Is beneficial ownership a relevant criterion when a company resident in Mauritius is seeking to claim treaty benefits under Article 13 of the India-Mauritius DTAA? 

In a recent ruling delivered by the Mumbai Income-Tax Appellate Authority (“ITAT”), the ITAT considered whether the beneficial ownership of shares is a relevant criterion for a taxpayer, under the India-Mauritius Double Taxation Avoidance Agreement (the “DTAA”), to avail itself of capital gains tax benefits under Article 13 of the DTAA.

Background

The issue was raised in the case of Blackstone FP Capital Partners Mauritius V Limited (“Blackstone”), a company incorporated in Mauritius and holding a global business licence and a tax residence certificate.  In the financial year 2015-2016, Blackstone, a subsidiary of Blackstone FP Capital (Mauritius) VA Ltd (the “Parent Company”) incorporated in the Cayman Islands, sold certain shares of CMS Info Systems Ltd, an Indian company to Sion Investment Holdings Pte Ltd, a Singaporean entity (the “Sale Transaction”). The capital gains of Blackstone from the Sale Transaction amounted to approximately INR 9.05 billion.

Stand of the Central Board of Direct Taxes

Blackstone, being tax resident in Mauritius, sought to claim treaty benefits under Article 13 of the DTAA. Blackstone contended that it should have been taxed in Mauritius as long as it could demonstrate that its management and control was being exercised from Mauritius. The Central Board of Direct Taxes (the “CBDT”), however, denied the application of the DTAA to the Sale Transaction, stating, amongst other reasons, that essentially:

  1. The Sale Transaction was a ‘scheme’ designed for the benefit of the Parent Company; and that
  2. The effective ownership and control of Blackstone was vested with the Parent Company.

The CBDT therefore concluded that it was the Parent Company which ultimately stood to benefit from the capital gains derived from the Sale Transaction. Since the Parent Company was a Cayman Islands entity, the India-Mauritius DTAA could not be applied to the Sale Transaction. Feeling aggrieved by the decision, Blackstone lodged an appeal before the ITAT.

Review by the ITAT

When reviewing the decision of the CBDT, the ITAT primarily ruled that beneficial ownership with respect to capital gains is not expressly mentioned in Article 13 of the DTAA, in contrast with the provisions in Article 10 (Dividends) and Article 11 (Interest) of the DTAA.

In the absence of any specific reference to beneficial ownership in Article 13 of the DTAA, the CBDT should not have inferred that beneficial ownership was a necessary condition for Blackstone to claim capital gains tax benefits under Article 13 of the DTAA.

The ITAT further stated that treaties are bilaterally agreed, and the requirements and intent of each provision have been specifically deliberated and agreed upon between the signatories of the treaty. 

The matter was referred back to the CBDT and it is expected that the CBDT will now follow well-established legal principles and judicial precedents in ascertaining the extension of treaty benefits to a taxpayer who meets the requirements laid down by both jurisdictions.

Key takeaways

  1. A DTAA or treaty is nothing more than a contract between two states. Hence, a strict interpretation is necessary to uphold the certainty and predictability that the contracting parties seek to achieve. Any deviation from such a strict interpretation is likely to result in confusion and be nefarious to commerce and industry between the jurisdictions.
  2. When interpreting international treaties, it is fundamental to uphold the principles of the Vienna Convention on the Law of Treaties, notably Article 26 which provides that: “Every treaty in force is binding upon the parties to it and must be performed by them in good faith”.

Stakeholders have observed that a wide interpretation of the treaty, such as the ‘reading-in’ of a beneficial ownership test which is not specifically embedded in the DTAA, is tantamount to re-writing the treaty provisions. The latter exercise, it should be stressed, lies within the sole purview of the governments of India and Mauritius.