It's a decision that could spell relief for many Mauritius-based investors. This week the Punjab and Haryana High Court has re-iterated that a Mauritian tax residency certificate is sufficient to avail treaty benefits. This re-iteration is important given the continuous litigation regarding India-Mauritius tax treaty benefits.
In 2011, Blackstone Mauritius sold 66.29 percent and Barclays Mauritius sold 12.75 percent of equity in SKR BPO to Serco. SKR-owned 100 percent of BPO service provider Intellenet and 20 percent of another BPO Sparsh.
Blackstone and Barclays applied to AAR seeking an advance ruling on the taxability of the transaction in India and whether Serco was to withhold tax before making the purchase payment. The premise was that since both the sellers were Mauritius-based entities they would be exempt from Indian capital gains tax under the India-Mauritius double tax avoidance treaty.
After a three-year delay, AAR declined to give a ruling on the basis of a prima-facie finding that the transaction was designed for avoidance of income tax.
The matter then went to the Punjab and Haryana High Court where the revenue department argued that the entire transaction was nothing but a device to take advantage of the DTAC between India and Mauritius. It was a case of treaty shopping. That Blackstone Mauritius and Barclays cannot be considered to be residents of Mauritius as they have absolutely no business interest in Mauritius. That the Residency Certificate issued in favour of Black Stone Mauritius and Barclays are irrelevant.
But the high court disagreed. It set aside the AAR ruling and declared that no capital gains tax was payable by Barclays Mauritius and Blackstone Mauritius, nor was there any withholding tax liability on Serco.
The High Court decision reiterates two important views – that 'it is incumbent upon the authorities in India to accept the certificates of residence issued by the Mauritian authorities', and on treaty shopping it said 'entering into a treaty and terms and conditions thereof are the sovereign functions involving important aspects of policy'.
To be clear – these views of the P&H HC are not a new precedent. The HC has re-iterated the Supreme Court's views in the famous Azaadi Bachao Andolan case. But it's an important re-iteration.
Senior advocate Porus Kaka, who represented Serco in the matter, says: "This brings us up to date. As I pointed out, as early as 2002 there has been a lot of developments, circulars, amendments, proposed amendments, instructions, things like that. So I think there has been a little to-ing and fro-ing. At one stage if you recollect, there was a Finance Bill which said a circular will not be sufficient, you will require something more. Then the Finance Minister went back on it. I think this really brings us up to date with the status of the current law. I am emphasising, the current law because the Parliament and the Central board can change it when they want to - the status of the current law with regards to the Mauritius Treaty."
Given how litigated the Mauritius tax treaty benefits are – this ruling assumes importance and offers relief to investors using that route. But the ultimate determination will be if the Indian government can once and for all decide whether it wants to grant in reality the benefits it has agreed to in signing the treaty. Until ofcourse the treaty is re-written.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
