3 August 2017


Recently, the Hon’ble Bombay High Court (HC) upheld the decision of the Authority for Advance Rulings (AAR) wherein a Mauritian entity was entitled to avail the beneficial provisions of the India Mauritius Tax Treaty (Treaty) in relation to capital gains arising from the sale of shares of an Indian company. The HC has followed the ruling of the Apex Court in the landmark case of Union of India v. Azadi Bachao Andolan [[2003] 132 Taxman 373 (SC)].


JSH (Mauritius) Limited (Taxpayer), is a company incorporated in Mauritius engaged in the business of investment and financing activities, having no permanent establishment or business presence in India. It held a valid Category 1 Global Business Company License (GBL-1) and a Tax Residency Certificate (TRC) issued by Mauritian authorities. The Taxpayer held shares of Tata Industries Limited (TIL), an Indian company, for a period of 13 years and in June 2009, it transferred the TIL shares owned by it to Tata Sons Limited (TSL). The sale proceeds from the TIL shares were re-invested in a group company of TIL.

The Taxpayer had approached the AAR to ascertain whether it was entitled to beneficial provisions (namely, Article 13(4)) of the Treaty in relation to sale of TIL shares in order to be exempt from paying any capital gains tax in India. The AAR ruled in favour of the Taxpayer and observed that it was not a ‘shell company’ and held that the transaction was not designed to avoid tax. Aggrieved by the decision of the AAR, the Income Tax Department (Revenue) filed the present writ petition before the HC. Importantly, the Revenue filed the writ petition after a delay of 8 (eight) months from the date of the AAR’s order.

Revenue’s Case before HC

The Revenue put forth the following key contentions to argue that the Taxpayer should be taxed in India in relation to capital gains arising from the sale of TIL shares:

  • The Taxpayer is a ‘shell company’ and ‘fly-by-night’ Company: Contending that the Taxpayer had been incorporated only to take advantage of the Treaty, the Revenue pointed to the original proposal made to the Indian regulator at the time of investment which depicted the name of one Jardine Matheson Bermuda as the investor. Only later was the proposal amended to route the investment through Mauritius.
  • No commercial substance: The Revenue argued that the Taxpayer had never incurred expenses of wages, salaries of staff, electricity, other charges etc., and its only income and expense (apart from the profits from the sale of shares of TIL) were on account of interest received from or paid to its group entities.
  • Period of holding: The mere fact that the Taxpayer had held shares of TIL for 13 (thirteen) years was irrelevant according to the Revenue while assessing the Taxpayer’s eligibility to avail Treaty benefits.
  • Beneficial owner of TIL shares: The Revenue contended that Jardine Matheson Bermuda was in fact the beneficial owner of the TIL shares since the Taxpayer had not nominated anyone on the Board of Directors (Board) of TIL and in fact, certain employees of Jardine Matheson Bermuda were appointed as directors on TIL’s Board.
  • AAR’s verdict on ‘shell company’: Arguing that the transaction was a clear case of Treaty abuse, the Revenue stated that the AAR is not empowered to decide cases of tax avoidance. According to the Revenue, the AAR was erroneous in not discussing the basis for concluding that the Taxpayer was not a ‘shell company’.

Taxpayer’s Case before the HC

The following key arguments were advanced by the Taxpayer before the HC:

  • Maintainability of Taxpayer’s application before the AAR: The Taxpayer submitted that the Revenue had failed to challenge the initial order of the AAR wherein it had reserved the right to examine the issue of tax avoidance at the final hearing stage as against at the admission stage. Consequently, the ruling had attained finality and maintainability of the Taxpayer’s application could not be challenged at this stage before the HC. The Taxpayer argued that the AAR’s order is thus final and binding on parties and the Revenue.
  • Bona fide and Residence of the Taxpayer: The Taxpayer reiterated its long-term investment in TIL, after due approval from the Indian regulator, its valid GBL-1 and TRC granted by Mauritian authorities and income tax returns filed in Mauritius. It argued that it was a Mauritian ‘resident’ for the purposes of the Treaty and therefore squarely entitled to Treaty benefits.
  • Exemption from Capital Gains Tax in India, Legality of Treaty shopping: The Taxpayer further substantiated its claim to avail Treaty benefits by placing reliance on the Azadi case (supra) and circulars (binding on the Revenue) issued by the Central Board of Direct Taxes. The circulars unequivocally provide that taxation of capital gains arising to a resident of Mauritius would be taxable in Mauritius; and that a TRC would constitute sufficient evidence of residence, respectively.

Decision of the HC

Dismissing the Revenue’s writ petition, the HC decided in favour of the Taxpayer. The HC held that it would not act as an appellate authority unless the AAR’s appreciation of facts and findings were perverse or if the provisions of law were incorrectly construed. The HC concluded that the AAR had considered all relevant aspects of the matter in arriving at a just conclusion and that the Treaty had also been rightly interpreted.

The HC noted that the long period of holding TIL shares and reinvesting the proceeds in another Indian company suggested the bona fide of the Taxpayer. It further held that since the AAR did not rule that the Taxpayer is a ‘fly-by-night’ company, alleging prima facie tax avoidance at a later stage was unwarranted.

Interestingly, the HC did not rule on the delay of 8 months on the Revenue’s part, in filing the writ petition challenging the AAR ruling, albeit, the Revenue had argued that “some time was lost due to administrative exigency.”


In the pre-General Anti Avoidance Rule and pre-Treaty amendment era, this decision of the HC is in line with several previous decisions of various courts where treaty eligibility of a Mauritius company has been upheld based on a valid TRC, absent any Indian business presence, fraud or façade. Having said that, it is interesting to note the factual details that the Revenue highlighted during the course of its arguments to contend that the Taxpayer was a ‘shell company’ – for instance, the investment proposal to the Indian regulator, expenses incurred by the Taxpayer, directors appointed on the Board etc. From a structuring perspective, it would be useful to evaluate such factual details to ensure that both from a commercial and tax perspective, the eligibility to Treaty benefits is not undermined in any way.