India–Mauritius Double Tax Treaty – Introduction
The India–Mauritius Double Tax Avoidance Agreement (DTAA), signed in 1983, has long been a pivotal treaty for investors due to its favourable tax terms.
For years, investors, particularly in the private equity and venture capital space, have utilised this treaty to minimise tax liabilities in India.
However, the treaty has also sparked numerous litigations and controversies, primarily concerning capital gains tax exemptions for investments made through Mauritius.
In a recent ruling, the Delhi High Court (HC) addressed a dispute concerning the application of the DTAA benefits to a Mauritius-based company, Tiger Global International.
This case clarified critical issues, including the significance of the Tax Residency Certificate (TRC), the Limitation of Benefits (LoB) clause, and the applicability of the grandfathering provision in the treaty.
The court’s decision has brought much-needed relief and certainty to taxpayers navigating the complexities of international taxation.
Facts of the Case: Tiger Global International’s Investment Structure
The case centres on Tiger Global International (the Assessee), a company incorporated in Mauritius for the purpose of making investments on behalf of Tiger Global Management LLC (TGM LLC), a Delaware-based investment manager.
The Assessee held a Category 1 Global Business License and a Tax Residency Certificate (TRC) from the Mauritius tax authorities.
Between October 2011 and April 2015, Tiger Global acquired shares in Flipkart Singapore and later transferred its holdings to Fit Holdings SARL, a Luxembourg-based entity.
The company sought clarity from India’s Income Tax Department (ITD) regarding the applicability of capital gains tax on these transactions under the DTAA.
However, the Advance Authority Ruling (AAR) ruled against the Assessee, stating that Tiger Global’s Mauritius-based structure lacked commercial substance and was merely a vehicle for *tax avoidance.
Assessee’s Arguments: Relying on the DTAA and TRC
The Assessee argued that its investments were eligible for the **capital gains tax exemption** under Article 13(3A) of the DTAA.
This provision exempts Mauritian residents from Indian capital gains tax for shares acquired before April 1, 2017, and transferred thereafter.
The Assessee also relied on a Tax Residency Certificate (TRC) from the Mauritius authorities as proof of its eligibility for DTAA benefits, citing CBDT Circular No. 789, which upholds the TRC as sufficient evidence of residency.
The Assessee further contended that the Limitation of Benefits (LoB) clause, which restricts treaty benefits for entities with little economic substance, did not apply to the transactions in question because the shares were acquired prior to 2017.
They also argued that the AAR erred in questioning the motives behind the company’s establishment in Mauritius, as the purpose of incorporation should not disqualify it from treaty benefits.
ITD’s Contentions: Alleging Tax Avoidance and Lack of Substance
The ITD took a starkly different position, arguing that the Mauritius-based entities were created solely to avoid capital gains tax in India.
The ITD asserted that TGM LLC, the US-based investment manager, exercised ultimate control and decision-making over the Mauritius entities, rendering the Mauritian companies mere intermediaries in a tax avoidance scheme.
The ITD relied on the Vodafone case, which allows the piercing of the corporate veil when an entity’s structure lacks commercial substance.
The ITD supported the AAR’s conclusion that Tiger Global International did not possess independent management and was ineligible for the DTAA benefits due to its tax avoidance motives.
Observations of the Delhi High Court: A Clear Ruling
The Delhi HC ruled in favour of the Assessee, providing a well-reasoned judgment that clarified the application of the India-Mauritius DTAA.
The court categorically held that TGM LLC was merely an investment manager and not the parent company of the Assessee.
The court observed that Tiger Global International was a significant entity with considerable economic activity, managing investments for more than 500 investors across 30 jurisdictions.
Regarding beneficial ownership, the court found no evidence to suggest that the Assessee was obligated to transfer revenues to TGM LLC or that it was merely acting on behalf of the US-based company.
Furthermore, the court upheld the Assessee’s Tax Residency Certificate (TRC) as conclusive proof of its eligibility for DTAA benefits, in line with earlier rulings.
Crucially, the court reaffirmed that grandfathering provisions under Article 13(3) of the DTAA would protect investments made before April 1, 2017, from the LoB clause.
This provision, the court held, was clear and unambiguous, ensuring that the General Anti-Avoidance Rules (GAAR) could not override treaty benefits.
India–Mauritius Double Tax Treaty – Conclusion
The ruling of the Delhi High Court is a major victory for international investors who rely on the India-Mauritius DTAA for tax certainty.
The judgment clarifies that corporate structures established in tax-friendly jurisdictions should not automatically be viewed as vehicles for tax avoidance, and that the Tax Residency Certificate (TRC) holds substantial weight in determining eligibility for treaty benefits.
The decision imposes a high burden of proof on tax authorities to establish tax evasion or fraud, ensuring that only in cases of sham transactions will treaty benefits be denied.
This landmark ruling provides investors with the much-needed confidence to structure their investments in line with international treaties, reinforcing India’s position as a tax- and investment-friendly jurisdiction.
Final thoughts
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