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Tax Treaty

Corporate entities have been invoking the provisions of the India-Mauritius tax treaty and using the infamous “Mauritius route” to avoid paying capital gains tax in India for a while now. This has been a sore subject for tax authorities in India.

In a bid to address this wrong, the Indian Government renegotiated certain terms with the Mauritius Government in 2017 and introduced the limitation of benefits (“LOB”) clause to avoid any incorrect availing of treaty benefits by unscrupulous investors. The LOB clause attempted to exclude shell/ conduit companies from claiming tax exemption by invoking the treaty. In other words, India re-acquired its right to tax capital gains of shell/ conduit companies set up in Mauritius to obtain such tax benefits. However, in order to ensure that these provisions are not invoked to question or challenge the tax benefits already availed/ to be availed by the taxpayers, it was decided that the investments made prior to April 2017 shall be eligible for tax benefits. The tax benefit provisions were accordingly grandfathered.

Despite the clear position, certain tax officers have questioned even grandfathered transactions, alleging them to be sham or undertaken only to avoid or evade tax liabilities in India. One such issue arose before the Hon’ble Mumbai bench of the Income-tax Appellate Authority (“ITAT”) in Blackstone FP Capital Partners[1], where Blackstone FP Capital Partners’ (“Taxpayer”) eligibility to claim capital gains tax exemption from the sale of shares held by it in India prior to the introduction of the LOB clause in the Indo-Mauritius tax treaty was questioned.


The Taxpayer was a company incorporated in Mauritius and was also registered as a foreign venture capital investor (“FVCI”) with the Securities and Exchange Board of India, the Indian securities regulator. The Taxpayer was holding a category I Global Business License issued by the Financial Services Commission, Mauritius, as well as a valid ‘tax residency certificate’ (“TRC”) issued by the Mauritian Revenue Authority. The Taxpayer earned some capital gains from the transfer of shares held by it in an Indian company, CMS Info Systems Limited, to a Singaporean company named Sion Investment Holdings Private Limited. It sought capital gains tax exemption by claiming the benefits as per the provisions of the Indo-Mauritius tax treaty.

The Assessing Officer (“AO”) based on certain information received from the tax authorities in Mauritius and Cayman Islands concluded that the Taxpayer is a wholly-owned subsidiary of Blackstone FP Capital (Mauritius) VA Ltd Cayman Islands, an entity incorporated in the Cayman Islands (“Blackstone Cayman”). He further alleged that the Taxpayer had no independent existence and its activities were entirely controlled by Blackstone Cayman. The AO went on to allege that the entire arrangement of buying and selling shares was undertaken for the benefit of Blackstone Cayman and thus found it to be a fit case to lift the corporate veil.

Thus the AO, based on his findings, concluded that the beneficial ownership of the shares does not rest with the Taxpayer and it is hence ineligible to claim the benefit of Article 13(4) of the Treaty. The decision of the AO was subsequently confirmed by the Dispute Resolution Panel. Aggrieved, the Taxpayer filed an appeal before the Mumbai ITAT.

The ITAT initially adjudicated the matter by passing an interim order to hold that the AO had incorrectly proceeded on the assumption that the principle of beneficial ownership  can be read into the Indo-Mauritius tax treaty, especially when the tax treaty does not provide for the same explicitly. The ITAT quoted the commentaries of the renowned author Mr. Philip Baker to hold that the omission of beneficial test provision in certain tax treaties was not inadvertent or unintentional. The ITAT further proceeded to hold that reading the principle of ‘beneficial ownership’ into Article 13 of the DTAA would amount to re-writing the tax treaty itself.

However, instead of concluding the case, the ITAT remitted the matter back to the AO, directing him to find out whether the beneficial ownership test can be applied to the Indo-Mauritius tax treaty especially when the tax treaty itself is silent on it.  

Aggrieved by the interim order, the Taxpayer filed a miscellaneous application seeking rectification of the interim ITAT order on the ground that the ITAT cannot remand back the matter to lower authorities on the question of law, especially when all the facts and evidences pertaining to the matter have already been provided.

The ITAT, while adjudicating on the miscellaneous application, concluded that there was indeed a ‘mistake apparent on record’, which was remitting the matter back to the AO on a question of law, when all the material facts were already on record. The ITAT ruled that it ought to have taken the decision on the requirements of beneficial ownership in Article 13 on merits based on the legal submissions made by the parties. The ITAT accordingly allowed the miscellaneous application and posted the case to be heard afresh before a regular bench. The ITAT also observed that remitting the matter to the AO would imply substantial delays in the matter reaching finality.


The ITAT ruling of recalling its interim order is a welcome move. As the initial ruling had categorically expressed its prima facie view that the test of beneficial ownership is not built into the provisions of the tax treaty and, therefore, incorporating the said test later to deny capital gains exemption otherwise available to a taxpayer would amount to re-writing of tax treaty provisions. It may, therefore, become very difficult for the ITAT to take a different position in its final ruling.

Notably, in the context of the Indo-Mauritius tax treaty, circular No. 789 issued by the Indian tax authorities categorically provided that a Tax Residency Certificate (“TRC”) was sufficient to evidence the status of residence as well as beneficial ownership and hence, when taxpayers possess a valid TRC, capital gains tax exemption should be granted under the Indo-Mauritius tax treaty. The validity of Circular 789[2] was upheld by the Supreme Court of India in the landmark case of Azadi Bachao Andolan[3], which had subsequently been followed by many other decisions.

Despite the above, the tax authorities have gone beyond their brief and have, time and again, challenged the capital gains exemption claimed by taxpayers.[4] Therefore, this ITAT ruling may hopefully put the beneficial ownership controversy to rest, allowing Mauritian investors to claim capital gains tax exemption on their forthcoming share sales, subject to the satisfaction of other requirements.

It is worthwhile to highlight that numerous measures have been introduced since 2017, both on the domestic and international front, to bring such transactions within the tax net. The general anti-avoidance rules (“GAAR”) enables tax authorities to deny treaty benefits on transactions that were entered into to avoid paying taxes. Bilaterally, India has amended its tax treaties with several countries such as Mauritius, Singapore, and Cyprus to acquire the right to tax capital gains accruing to investors from the transfer of shares of Indian companies. Further, several nations, including India, have also signed the Multilateral Instrument to include anti-avoidance provisions into the tax treaties such as the principal purpose test. However, for investments made till March 2017, it is expected that the tax authorities would consider taxpayers’ claims compassionately and not try to challenge them, in the absence of enabling clauses in the applicable tax treaties.

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

[2] Circular No. 789 of 2000 dated April 13, 2000.

[3] Azadi Bachao Andolan v. Union of India [2003] 263 ITR 706 (SC)

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