Circular No. 682 — 1605B. Clarification regarding agreement for avoidance of double taxation with Mauritius

What this is

Circular No. 682 was issued by the Central Board of Direct Taxes on 30 March 1994. Its subject is 1605B. Clarification regarding agreement for avoidance of double taxation with Mauritius.

This one is about a tax treaty. India’s treaties enter Indian law by notification under section 90; where the instrument below is that notification, its date decides from when the treaty may be applied, and where it is a circular, it is the Board telling its officers how it reads the treaty — which is not the same thing.

What it does

Reads Article 13 of the India-Mauritius double taxation avoidance convention, notified on 6-12-1983 and applying in India from assessment year 1983-84, and states the Board's position on capital gains. Paragraph 1 gives the taxing right on gains from immovable property to the State where the property is situated, paragraphs 2 and 3 deal with movable property of a business or professional enterprise and with ships and aircraft, and paragraph 4 gives gains from the alienation of any other property to the State of which the alienator is a resident alone. On that reading, a resident of Mauritius who alienates shares of Indian companies is chargeable to capital gains tax only in Mauritius under Mauritius law and bears no capital gains tax liability in India. Paragraph 5 defines alienation as sale, exchange, transfer or relinquishment of the property, extinguishment of any rights in it, or its compulsory acquisition under any law in force in India or Mauritius.

Why it was issued

The circular is a clarification by the Board on how Article 13 of the Mauritius convention operates, the taxation of gains on shares of Indian companies held by Mauritius residents being the point in issue.

Who it reaches

Residents of Mauritius holding shares in Indian companies
Indian companies whose shares are transferred by Mauritius residents
Persons deducting tax on payments to Mauritius residents on a share transfer
Assessing Officers dealing with treaty claims under Article 13

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

1605B. Clarification regarding agreement for avoidance of double taxation with Mauritius
1. A Convention for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes of income and capital gains was entered into between the Government of India and the Government of Mauritius and was notified on 6-12-1983. In respect of India, the Convention applies from the assessment year 1983-84 and onwards.
2. Article 13 of the convention deals with taxation of capital gains and it has five paragraphs. The first paragraph gives the right of taxation of capital gains on the alienation of immovable property to the country in which the property is situated. The second and third paragraphs deal with right of taxation of capital gains on the alienation of movable property linked with business or professional enterprises and ships and aircrafts.
3. Paragraph 4 deals with taxation of capital gains arising from the alienation of any property other than those mentioned in the preceding paragraphs and gives the right of taxation of capital gains only to that State of which the person deriving the capital gains is a resident. In terms of paragraph 4, capital gains derived by a resident of Mauritius by alienation of shares of companies shall be taxable only in Mauritius according to Mauritius tax law. Therefore, any resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius as per Mauritius tax law and will not have any capital gains tax liability in India.
4. Paragraph 5 defines ‘alienation’ to mean the sale, exchange, transfer or relinquishment of the property or the extinguishment of any rights in it or its compulsory acquisition under any law in force in India or in Mauritius.
Circular : No. 682, dated 30-3-1994.

What to watch

The relief flows entirely from paragraph 4 of Article 13 as the convention stood when notified on 6-12-1983; the convention has since been amended in terms this text does not carry.
Only gains falling within paragraph 4 are covered; immovable property and business or professional movable property go to paragraphs 1 to 3 and can be taxed in India.
The definition of alienation is wide enough to take in relinquishment, extinguishment of rights and compulsory acquisition, not just a sale.
The circular says nothing about who is a resident of Mauritius for this purpose or how that is to be established.

Where you meet it

In a claim that no tax is deductible on the consideration for shares of an Indian company sold by a Mauritius holder, and in an assessment or reassessment where the treaty benefit on such a gain is disputed.

← Circular No. 683 · Circular No. 681 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.