Indian Supreme Court upholds the India-Mauritius tax treaty

The Indian Supreme Court has reaffirmed the conclusiveness of the decision of the Tax Residence Certificate issued by Mauritian Tax Authorities. In a landmark decision delivered in the case of Union of India & Anor v/s Azadi Bachao Andolan and Anor, on the 8th October 2003, the  Indian Supreme Court quashed an earlier decision of the Delhi High Court and affirmed  the validity of CBDT Circular  No.  789 of 2000 directing that a certificate of residence issued by the Mauritius authorities should be taken as sufficient evidence of residence in Mauritius.  This circular was issued pursuant to the India-Mauritius DTA which states that the determination of residence of a ‘person’ of Mauritius shall be made according to the laws of Mauritius where such person is liable to tax.

This judgment comes at an opportune time, since over the recent years, the use of the India-Mauritius DTA has been the subject of numerous criticisms by the Indian Press.  This decision of the Supreme Court clarifies the legal and economic legitimacy of the India–Mauritius DTA and reinforces the position of Mauritius as a legitimate base for investment in India.

The Supreme Court reversed the decision of High Court and concluded that:

Ø      The Indo-Mauritius DTAC was validly entered into by the Executive pursuant to the Income Tax Act.

Ø      The CBDT Circular No. 789 of 2000 was validly issued pursuant to section 119 of the Income Tax Act.

Ø      Liability to tax in Mauritius is sufficient to ground the DTAC.

Ø      Treaty shopping is not precluded by the Terms of the DTAC.

Ø      Tax Planning by an investor is legitimate and lawful.

¨       Liability to Tax:

On the issue of liability to tax, the Court disagreed with the advance ruling in the case of Cyril Eugene Pereira 1 and distinguished between liability to tax and actual payment of tax.  It was argued that companies registered in Mauritius are exempt from the payment of capital gains tax in Mauritius and therefore must be liable to the payment of capital gains tax in India.  The Court refused to accept this contention and stated that “the respondents proceeds on the fallacious premise that the liability to taxation is the same as payment of tax”  and that “ the test of liability is not to be determined on the basis of an exemption granted in respect of any particular source of income, but by taking into consideration the totality of the provisions of the income tax  law that prevails in contracting States”.

¨       Treaty Shopping and Tax Planning:

The Court highlighted that “ in developing countries, treaty shopping is often regarded as a tax incentive to attract scarce foreign capital or technology” and  recognized that India has been the beneficiary of significant foreign funds through the “Mauritius conduit” and that the amount of capital transfers to the Indian economy would have been much lower without the India –Mauritius tax treaty.  Treaty shopping, according to the Indian Supreme Court, by the national of a third country, is not precluded under the India-Mauritius Tax.  The Court stated that if there was an intention of precluding treaty shopping, “then a suitable term of limitation to that effect should have been incorporated “  as is specifically provided in Article 24 of the Indo-US Treaty.

The Court further highlighted the legitimacy of tax planning by citing the case of IRC v.  Duke of Westminster2 Where Lord Tomlin stated that “ Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.  If he succeeds in ordering them so as to secure this result, then, however, unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.”

The Court concluded that not every attempt at tax planning is illegitimate and that all tax payer has a legal right to decrease the amount of tax by means which the law permits and that it should not be guided by the assessee’s real motive.

The Court stated that it refused to interfere in what was essentially a legislative and executive function.

Supreme Court Judgement in .pdf format: Click Here

14 October 2003

Financial Services Commission