Two Mauritius companies my UK parent set up hold shares in an Indian bank. Can we get the India-Mauritius treaty rate on the dividends and exemption on the eventual share gains?
No, and the Authority refused to rule at all. It accepted that the two Mauritius companies were residents of Mauritius under article 4, their effective management being there and not in India, so that on the face of the treaty article 13(4) would leave gains on the shares taxable only in Mauritius. But it then rejected both applications under clause (c) of the proviso to section 245R(2), holding the arrangement prima facie designed for the avoidance of income-tax: newly formed Mauritius subsidiaries wholly owned by a British bank served no purpose the bank could not serve by investing directly. The rejection binds only those applicants.
Pronounced by the Authority for Advance Rulings (S. Ranganathan, J. (Chairman), D. B. Lal and R. L. Meena, Members) on 1995-12-22, reported as [1996] 220 ITR 377 (AAR). It bears on section 245R(2), section 90, section 9(1)(i), section DTAA art 4, section DTAA art 13, section DTAA art 10 of the Income Tax Act 1961, in Residence & Treaty Benefit and Capital Gains matters.
This is where the Indian anti-treaty-shopping argument starts, and it is read for the argument rather than the result. The Authority put the objection at its highest: a company with no business of its own, formed just before the investment, is interposed, and the treaty was not made for it. The Supreme Court took a different course in Union of India v. Azadi Bachao Andolan on 7 October 2003, upholding Circular 789 and the sufficiency of a Mauritius residence certificate and declining to follow the Authority's contrary line. The ground has shifted again since: the 2016 Protocol lets India tax gains on shares acquired on or after 1 April 2017 and adds a limitation-of-benefits article. Use it for the shape of the Revenue's case, not as authority.
Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them.
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Two limited liability companies were incorporated in Mauritius in November 1994. Each was a wholly owned subsidiary of a British bank. Each held two crore equity shares, of Rs 20 crores, in an Indian bank. The applicants came to the Authority for confirmation that the dividends they received from the Indian bank would bear withholding tax not exceeding 5 per cent of the gross amount under article 10 of the India-Mauritius agreement, and that any gains derived from the eventual alienation of their shares in that bank would not be taxable in India under article 13(4). The Commissioner objected that the two companies had been interposed by the British bank purely to obtain benefits the bank itself could not have claimed, the United Kingdom agreement conferring no such exemption on capital gains.
The Authority did not answer the questions. On residence it accepted the applicants' case: article 4(1) asks whether a person is liable to tax in a State under its laws, and the place of effective management of the two companies was in Mauritius, since they had no place of management in India at all. On that footing article 13(4) would have left gains on the alienation of the shares taxable only in Mauritius, and article 10 would have capped the tax on dividends. But the Authority then applied clause (c) of the proviso to section 245R(2), which forbids it to allow an application where the question relates to a transaction designed prima facie for the avoidance of income-tax. It held that investment through newly formed Mauritius subsidiaries of a British bank could only have been for that purpose, and rejected both applications.
The Authority separated two questions: whether the treaty on its terms covered the applicants, and whether it should entertain the applications at all. On the first it refused the Revenue's narrow reading of article 4. Being liable to tax in paragraph 1 does not require that a tax has actually been imposed and collected; it asks whether the person is within the reach of that State's taxing laws. Nor did British parentage move the place of effective management out of Mauritius: what matters is where the day-to-day affairs are carried on, not where ultimate control resides in another country, and the companies had no place of management in India. Had the matter rested there the applicants would have had their ruling. The Authority then turned to the gateway. The proviso to section 245R(2) is not a rule of substantive tax law; it is a power to decline. The Authority reasoned that the object of an anti-abuse approach to treaties is to stop persons not entitled to a treaty from obtaining its benefits through interposed persons, and that on these facts the interposition was plain - two subsidiaries formed weeks before the investment, wholly owned by a bank that would have borne tax on the gains had it invested directly. That was enough to make the transaction prima facie designed for avoidance, and the applications were rejected without any ruling on the merits.
Persons not entitled to protection by a particular treaty were to be prevented from obtaining its benefits with the help of interposed persons ('treaty shopping').
