For global investors looking to participate in the attractive India growth story, navigating the complex terrain of tax regulations can be challenging. In this regard, international tax treaties offer global investors much needed certainty with respect to the cross-border tax implications for their global income. Historically, India-Mauritius and India-Singapore tax treaties have offered benefits to investors from these countries in the form of capital gains tax exemptions. While such benefits have been phased out since 2017, eligibility for benefits under these treaties remains a contested issue before Indian courts. Revenue authorities have often challenged the eligibility of entities from Mauritius and Singapore for treaty benefits. Recent developments in the Supreme Court indicate that investors may have to remain extra cautious while claiming such tax treaty benefits.
The road so far
The India-Mauritius Tax Treaty offers capital gains tax exemption to investors from these jurisdictions for shares in Indian companies acquired before 1 April 2017. Historically, the India-Mauritius Tax Treaty has been the subject of considerable litigation in India with respect to the denial of tax treaty benefits concerning capital gains tax exemption. This changed with the Supreme Court’s landmark ruling in the UOI v. Azadi Bachao Andolan case in 2003. In this ruling, the apex court upheld the Government’s circular which stated that a ‘Certificate of Residence’ (also known as Tax Residence Certificate or TRC) issued by Mauritian revenue authorities would be sufficient evidence to prove eligibility for the tax benefit under the India-Mauritius Tax Treaty. Indian courts frequently use this principle and rely on TRCs when deciding eligibility for treaty benefits (including the India-Singapore Tax Treaty).
Despite the Supreme Court’s 2003 ruling, there were many on-ground and practical difficulties for Mauritius and Singapore-based entities seeking capital gains tax benefits under these treaties. These entities often face several challenges in their attempts to avail tax exemptions as authorities often raise questions on treaty eligibility, despite producing a TRC. Authorities are also known to scrutinise the ‘substance’ angle and conduct an in-depth verification of their beneficial ownership. In many such cases, authorities have denied the benefit of a tax treaty. Further, tax authorities are also intensely scrutinising aspects such as the conduct and credibility of the local board of directors, the location of board meetings, examination of minutes of board meetings, ascertaining who was really in the driving seat to take important business or investments and policy decisions, person in control of the bank account, residency of company shareholders and so on. The Supreme Court’s recent order may place a kind of question mark on one’s ability to rely on Blackstone and Azadi Bachao Andolan rulings and could possibly impact ongoing treaty eligibility litigations.
Recent developments
Last year, the Delhi High Court made a significant ruling in the case of Blackstone Capital Partners (Singapore), or the Blackstone Judgement. This ruling on the India-Singapore Tax Treaty reiterated the settled legal position laid down by the Supreme Court in the Azadi Bachao ruling and Vodafone International Holdings BV case. Essentially the court emphasised that a TRC serves as sufficient evidence to claim eligibility under a tax treaty, confirm residential status, establish beneficial ownership, and importantly, prevent the tax authorities from disregarding the TRC issued by another tax jurisdiction.
However, in another new development, the Supreme Court has admitted the tax departments’ ‘special leave petition’ seeking to challenge Blackstone judgement. As of 12 January 2024, the Supreme Court has granted a stay on the operation of the judgement of the Delhi High Court. Additionally, the Supreme Court has also provided protection to Blackstone Capital Partners (Singapore) against any tax recovery during this interim period, and hearing on this matter has been expedited. Subsequently, the Supreme Court will now hear the arguments of both sides and decide the appropriateness of the Blackstone Judgment.
Impact on foreign funds and private equity investors
Until the Honourable Supreme Court finally decides on the Blackstone Judgement, it may not be an easy road for Mauritius and Singapore investors to get capital gains exemption benefits in India under these tax treaties. It is very likely that these entities may have to go through detailed scrutiny by tax authorities, and they may not regard TRC as sufficient evidence for entitlement to tax treaty benefits despite Azadi Bachao Andolan and the Government Circular upheld by it.
While the apex court’s final decision is awaited, it may be prudent to seek appropriate legal tax counselling on tax assessments, tax audits and how best to present a case for capital gains tax exemption in India under the India-Mauritius or India-Singapore Tax Treaty. Filing quality and effective legal submissions, including written arguments, justifications, and factual narratives, also plays an important role in putting forth a strong case for claiming tax treaty benefits as applicable.
