Foreign investors utilising Mauritius as a route to investments in India will be pleased by the recent ruling by the Authority for Advance Ruling (“AAR”) that upheld the capital gains tax exemption available for Mauritius routed investments into India.
We discussed in our previous article at that the Bombay High Court in E*Trade Mauritius Limited (“E*Trade Mauritius,”) v. ADIT & Ors in 2009 disposed the writ petition filed by E*Trade and held that the capital gains tax of Rs 245 million deposited with it should be released to the Income Tax Department. The Income Tax Department’s argument was that E*Trade Mauritius was a shell company (which was incorporated only several weeks before the sale transaction) and that the shares were actually owned by E*Trade US which made it liable to pay capital gains tax because it would not be entitled to the benefits of India Mauritius Double Taxation Avoidance Treaty.
The prior decision of the Bombay High Court in favour of the Income Tax Department appears to have been an attempt to distinguish the decision of the Supreme Court of India in Union of India v. Azadi Bachao Andolan ([2003] 263 ITR 706 (SC)) which held that any Mauritian company having tax residency certificate could benefit from the India-Mauritius tax treaty.
However, yesterday’s AAR decision reversed the above stance and clarified the position that a Mauritius entity was entitled to the capital gains exemption available under Article 13(4) of the India-Mauritius Tax Treaty, thus upholding the Supreme Court decision in Azadi Bachao Andolan.
Although an AAR ruling is binding only on the specific matter heard, it is of persuasive value in other similar cases.
The AAR declined to opine on the political question of the continuation of the India-Mauritius Tax Treaty stating that this was a policy question and not a legal issue. In addition, the Vodafone case is still being heard and observers are waiting for the result.
Nonetheless, the E*Trade ruling is welcome news to international investors as it does provide some clarity as to the validity of the India-Mauritius Tax Treaty.
