India's DTAA with Mauritius has led to several controversies. As per Article 13(4) of the DTAA, the right to tax capital gains derived by a resident of Mauritius is only with Mauritius. India does not have a right to tax such gains. Further, capital gains are not taxable in Mauritius as per its domestic tax laws and thus, a Mauritius tax resident earning capital gains in India does not have to pay tax in either country. For example, shares of an Indian company sold by a Maurtian tax resident would not suffer any tax in either country. Therefore, Mauritius has been a preferred tax jurisdiction for inbound investments.
There has been considerable litigation on this benefit of double non-taxation enjoyed under this DTAA. The tax authorities have alleged that investors using the India-Mauritius DTAA are indulging in treaty shopping as they lack commercial substance in Mauritius. The CBDT in its Circular No. 789 stated that wherever a Tax Residency Certificate is issued by the Mauritian Revenue Authorities, it will be sufficient evidence for residence and beneficial ownership for applying the provisions of the DTAA. The Supreme Court in Azadi Bachao Andolan14 upheld the validity of this circular.
However, in the recent case of Aditya Birla Nuvo15, the Bombay High Court has held that, based on the facts of the case, even though the Mauritian company was the registered owner of the Indian company's shares, it could not be regarded as the legal/beneficial owner of the
income accruing thereon. The Court further held that both the circular and the Supreme Court decision in Azadi Bachao Andolan are not applicable to the facts of the case as the gains may not have arisen to a Mauritius taxpayer.
Therefore, the issues under the Mauritius DTAA stay alive and clarity may come only once the DTAA is revised.
4.7.3
Singapore DTAA
Singapore DTAA has a favourable clause for gain on sale of shares. If a resident of Singapore sells shares of an Indian company, the gain is not taxable in India16. I understand that it was brought about at the request of Singapore Government as Mauritius DTAA has a similar benefit.
There is however a Limitation of Benefits clause (LOB clause) which was also brought about at the same time17. The LOB clause applies to sale of other assets (which include shares) not covered in Articles 13(1) to 13(3) of the main DTAA. The LOB clause provides for the certain tests, which are discussed below:
As per clause (1) of the LOB clause, the benefit of exemption of tax in India of Capital Gain will not be available if the affairs of the Singapore resident are “arranged with the primary purpose to take advantage of the benefits in Article 1 of this Protocol.”
Clause (2) of the LOB clause provides that a shell/conduit company which claims to be a resident of Singapore, will not be entitled to the benefits of Capital Gain relief. It may be noted that this is an independent test, not related to the first test of “Affairs”.
A shell/conduit company (shell company) is any legal entity “with negligible or nil business operations or with no real and continuous business activities carried out in that Contracting State.” This
test applies to any legal entity and not just a company. There are tests for deeming a company as a shell company. These are given in clauses
(3) and (4) of the LOB clause. Clause (3) provides that the entity will be a shell company if its total annual expenditure on operations in Singapore is less than S$ 200,000 in Singapore. Thus if the company is to be considered as a bona fide company for this clause, it must spend at least S$ 2,00,000 per year on its operations in Singapore. The expenditure has to be incurred over a period of 2 blocks of 12 months immediately preceding the month in which the Capital gain arises.
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it is listed on a recognised stock exchange in Singapore; and
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the total annual expenditure on the operations is at least $ 2,00,000 in the immediately preceding 24 months from the date of sale.
4.7.4
Cyprus DTAA
The India-Cyprus DTAA also provides for similar benefits on capital gains as the India- Mauritius DTAA. Therefore, no tax is payable in India on sale of shares in an Indian company by a tax resident of Cyprus.
However, recently, the CBDT has notified Cyprus as a “Notified Jurisdictional Area” under Section 94A18. In other words, Cyprus has been listed as a non-co-operative jurisdiction and the applicable anti-tax avoidance provisions come into effect from the date of this notification, i.e, from 1st November, 2013 on all transactions with Cyprus. The implications of this notification have been summarised in a Press Release19. Provisions relevant for capital gains are:
All parties to transactions with a person in Cyprus shall be treated as associated enterprises and the transfer pricing provisions will accordingly apply. Additional documentation as prescribed will be required to be maintained.
Any payment on which tax is deductible at source and made to a person located in Cyprus, will be liable for deduction of tax at source as per the rates under the Act or 30%, whichever is higher.
Impact on gains not taxable under the DTAA? Section 94A prescribes additional requirements to be applied on transactions with Notified
Jurisdictional Areas. However, it does not deny the benefits available under the DTAA. As mentioned earlier, capital gains earned in India will not be taxable in India as per the DTAA with Cyprus.
Therefore, the above provision for deduction of tax at source at higher rate will not apply to such capital gains. In my view, while this stand is correct, it should be noted that once these anti-tax avoidance provisions are enforced, the transactions will be scrutinised thoroughly. An Indian resident must obtain and maintain all required details for even tax exempt transactions.
4.7.5
UAE DTAA
The India-UAE DTAA had a beneficial clause for taxation of shares. If the UAE resident earned capital gain on sale of shares, it was not taxable in India. However in March 2007, the DTAA has been amended by a protocol. As per the protocol, capital gain earned on sale of shares will be taxable in India.
4.8
Overall, the DTAAs generally do not give any benefit for immovable properties situated in India, or for properties of PEs in India. However, significant benefits may be available for capital gains on sale of shares under certain DTAAs. Impact of DTAAs on taxation of FIIs is dealt with in para 6.2 and their impact on taxation of 'indirect transfers' is discussed in detail in para 11.7.
If the income is considered as Capital Gain, then the same may be taxable in India according to most of the DTAAs. However as per some of the DTAAs like Mauritius, Singapore and Cyprus, the Capital Gain will be taxable only in those countries as COR. As these countries have no tax on Capital Gains under their respective domestic tax laws, the gains can be earned tax free.
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