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Handle my notice → Ask a CA on WhatsAppNo, and the Authority refused to rule at all. It accepted that the two Mauritius companies were residents of Mauritius under article 4, their effective management being there and not in India, so that on the face of the treaty article 13(4) would leave gains on the shares taxable only in Mauritius. But it then rejected both applications under clause (c) of the proviso to section 245R(2), holding the arrangement prima facie designed for the avoidance of income-tax: newly formed Mauritius subsidiaries wholly owned by a British bank served no purpose the bank could not serve by investing directly. The rejection binds only those applicants. This was decided by the Advance Ruling (S. Ranganathan, J. (Chairman), D. B. Lal and R. L. Meena, Members) and bears on section 245R(2), section 90, section 9(1)(i), section DTAA art 4, section DTAA art 13, section DTAA art 10 of the Income Tax Act 1961. It is reported as [1996] 220 ITR 377 (AAR). This is where the Indian anti-treaty-shopping argument starts, and it is read for the argument rather than the result. The Authority put the objection at its highest: a company with no business of its own, formed just before the investment, is interposed, and the treaty was not made for it. The Supreme Court took a different course in Union of India v. Azadi Bachao Andolan on 7 October 2003, upholding Circular 789 and the sufficiency of a Mauritius residence certificate and declining to follow the Authority's contrary line. The ground has shifted again since: the 2016 Protocol lets India tax gains on shares acquired on or after 1 April 2017 and adds a limitation-of-benefits article. Use it for the shape of the Revenue's case, not as authority. If it applies to you, the first step is this: Read the 2016 Protocol before assuming a Mauritius holding structure still shelters share gains: shares acquired on or after 1 April 2017 are taxable in India.
Two limited liability companies were incorporated in Mauritius in November 1994. Each was a wholly owned subsidiary of a British bank. Each held two crore equity shares, of Rs 20 crores, in an Indian bank. The applicants came to the Authority for confirmation that the dividends they received from the Indian bank would bear withholding tax not exceeding 5 per cent of the gross amount under article 10 of the India-Mauritius agreement, and that any gains derived from the eventual alienation of their shares in that bank would not be taxable in India under article 13(4). The Commissioner objected that the two companies had been interposed by the British bank purely to obtain benefits the bank itself could not have claimed, the United Kingdom agreement conferring no such exemption on capital gains. The matter was decided on 1995-12-22 by the Advance Ruling (S. Ranganathan, J. (Chairman), D. B. Lal and R. L. Meena, Members). On those facts the Advance Ruling held as follows. The Authority did not answer the questions. On residence it accepted the applicants' case: article 4(1) asks whether a person is liable to tax in a State under its laws, and the place of effective management of the two companies was in Mauritius, since they had no place of management in India at all. On that footing article 13(4) would have left gains on the alienation of the shares taxable only in Mauritius, and article 10 would have capped the tax on dividends. But the Authority then applied clause (c) of the proviso to section 245R(2), which forbids it to allow an application where the question relates to a transaction designed prima facie for the avoidance of income-tax. It held that investment through newly formed Mauritius subsidiaries of a British bank could only have been for that purpose, and rejected both applications.
The Authority separated two questions: whether the treaty on its terms covered the applicants, and whether it should entertain the applications at all. On the first it refused the Revenue's narrow reading of article 4. Being liable to tax in paragraph 1 does not require that a tax has actually been imposed and collected; it asks whether the person is within the reach of that State's taxing laws. Nor did British parentage move the place of effective management out of Mauritius: what matters is where the day-to-day affairs are carried on, not where ultimate control resides in another country, and the companies had no place of management in India. Had the matter rested there the applicants would have had their ruling. The Authority then turned to the gateway. The proviso to section 245R(2) is not a rule of substantive tax law; it is a power to decline. The Authority reasoned that the object of an anti-abuse approach to treaties is to stop persons not entitled to a treaty from obtaining its benefits through interposed persons, and that on these facts the interposition was plain - two subsidiaries formed weeks before the investment, wholly owned by a bank that would have borne tax on the gains had it invested directly. That was enough to make the transaction prima facie designed for avoidance, and the applications were rejected without any ruling on the merits. In the words reproduced by the source cited on this page: "Persons not entitled to protection by a particular treaty were to be prevented from obtaining its benefits with the help of interposed persons ('treaty shopping')."
