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361International Taxation n Vol. 13 n October 2015 n 71

Shailesh Monani*

Chandresh Bhimani**

Gaurish Zaoba***

Introduction

The Indian government is aiming to put India on a high growth trajectory by attracting non-resident investment through ambitious flagship programs such as “Make in India”, “Digital India”, “Skill India” etc. Foreign investment is critical to the success of these projects and the government on its part, is promising ease of doing business on the tax and regulatory front including non-adversarial tax regime, to the potential non-resident investors.

Certainty with respect to the tax costs is perhaps the cornerstone of a non-adversarial tax regime. One of the key aspects of the certainty when it comes to the Indian income-tax is the eligibility of the non-residents to access the double taxation avoidance agreements (tax treaties). Very often the non-resident investors prefer to invest in India through entities set up in countries having favourable tax treaties with India such as Mauritius, which accounts for considerable investments flowing into India.

Usually the non-residents access the tax treaties based on tax residency certificate (TRC) issued by the tax authorities of their respective country. However the tax treaty claims based solely of the TRC have not always accepted by the tax authorities and there has been significant litigation on this matter especially in the context of the India-Mauritius tax treaty.

This article discussed in brief the following:

�� controversy over non-resident investors’ claims for being eligible to claim the tax treaty on the basis of Tax Residency Certificate;

�� recent decision of the Punjab and Haryana High Court in case of Serco BPO (P.) Ltd. v. Authority for Advance Rulings1 on the subject; and

Tax residency certificate – An Indian perspective

inTErnaTional TaxaTion

* Shailesh Monani, Partner, PricewaterhouseCoopers Pvt. Ltd. ** Chandresh Bhimani, Director, PricewaterhouseCoopers Pvt. Ltd. *** Gaurish Zaoba, Manager, PricewaterhouseCoopers Pvt. Ltd.

362 International Taxation n Vol. 13 n October 2015 n 72

�� the impact of the action plans being developed by OECD and the G20 group of countries as a part of the Base Ero-sion and Profits Shifting Project (BEPS).

Controversy over TRC

If a tax treaty is applicable to a non-resident, then the provisions of the Indian Income-tax Act, 1961 (the Act) are applicable only to the extent they are more beneficial to it2.

The Act was amended 3 years back to include a specific provision allowing treaty benefits to the non-residents subject to furnishing of a valid tax residency certificate (TRC)3 and certain prescribed information4. While these amendments are relatively recent, the TRC was widely believed to be necessary and sufficient documentary evidence for enabling a non-resident to avail the tax treaty benefits. Further in the context of the India-Mauritius tax treaty, a specific instruction was issued by the Central Board of Direct Taxes (CBDT), the apex body of the Income-tax authorities allowing India-Mauritius tax treaty benefit to persons with a valid TRC from the Mauritius tax authorities5.

Yet the tax authorities have often raised the question of sufficiency of the TRC for claiming tax treaty relief especially in the context of the India-Mauritius tax treaty which allocates the right to tax the capital gains arising on transfer of shares to Mauritius if the tax payer is a resident of Mauritius (capital gains exemption).

The genesis of the tax authorities’ reluctance to accept the TRC as the final word on the tax residency in the case of India-Mauritius tax treaty appears to be that the Mauritius entities claiming the tax residency of Mauritius, were merely shell entities having no business operations in Mauritius and were set up only for claiming the capital gains exemption under the India-Mauritius tax treaty. Further the tax authorities contend that allowing the benefits of the India-Mauritius tax treaty to these entities, results into double non-taxation

since the capital gains on sale of shares are exempt from tax in Mauritius.

There has been significant litigation on this subject. The most prominent decision on this subject is that of the Supreme Court in the case of Union of India v. Azadi Bachao Andolan6 wherein the Supreme Court had upheld the validity of the abovementioned Circular 789 which had provided that a person holding a valid TRC issued by the Mauritius tax authorities, would be entitled to claim the benefits of the India-Mauritius tax treaty.

It is also interesting to note that section 90 of the Act was amended vide Finance Act, 2003 to empower the Central government to enter into tax treaties for inter-alia granting relief in respect of income-tax chargeable under the Act “to promote mutual economic relations, trade or investment”. Thus the central government is empowered to enter into tax treaties for non-tax considerations also.

Thereafter the section 90 of the Act was further amended by the Finance Act, 2012 to provide that TRC containing the prescribed details, would be mandatorily required to be furnished by a non-resident for claiming tax treaty benefits. In addition, the explanatory memorandum to the Finance Bill, 2012 introducing these provisions, mentioned that the TRC would be a necessary but not a sufficient condition for the purposes of availing the tax treaty benefits.

This caused severe anxiety amongst the non-residents since it seemed to suggest that the TRC would not be the last word on the tax treaty benefits and the tax authorities can tear the veil of TRC and examine the factual matrix.

This was sought to be addressed by a press release issued by the then Finance Minister stating that the TRC would be accepted for evidencing the tax residence under the tax treaty and the tax authorities would not go behind the TRC to examine the residential status. The press release also reiterated the Circular 789 would still be applicable. This

international Taxation


was reflected by an amendment to section 90 in the very next year by Finance Act, 2013 which dropped the requirement of furnishing the TRC with the prescribed details. Instead a provision was inserted in section 90 requiring the taxpayers to provide such particulars7 separately along with a TRC, for availing the tax treaty benefits.

