AAR upholds sanctity of tax residency certificate; allows treaty benefits

Mauritius-based companies that have invested in India have a cause for cheer — a valid Tax Residency Certificate can get them exemption from paying capital gains tax on exiting Indian investments. The Authority for Advance Ruling (AAR) has upheld the validity of the TRC.

There has been lot of apprehension if the TRC was adequate to get the benefits under the India-Mauritius treaty. TRC is a certificate of residency of the investor. Having such a certificate establishes proof that the company concerned is resident of Mauritius.

The uncertainty arose because in some recent decisions, the AAR had disregarded the legal form of the transactions after applying the principles of anti-avoidance. Consequently, capital gains tax exemption under the India-Mauritius treaty was denied to the companies.

Now, in a significant ruling, the AAR has allowed Mauritius-based Dynamic India Fund (DIF)–I to get the benefits of the treaty as it had a valid TRC from the Mauritius revenue authority.

DIF-I, a company incorporated in Mauritius, had approached the AAR to seek an advance ruling on the taxability of capital gains arising out of the sale of shares of Indian companies.

Relying on the valid TRC and following the Supreme Court decision in the Azadi Bachao Andolan case, the AAR said DIF-I need not pay the capital gains tax on any sale of shares held by it in Indian companies.

While the latest ruling is binding only on the parties to the case, tax experts point out that it could have persuasive effect on other cases as well.

This AAR ruling should provide comfort to investors as it has upheld the sanctity of the TRC, say tax experts.

As an applicant, DIF-I said that it was a resident of Mauritius and held a valid TRC. The shares proposed to be sold were held as investments in its books of accounts and that the gains arising therefrom would be in the nature of capital gains.

It was also submitted that DIF-I did not have a permanent establishment in India. The revenue authorities contended that the structuring of the investment through Mauritius was a way to evade the capital gains tax arising from sale of shares of the Indian company. It also argued that control and management of DIF-I was in India making it a tax resident of India.

The AAR also said in its ruling that General Anti-avoidance rules (GAAR) provisions have no relevance at present.

These provisions could be dealt with by the revenue authorities as and when they come into force, the AAR said.

Mauritius is a main provider of foreign direct investments into India. It is also the preferred jurisdiction for Indian outward investments into Africa.


(This article was published on July 24, 2012)
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