Indo-Mauritius Tax Treaty: Beneficial Ownership Test Not Required

In the Indo-Mauritius Double Tax Avoidance Agreement (herein referred as ‘DTAA’), the Beneficial Ownership clause is exclusively stated in Article 10 and Article 11. However, it is not mentioned in Article 13 of the DTAA, which covers the benefits and liabilities related to capital gains.

The DTAA between India and Mauritius is a bilateral agreement between the two countries that provides for potential tax exemption to foreign investors and prevents individuals/entities from being taxed twice for the same transaction.

Mauritius is considered as one of the most preferential routes for investing in India, which exempts capital gains tax arising on sale of shares of an Indian company.

• As per Article 13(4) of the DTAA, the profits made by a resident of a contracting state from the alienation of shares shall be taxable only in that state. Besides, the Central Board of Direct Taxes, through their Circular No. 789 dated 13 April 2000, has clarified that under Article 13(4) of the DTAA, a resident of one state shall mean any person who is liable to tax under the laws of that state.

What is Beneficial Ownership?

The term ‘Beneficial Ownership’ determines the taxation of income/person. As such it is relevant for the DTAA and the Income Tax Act, 1961. There have been several litigations in respect to the set-off of losses solely on the grounds of beneficial ownership.

Different Articles (like fees for technical services, royalty, etc.) on the DTAA front grant concession if the taxpayer is the most beneficial owner of the income. However, Article 13 (relevant to Capital Gains) of most of the DTAAs entered by India does not include a reference to the term ‘beneficial ownership’.

• With respect to this, the Mumbai Tax Tribunal (Tax Tribunal) recently had to decide whether or not the terms of beneficial ownership can be read into Article 13 of the India-Mauritius DTAA.

Who can’t be a Beneficial Owner?

However, there are some people who legally cannot be a ‘beneficial owner’.

• When it comes to Article 10 (dividend), the Organization for Economic Co-operation and Development (OECD) Model Tax Convention states that direct recipients of the dividend must not be the ‘beneficial owner’ if their right to use and enjoy the dividend is limited by some contract or legal obligation to pass on the payment they receive to another individual.
• It also specifically excludes people who receive dividends as representatives, agents or continuous companies, whose decision-making powers are negligible and who seem to be simply agents or administrators, not being entitled to use the dividend income.
• The commentary also states that the benefits under Article 10 of the tax treaty should not be granted to anyone who abuses this provision. This principle is further supported by the introduction of the principal purpose test (PPT) under numerous tax treaties in accordance with the MLI.

Limitation of Benefits: India-Mauritius Tax Treaty

The Indian Revenue have in past questioned the eligibility of capital gains tax exemption under the Tax Treaty on the basis that the Mauritian Company has no real commercial substance in India, and that it has been merely setup for ‘Treaty Shopping’.

This method has led to numerous long-drawn litigation in a number of cases concerning investments made in India via Mauritius, where corporate entities pay capital gains tax by citing the provisions stated under the India-Mauritius tax treaty and utilizing the infamous ‘Mauritius Route’. This has become quite a tedious tax aspect for tax authorities in India.

In an attempt to prevent such tax evasions, the Indian Government reached out to the Mauritius Government in 2017 to renegotiate certain terms and introduce the limitation of benefits (LOB) clause, which would help avoid any incorrect availing of treaty benefits by unscrupulous investors. The LOB clause aimed to exclude shell/conduit companies from citing the treaty to claim tax exemptions.

• However, to ensure that these provisions are not cited to question or challenge the tax benefits already availed/to be availed by the taxpayers, the Indian Government deemed that the investments made before April 2017 shall be eligible for tax benefits.

Despite the clear position, some tax officers have questioned and even exempted transactions, proclaiming them to be sham or undertaken only to avoid their tax liabilities in India.

An issue related to this arose before the Mumbai Bench of the Income-tax Appellate Tribunal (ITAT) in Blackstone FP Capital Partners, where Blackstone FP Capital Partners’ (Taxpayer) eligibility to claim capital gains tax exemption from the sale of shares that it held in India prior to the LOB clause being introduced in the Indo-Mauritius tax treaty was questioned.

Relevant Articles in India-Mauritius DTAA on Beneficial Ownership

According to The Mumbai Tax Tribunal, the concept of beneficial ownership is a requirement for entitlement of DTAA benefits and cannot be inferred or assumed in the absence of certain provisions. The Tax Tribunal, while coming to this decision, made the following observations:

• Article 10 and Article 11 of the India-Mauritius DTAA specifically provides for beneficial ownership of interest and dividend to be eligible to claim the benefit under the DTAA. However, this clause is missing in Article 13 of the India-Mauritius DTAA.
• Considering the concept of beneficial ownership is the sine qua non for entitlement of treaty benefits, the same cannot be inferred or assumed in the absence of specific provisions.
• When the provisions of the DTAAs do not specifically insert the test of beneficial ownership in Article 13, then assuming so will result in rewriting the treaty itself. This approach negates the benefits of the treaty resulting in uncertainty and unpredictability for the taxpayers.
• Two countries bilaterally agree upon DTAAs between them. As such, any violation of this approach, even if well-intended, shall lead to high tax unpredictability.

From this, it can be concluded that as the Indo-Mauritius DTAA does not exclusively have a beneficial ownership clause in Article 13, the same is not necessary.

The Tax Tribunal distinguished the taxpayer’s case from the judgements relied on by the tax officer and sent the matter back to the tax officer to adjudicate whether the concept of beneficial ownership is inbuilt in Article 13 and, if so, what are the connotations of beneficial ownership in this context. The need to complete the beneficial ownership test along with tax residency are grounds on which tax authorities have denied treaty benefits to the taxpayers. The Supreme Court in the Azadi Bachao Andolan case stated that the Tax Residency Certificate (TRC) is sufficient to claim DTAA benefits. Note: With the Multilateral Instrument (MLI) now in place, you will have to read the DTAA in the light of the MLI and it states that the benefit of DTAA can be granted only if the taxpayer holds securities for at least 12 months.

Conclusion

Unless a DTAA exclusively has the beneficial ownership clause mentioned in Article 13, reading it otherwise would be similar to rewriting the treaty itself. Therefore, the absence of this provision from Article 13 of the Indo-Mauritius deems it so that there is no need for a beneficial ownership test with respect to this agreement.