The famous India Mauritius tax treaty has again been in the limelight. The spark causing the ignition this time is not any talk of revising the treaty but a recent ruling of the Bombay High Court (HC).
A typical PE structure, in the Indian context, would comprise of investment vehicles residing in Mauritius. In this recent ruling, the view taken by the Court is purely based on facts and hence there may not be an immediate cause for panic. However, the lesson learnt from the ruling is that the transaction documents need to be tightly weaved without there being any loose ends resulting in unexpected or multiple interpretation. This does necessitate a need to review documents of all transactions.
The Court has upheld the proceedings initiated by the tax department with the intention of denying India-Mauritius treaty benefits as well as to levy tax on ‘indirect’ transfer. The HC held that prima facie, the transactions under the two Sale and Purchase Agreements were basically transactions to transfer the entire right, title and interest in the Indian company viz. Idea Cellular, India (‘ICL India’) by one joint venture partner in the USA to the remaining two Indian joint venture partners.
India-Mauritius Tax Treaty Benefit
On the issue of applicability of India- Mauritius tax treaty (‘Treaty’), the HC held on facts that AT&T Mauritius cannot be said to be the beneficial owner of shares of ICL India and accordingly provisions of the Treaty would not apply to the transaction of sale of shares of ICL India by AT&T Mauritius to one of the India joint venture partner.
While this decision seems to have raised fresh debate on the availability of capital gains tax benefit under the treaty, it has to be recognized that the decision is an interim view rendered purely based on the facts of the case. The HC rejected the applicability of treaty provisions on the ground that AT&T Mauritius was holding shares in ICL India on behalf of AT&T USA. In arriving at this conclusion, the HC relied on the terms of the Joint Venture Agreement (‘JVA’) between the shareholders and held that shares of ICL India were in the name of AT&T Mauritius only as a permitted transferee of AT&T USA under the JVA and such allotment of shares did not confer any beneficial ownership to AT&T Mauritius. In fact, the HC even refused to accept that AT&T Mauritius could be said to be the legal owner of the shares since the JVA gave this right to AT&T USA.
In light of the above, the HC held that Circular 789 (allowing benefits of India- Mauritius tax treaty on the basis of a Tax Residency Certificate) and the decision of the Apex Court in the case of Azadi Bachao Andolan (which upheld the validity of Circular 789) would not apply to the facts of this case.
We may point out that this is not the first time that an Indian Court has addressed the question of beneficial ownership for granting tax treaty benefits. In an earlier ruling, the Authority for Advance Ruling (AAR) had rejected the tax department’s contention and held on facts that KSPG Netherlands Holding B.V was the beneficial owner of the Indian entity and entitled to the India-Netherlands tax treaty benefits.
The Indian tax department has recently filed a special leave petition to the Supreme Court challenging one such ruling passed by the AAR.
Taxation Of ‘Indirect’ Transfers
Besides rejecting the treaty benefits to AT&T Mauritius, the HC also held that the transaction under which another Indian JV partner acquired shares of AT&T Mauritius from the JV partner in the US was also prima facie liable to tax in India. Based on the transaction documents, the HC observed that the real objective of acquiring shares in AT&T Mauritius was to purchase shares of ICL, India and not of AT&T Mauritius.
Taxation of ‘indirect’ transfers in India has been a matter of lot of controversy in recent past. The tax department questioned the taxability of such indirect transfers for the first time in the Vodafone case which is currently being litigated. The proposed Direct Tax Code (DTC) also points to tax such indirect transfers in certain situations. However, even on this issue, the HC has laid a lot of emphasis on the terms of shareholder agreements to arrive at the real intention of the parties.
To conclude, the proceedings will take its course and the parties will have the right to appeal on merits of the case. However, the judgment reaffirms an important principle that shareholder agreements and other transaction agreements are vital documents for demonstrating the real intention of the parties and due regard should be given to these agreements while evaluating the tax implications.
Anil Talreja (Partner) and Jatin Kanabar (Senior Manager) – Deloitte Haskins & Sells – views are personal
Anil Talreja (Partner) and Jatin Kanabar (Senior Manager) – Deloitte Haskins & Sells – views are personal
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