Legal dispute concerning the taxability of capital gains arising ...

Tax dispute over Mauritius route sale of shares by foreign entity to Indian firm.

Case Laws     Income Tax

September 2, 2024

Legal dispute concerning the taxability of capital gains arising from the sale of shares by a Mauritian entity to an Indian company. The central issues revolve around the applicability of the India-Mauritius Double Taxation Avoidance Agreement (DTAA), beneficial ownership of shares, substance over form principle, treaty shopping, and grandfathering clause under Article 13(3A) of the DTAA. The court held that the Mauritian entity cannot be considered lacking economic substance or engaged in treaty abuse solely based on its incorporation in Mauritius. Investments routed through Mauritius cannot be presumed illegitimate, and the issuance of a Tax Residency Certificate (TRC) by Mauritius authorities is sacrosanct. The court emphasized that treaty benefits can only be denied in cases of sham transactions, fraud, or entities acting as mere conduits, subject to stringent standards of proof by the Revenue authorities. The court affirmed that the transaction was grandfathered under Article 13(3A) of the DTAA, excluding capital gains from taxation for shares acquired before April 1, 2017. Domestic tax legislation cannot override treaty provisions, and the Revenue cannot impose additional barriers beyond the Limitation of Benefits (LOB) clause in the DTAA. The court rejected the Revenue's arguments regarding beneficial ownership and held that the.

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