P&H High Court Upholds Mauritius Tax Residency Certificate

The issue of whether the grant of a
tax residency certificate by the authorities in Mauritius would enable a
company situated there to claim the benefit of the double taxation avoidance
treaty between India and Mauritius was decided favourably by the Supreme Court
in Union of India v. Azadi Bachao
, (2004) 10 SCC 1. This issue resurfaced before the Punjab &
Haryana High Court in Serco
BPO Private Limited v. Authority for Advance Rulings
, where the court
after a detailed analysis stayed true to the broader principles laid down in Azadi Bachao Andolan and upheld the
sanctity of tax residency certificates issued by the Mauritius authorities.
The essential facts of the case are
that two Mauritius based companies, i.e. Barclays (H&B) Mauritius Limited
(“Barclays”) and Blackstone GPV Capital Partners (Mauritius) V – B Ltd.
(“Blackstone”) held nearly 80% shares in an Indian company SKR BPO Services
Pvt. Ltd. (“SKR”) after obtaining the necessary regulatory approvals. In 2011,
Barclays and Blackstone entered into an agreement with Serco BPO Pvt. Ltd.
(“Serco”) for the sale of 66.29% and 12.75% shares respectively to Serco. The
core issue pertains to whether Serco is required to deduct tax at source for
any capital gains tax payable by Barclays and Blackstone on the sale of their
shares to Serco. In this behalf, Serco approached the Authority for Advance
Rulings (“AAR”) under section 245-R of the Income Tax Act, 1961 seeking
guidance on whether the transaction was taxable in India. To this, the AAR
(after considerable delay) found that “the factual scenario projected … clearly
establishes that the transaction in question was designed prima facie for
avoidance of income tax”. On this basis, the AAR declined to provide a ruling
and rejected Serco’s application. Serco then challenged the AAR’s order by way
of a writ petition before the Punjab & Haryana High Court, which issued the
ruling discussed in this post.
The Court’s decision traverses
different issues, which are discussed separately below:
1.         Whether
the transaction was designed
prima facie
for the avoidance of income tax?
Section 245-R(2),
proviso (iii) states that the AAR shall not allow an application where the
question raised “relates to a transaction or issue which is designed prima
facie for the avoidance of income tax …”. This was the ground on which the AAR
rejected Serco’s application in the present case. The High Court, however,
found no basis for the same, as the AAR’s order did not contain a single
finding of fact to support its conclusion. The Court observed (in para. 21) that
“[t]here was no indication in the order and there was no indication even before
us as to the direction or the nature of the analysis”. On the contrary, the
facts suggest that Barclays and Blackstone had intended to acquire and hold the
shares, and in fact did so: there was nothing to suggest that the structure was
devised merely to profit from the sale of the shares.
2.         Whether
the High Court should decide the matter or remand it to the AAR?
The Court found no
purpose in remanding the matter given the extensive delays that occurred
previously before the AAR. Hence, the Court decided the matter on merits.
3.         Whether
Barclays and Blackstone actually reside in Mauritius for the purpose of the
double taxation avoidance treaty?
This is the crux
of the issue. Here, the Court examined the impact of Azadi Bachao Andolan and various circulars issued under the Income
Tax Act. The Court was categorical in its acceptance of the tax residence
certificate issued by the Mauritius authority as a method of determining
whether the companies are in fact resident in Mauritius. In the Court’s own
29. … The
certificates of residence issued by the Mauritius Authorities, therefore,
establish that Blackstone Mauritius and Barclays are residents of Mauritius
within the meaning of Article-1.

