Amid uncertainty over tax treatment of investments from Mauritius, a tax tribunal has ruled that capital gains on sales of shares in India by a Mauritian company cannot be taxed.
The Authority for Advance Ruling (AAR) said if a company produced a certificate of tax residency issued by the Mauritian government, it could not be taxed in India.
The General Anti-Avoidance Rules on taxes introduced by the Finance Act, 2012, would come into force only from April 2013, it noted, and so its provisions would have no relevance at this stage. Despite this ruling, it however conceded, the tax department could reopen these provisions once the GAAR came into force.
The ruling came in a case of a Mauritian company, Dynamic India Fund I, against the tax department. The company was set up to invest in growing sectors in India.
It filed an application to seek an advance ruling on the taxability in India arising out of the sale of shares of Ranbaxy Fine Chemicals Ltd.
The company said being a tax-resident of Mauritius, it was entitled to claim the benefit of the India-Mauritius Double Tax Avoidance Convention. Under Article 13 of the treaty, capital gains in such cases are taxable only in Mauritius and not in India.
The revenue department, on the other hand, contended that only four out of 55 investors were from Mauritius. It argued this was a case of routing investments through Mauritius to evade taxation on the capital gains they’d make. It also said as only two directors of the company were based out of Mauritius, while the other three were in India, the control of its affairs lay in India.
AAR rejected the department’s contention and observed that in addition to two Mauritian directors, the company had one Indian director and one director resident in the US. It said the company was a tax resident of Mauritius, given the certificate produced by it in this regard.