It was decided by the Advance Ruling on 1995-12-22 and is reported as [1996] 220 ITR 377 (AAR). Binding only on the applicant who sought it, in respect of the transaction the ruling was sought on, and on the Principal Commissioner or Commissioner and the authorities subordinate to him in respect of that applicant and that transaction — and only until the law or the facts change (section 245S). It binds nobody else. The Tribunal and the courts nonetheless treat a considered ruling as persuasive, which is why practitioners cite them. An advance ruling binds only the applicant who sought it, only for the transaction it was sought on, and only the Commissioner and the officers under him in relation to that applicant and that transaction — and only until the law or the facts change. That is section 245S, and it means the ruling is not a precedent and binds nothing in your case. You cite it because the Authority reasoned the point out, often first and most fully, and the Tribunal and the courts treat a considered ruling as persuasive. Check before you rely on one: most of these were pronounced before 2009, and a great deal of cross-border tax has been rewritten since by amendment, protocol and judgment. On section 245R(2), section 90, section 9(1)(i), section DTAA art 4, section DTAA art 13, section DTAA art 10, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The Authority did not answer the questions. On residence it accepted the applicants' case: article 4(1) asks whether a person is liable to tax in a State under its laws, and the place of effective management of the two companies was in Mauritius, since they had no place of management in India at all. On that footing article 13(4) would have left gains on the alienation of the shares taxable only in Mauritius, and article 10 would have capped the tax on dividends. But the Authority then applied clause (c) of the proviso to section 245R(2), which forbids it to allow an application where the question relates to a transaction designed prima facie for the avoidance of income-tax. It held that investment through newly formed Mauritius subsidiaries of a British bank could only have been for that purpose, and rejected both applications. It arises in Residence & Treaty Benefit and Capital Gains matters, on section 245R(2), section 90, section 9(1)(i), section DTAA art 4, section DTAA art 13, section DTAA art 10 of the Income Tax Act 1961, and was decided by S. Ranganathan, J. (Chairman), D. B. Lal and R. L. Meena, Members. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Keep evidence that the offshore company does something of its own - board meetings held there, its own people, its own expenditure - because that is what the Authority found missing. Cite Azadi Bachao Andolan if an officer puts the treaty-shopping objection in this form, and make him identify the statutory provision he is invoking. Do not rely on this decision for your own client: section 245S confines it to the applicants who sought it.
Superseded by amendment. Checked two things. First, the Supreme Court in Union of India v. Azadi Bachao Andolan, decided 7 October 2003, upheld CBDT Circular 789 and the sufficiency of a Mauritius residence certificate and, of the Authority's contrary line in Cyril Eugene Pereira, said it was not persuaded; the treaty-shopping objection in the form the Authority put it did not survive. Second, the India-Mauritius Protocol notified by Notification No. 68/2016, S.O. 2680(E) dated 10 August 2016 inserted paragraphs 3A and 3B in article 13, so that India may tax gains on shares acquired on or after 1 April 2017, and inserted article 27A, a limitation-of-benefits provision. The exemption these applicants were seeking no longer exists for new investment. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Indian Kanoon's reproduction is the only text I could reach; no official AAR text is online, and the quotations come from that reproduction. The input note for this case matched the ruling. I did not read Cyril Eugene Pereira itself, and I did not check whether Chapter X-A has been applied to a structure of this kind. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Authority did not answer the questions. On residence it accepted the applicants' case: article 4(1) asks whether a person is liable to tax in a State under its laws, and the place of effective management of the two companies was in Mauritius, since they had no place of management in India at all. On that footing article 13(4) would have left gains on the alienation of the shares taxable only in Mauritius, and article 10 would have capped the tax on dividends. But the Authority then applied clause (c) of the proviso to section 245R(2), which forbids it to allow an application where the question relates to a transaction designed prima facie for the avoidance of income-tax. It held that investment through newly formed Mauritius subsidiaries of a British bank could only have been for that purpose, and rejected both applications.
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