30. In view of the circular, it is incumbent upon the authorities in India to
accept the certificates of residence issued by the Mauritian authorities.
Circular No. 789 is a statutory circular issued under section 119 of the Act.
It is obviously based upon the trust reposed by the Indian authorities in the
Mauritian authorities. Once it is accepted that the certificate has been issued
by the Mauritian authorities, the validity thereof cannot be questioned by the
Indian authorities. This is a convention/treaty entered into between two
sovereign States. A refusal to accept the validity of a certificate issued by
the contracting States would be contrary to the convention and constitute an
erosion of the faith and trust reposed by the contracting States in each other.
It is for the Government of India to decide whether or not such a certificate
ought to be accepted. Once it is established that it has been issued by the
contracting State i.e. Mauritius, a failure to accept the residence certificate
issued by the Mauritian authorities would be an indication of break down in the
faith reposed by the Government of India in the Government of Mauritius and the
Mauritian authorities reiterated in and evidenced by statutory Circulars issued
under section 119 of the Act.
31. Consequently,
the convention applies to Blackstone Mauritius and Barclays being persons who
are residents of one or both the contracting States-India and Mauritius.
In arriving at
this conclusion, the Court upheld the sanctity of the bilateral nature of the
treaty, which would prevent one of the countries’ authorities from acting in a
manner that undermines the basic nature of the arrangement.
4.         Whether
recent reform proposals to the Income Tax Act clarify the nature of the
previous position?
Attention was
drawn to proposed amendments to section 90 of the Income Tax Act in 2013 which
indicates that the tax residency certificates issued by other countries was a
“necessary but not sufficient condition for claiming any relied” under the treaty.
However, this amendment did not materialise. This and a subsequent
clarification issued by the Ministry of Finance were seen by the Court to
“establish beyond doubt that the Residence Certificate issued by the Mauritius
authorities must be accepted provided of course it is established that it has
been issued by the appropriate Mauritius Authorities”.
5.         Whether
the treaty benefits can be availed of by the sellers even though Mauritius does
not impose capital gains tax on the sale of shares?
            The Revenue’s argument surrounded
the fact that while the double taxation avoidance treaty does not require
sellers to pay capital gains tax in India, they are able to benefit from the
fact that Mauritius does not levy any tax on capital gains. The Court found this
to be irrelevant, since that is precisely the reason why several companies
invest into India through Mauritius. This was based on an interpretation of the
treaty, where the Court observed as follows:
            39. Article 4 provides that for the
purpose of the Convention, the term “resident of a Contracting State” means any
person, who, under the laws of that State, is liable to taxation therein by
reason inter-alia of his domicile residence, place of management or any other
criterion of similar nature. The words “is liable to taxation” mean that the
income of the person may be liable to taxation and not that he is actually
taxed or pays tax. The words mean that the Government is entitled to tax the
person and not whether under the laws he actually pays the tax. A person liable
to pay tax may not be required to pay tax for variety of reasons. For instance,
his income may not be within the taxable bracket. There may be a special
provision exempting the payment of the taxes by him. Even such a person is
liable to taxation. This is clear from the words “any person who, under the
laws of that State” which immediately precede the words “liable to taxation
therein”. Had it been otherwise, Article 4 would have been worded differently.
A view to the contrary would make the DTAC unworkable and erode the basis
6.         Whether
the situs of the property in the form of shares is relevant in the
determination of whether tax on capital gains is to be levied in India or
            Article 13(4) of the treaty between
India and Mauritius provides that gains derived by a resident of a contracting
state from the alienation of property (other than those dealt with in other
provisions of the article) shall be taxable only in that state. The question
arose as to whether the situs of the shares is relevant to the determination of
which country it is taxable in. The Court found that for the purpose of article
13(4), which covers shares, the situs of the property is irrelevant. This
stands in contrast with other provisions of the article such as immovable
property, ships, aircraft, etc. where the situs of the property is relevant.
Hence, the Court found that capital gains tax on sale of shares (although
situated in India) could only be taxed in Mauritius.
7.         Whether
this is a case of treaty shopping?
            On this question, the Court relied
heavily on Azadi Bachao Andolan,
which had answered the question in the negative in a similar case. Further, in
this case, the Court noted:
            49. The Supreme Court also dealt with the
interpretation of treaties with respect to ‘treaty shopping’ in considerable
detail. It is sufficient to note only a few observations. It was observed that
many developed countries
tolerate or encourage treaty
shopping, even if it is unintended, improper or unjustified, for other non-tax
reasons unless it leads to a significant loss of tax revenues. Several
countries allow use of their treaty network to attract foreign enterprises and
offshore activities. In developed countries, treaty shopping is often regarded
as a tax incentive to attract scarce foreign capital or technology. The
countries take a holistic view keeping in mind the fiscal necessity and
political compulsions. The Supreme Court observed that it could not judge the
legality of treating shopping merely because one
section of thought considers it improper. We would only add that entering into
a treaty and terms and conditions thereof are the sovereign functions involving
important aspects of policy. Such decisions must be left to the policy makers
who are best equipped and have been entrusted with the responsibility of
negotiating the treaty to the greatest advantage and good of the country.
Consequently, the High Court
quashed the order of the AAR and declared that no capital gains tax is payable
by Barclays and Blackstone in respect of the sale of their shares in SKR BPO,
due to which there was no requirement on the part of Serco (as the purchaser)
to withhold tax.
At one level, this decision may be
considered to be a reiteration of the principles laid down by the Supreme Court
in Azadi Bachao Andolan. But, at the
same time, it reinforces the use of the double taxation avoidance treaty
between India and Mauritius, and particularly the reliance upon tax residency
certificates issued by the Mauritius authorities as a means to claim the treaty
benefits. It is also evident from the High Court’s decision that any change to
the legal position can only be brought about through executive action by
renegotiating the treaty. This is a broader issue that has been in the news
lately, but until then the current position is likely to ensue.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

    "….any change to the legal position can only be brought about through executive action by renegotiating the treaty. This is a broader issue ….but until then the current position is likely to ensue."

    The purport of or merit in this concluding observation is not at all understood; it is rather tantamount to an attempt to open, reopen and persist in doing so, impudently, to eternity. For, so far as one knows or is convinced,the indisputable basic principle that it is the DTAA that should prevail over the domestic law has come to be accepted and stands conceded once for all by the FM itself. Further, what ought not to be over-sighted is the fact that in the leading SC case,it was the REVENUE which sought to, and fought for, successfully so,in reiterating and reinforcing the self same principle referred above.

    All not having been said, is it not a national tragedy that even such devoutly unshakable principles, sanctified once for all, should be kept surfacing and resurfacing,thereby impairing and adversely impacting the legal regime (in its most comprehensive sense),to the very core !

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