treaty to entities that were mere shell companies incorporated in Mauritius for the sole purpose of treaty shopping[1]. Recently, a similar question arose before the Mumbai Income-tax Appellate Authority (“ITAT”) in Blackstone FP,[2] where investments in Indian shares had been made prior to the amendment of the Indo-Mauritius tax treaty.

Mumbai ITAT Ruling in Blackstone FP

In Blackstone FP, the taxpayer was a company incorporated in Mauritius. The taxpayer transferred certain shares of an Indian company and earned income in the nature of long-term capital gains. According to Article 13(4) of the Indo-Mauritius tax treaty (as it stood prior to the amendment), capital gains are taxable only in the resident state. The taxpayer sought to claim benefit of this provision. The Assessing Officer (“AO”), however, stated that the Cayman Islands-incorporated parent company had the effective ownership and control of the taxpayer. Thus, the AO lifted the corporate veil and denied benefit of the Indo-Mauritius tax treaty to the taxpayer. The order of the AO was confirmed by the Dispute Resolution Panel. Being aggrieved, the taxpayer filed an appeal before the Mumbai ITAT.

The Mumbai ITAT discussed the scheme of the Indo-Mauritius tax treaty and noted that unlike Article 10 (dividend) and Article 11 (interest) of the treaty, Article 13 does not have a provision for ‘beneficial ownership’. The ITAT further relied on a paper annexed in a report[3] of the United Nations Committee (“UN Report”) and a decision of the Canadian Supreme Court[4] to state that the concept of ‘beneficial ownership’ was foreign to Article 13. Thus, the ITAT held that a beneficial ownership test, when not embedded in the treaty provision, may be construed as rewriting of the treaty provision rather than its permissible interpretation. In the absence of a specific provision, it could not be inferred or assumed by the AO.

Further, reliance was placed on the rules of treaty interpretation and the provisions of the Vienna Convention on the Law of Treaties. The ITAT opined that it was necessary to uphold the principle of pacta sun servanda to ensure tax certainty & predictability. When the treaty was silent, it could not be unilaterally nullified by the AO without assigning any specific and cogent reasons in support of this inference.

Accordingly, the matter was remanded back to the AO for deciding the fundamental issue as to whether the requirement of beneficial ownership can be read into the scheme of Article 13 of the Indo-Mauritius tax treaty.

Significant Takeaways

Treaty shopping and using colourable devices to avoid tax have been a pressing concern for countries globally. Numerous measures have been introduced, both on a domestic and international front to bring such transactions within the tax net. Domestically, the Indian government introduced general anti-avoidance rules (“GAAR”) with effect from FY 2017-18. The GAAR provisions enable the tax authorities to, inter alia, tax transactions which misuse treaty benefits and engage in treaty shopping. Bilaterally, as discussed above, India has amended its tax treaties with several countries such as Mauritius, Singapore and Cyprus to acquire the right to tax gains arising from transfer of shares of Indian companies. Additionally, anti-avoidance provisions such as a LOB clause were inserted, which exclude any shell/conduit company to claim certain benefits under these tax treaties. Further, several nations, including India, have also signed the Multilateral Instrument to include anti-avoidance provisions such as the principal purpose test, which enables countries to disallow treaty benefits where the principal purpose of the transaction is to engage in treaty shopping.

However, it is relevant to note that the taxpayer’s case pertained to FY 2015-16, i.e., prior to the aforementioned anti-avoidance provisions coming into effect. Prior to adoption of the GAAR provisions, the Supreme Court[5] (“SC”) had laid down the law in relation to bringing tax avoidance transactions within the tax net of Indian authorities. The SC has permitted lifting of corporate veil between a subsidiary and a parent, albeit, only where the tax authorities are able to prove abuse of organisation form/legal form and without reasonable business purpose[6].

In his order, the AO made the following observations – (i) the taxpayer was a wholly owned subsidiary of an entity in Cayman Islands and had no independent existence from its parent company; (ii) the entire sale transaction was designed for the benefit of the parent company; (iii) the amount used for purchase of the shares was remitted by the parent company to the taxpayer; and (iv) the decisions regarding the purchase and sale of the shares were taken by the parent company. Thus, the AO found the case fit for lifting of the corporate veil.

It is relevant to note that the SC in the Vodafone case[7] recognised that it is common practice for foreign investors to invest in Indian companies indirectly for both tax and business purposes. Such transactions by themselves would not become taxable in India. Reference has to be made to various factors such as the period of investment, the duration of existence of the subsidiary, the continuity of business of the subsidiary, etc. The Blackstone Group is involved in the business of making global investments, and it is commercial practice for such businesses to make investments through global subsidiaries. However, this aspect was not discussed either by the AO or the ITAT in Blackstone FP.

Instead, the ITAT relied on the UN Report to state that the concept of ‘beneficial ownership’ was foreign to the scheme of Article 13 of the Indo-Mauritius tax treaty. It is relevant to note that the paper annexed to the UN Report focused on the limitations of the concept of ‘beneficial ownership’ when trying to counteract transactions structured for the purpose of tax avoidance while dealing with asset disposal instead of flow of income such as in dividend, interest, etc. Regardless, it opined that since Article 13(6) of the UN Model Convention (which is similar to Article 13(4) of the Indo-Mauritius tax treaty) is prone to treaty shopping, a beneficial ownership provision may be included under it. It also opined that a more general LOB provision could also serve the purpose sought to be achieved by the inclusion of ‘beneficial ownership’ under Article 13. The UN Report gave a general comment that the beneficial ownership concept could not be a substitute for more specific anti-abuse provisions in a treaty. Thus, while the concept of beneficial ownership may not have been the most appropriate countermeasure, the UN Report was against the use of beneficial treaty provisions, including Article 13, to engage in treaty shopping.


The Mumbai ITAT has asked the tax authorities to first conclusively determine whether the concept of ‘beneficial ownership’ can be read into Article 13 of the Indo-Mauritius tax treaty and then look into the question of effective ownership and control of the shares. It will be interesting to see if the AO simply adjudicates on the inclusion of a limited concept of ‘beneficial ownership’ under Article 13 or presents conclusive evidence on whether the transaction itself was a colourable device or a sham transaction, irrespective of such inclusion. While, this case relates to a period when GAAR provisions and other similar anti-avoidance treaty measures (discussed above) were not applicable, the decision may still have significant relevance for foreign investors.

[1] Bid Services Division (Mauritius) Ltd., In re [2020] 275 Taxman 44 (AAR – Mumbai); AB Mauritius, In re [2018] 301 CTR 271 (AAR – New Delhi).

[2] Blackstone FP Capital Partners Mauritius V Ltd. v. DCIT, ITA Nos. 981 and 1725/Mum/2021.

[3] United Nations Committee of Experts on International Cooperation on Tax Matters document, available at

[4] Her Majesty v. Alta Energy Luxembourg SARL, 2021 SCC 49.

[5] Mc Dowell & Company Limited v. The Commercial Tax Officer, 1986 AIR 649, 1985 SCR (3) 791; Union of India v. Azadi Bachao Andolan [2003] 132 Taxman 373 (SC); Vodafone International Holdings BV v. Union of India [2012] 341 ITR 1 (SC).

[6] Vodafone International Holdings BV v. Union of India [2012] 341 ITR 1 (SC).

[7] Id.