Despite the Supreme Court decision and the CBDT circular/press release, the Indian tax authorities have raised questions over the tax treaty eligibility claims of the non-residents and there has been subsequent litigation on this front. Fortunately the principles enunciated by the Supreme Court have been consistently applied by the Indian Courts in the subsequent decisions8, the latest one being rendered by the Punjab and Haryana High Court, which is discussed below:

Decision of the Punjab and Haryana High Court

The Punjab and Haryana High Court (High Court) dealt with the question as to whether a non-resident would be required to withhold tax on the payments being made to another non-residents (based out of Mauritius) for acquiring their shares in an Indian company.

The facts of the case are briefly mentioned below:

�� Blackstone GPV Capital Partners Mauritius VB Ltd (“Blackstone”) had subscribed to 80% of the equity share capital in an Indian company, SKR BPO Services Pvt. Ltd. (Serco Services) in the year 2007 after applying for and obtaining the necessary regulatory approvals.

�� It had transferred part of its sharehold-ing amounting to 12.75% of the total shareholding to Barclays H&B Mauritius Limited (“Barclays”), incorporated in Mauritius.

�� Serco BPO Private Limited (“Serco BPO or taxpayer”) incorporated in Mauritius, entered into a share purchase agreement

for acquiring shares from Blackstone and Barclays (sellers) in Serco Services in the year 2011.

�� Serco BPO applied for a ruling from the Authority of Advance Rulings (AAR) for determining the tax implications arising to the non-resident shareholders and its own withholding tax liability under the provisions of the Act read with the pro-visions of the India-Mauritius tax treaty.

�� The AAR declined to give its ruling on the basis of a prima facie finding that the sale transaction had been designed for the purpose of tax avoidance. The AAR further directed the tax authorities to find out the true nature of the trans-action by investigating and examining fund flows, commercial purpose of the Mauritius entities, commercial expediency of the transaction etc.

�� Serco BPO filed a writ petition before the Punjab and Haryana High Court.

Tax payer’s contention before the High Court:

�� Sellers were tax resident of Mauritius and had obtained TRC from the Mauritius tax authorities. Thus the transfer of shares in Serco Services were covered under Article 13(4) of the India-Mauritius tax treaty, and therefore the sellers were not liable to Capital Gain taxation in India and thus there is no correspond-ing withholding tax obligation on the tax payer.

�� Detailed submissions were made to the revenue authority to substantiate the transaction including information such as:

�n corporate structure, share purchase agreements, confidential valuation report about Serco Services;

�n details of incorporation/memoran-dum and articles of association/financial statements of Blackstone and Barclays, regulatory approvals in India;


�n source of initial investments into Serco Services, bank account state-ments from the date of initial in-vestments into Serco till the sale of shares, details of consideration received etc.

Tax authorities’ contentions before the High Court:

The beneficial provisions governing capital gain taxation of India-Mauritius tax treaty shall not be applicable to the present case on account of the following:

�� The sellers could not be considered as resident of Mauritius since:

�n they did not have any business interest/ business activity/ manu-facturing unit in Mauritius and they did not render any services in Mauritius.

�n the real beneficiaries were the share-holders of both the sellers in Serco Services, who were not tax residents of Mauritius.

�n the TRCs issued by Mauritius gov-ernment is not relevant and is not conclusive to establish the residency of both the entities in Mauritius

�� Article 13(4) of India-Mauritius tax treaty is applicable where taxes are paid in Mauritius. However no taxes can be said to have been paid in Mauritius, in absence of levy of capital gain tax in Mauritius and consequently the Article 13(4) of India-Mauritius tax treaty is not applicable. The entire transaction was devised with an intention to obtain tax advantage by way of treaty shopping.

High Court decision:

The High Court held that:

�� The validity of the TRCs have not been challenged by the tax authorities. Con-sequently the sellers holding the TRCs, are to be regarded as the tax residents

of Mauritius and eligible to claim the benefits of the India-Mauritius tax treaty.

�� Consequently the income arising to the sellers from the sale of shares in Serco Services would not be taxable in India and the taxpayer would not be required to withhold tax thereon.

The relevant observations of the Punjab and Haryana High Court on the validity of TRC issued by the Mauritius tax authorities are as follows:

�� In view of the Circular No. 789 and the Supreme Court decision in case of Azadi Bachao Andolan, it is incumbent upon the tax authorities in India to ac-cept the TRCs issued by the Mauritian authorities. Once it is established that it has been issued by the contracting State i.e. Mauritius, a failure to accept the TRCs issued by the Mauritian authorities would be an indication of break down in the faith reposed by the Government of India in the Government of Mauritius and the Mauritian authorities reiterated in and evidenced by statutory Circulars issued under section 119 of the Act

�� The entire sequence of events namely the Finance Bill, 2013, the clarification issued by the Finance Ministry regard-ing the TRC dated 1 March, 2013 and the Finance Act, 2013 establish beyond doubt that the TRCs issued by the Mauritius authorities must be accepted provided of course it is established that it has been issued by the appropriate Mauritius Authorities. Either ways the Indian tax authorities did not raise any question regards the genuineness or va-lidity of the TRC issued by Mauritius tax authorities.

It is also relevant to note the decision of the High Court with respect to tax authorities’ contentions on treaty shopping and investments made for purposes of availing India-Mauritius tax treaty benefits:



Treaty Shopping

The High Court accepted tax payer’s contention that in absence of limitation clause, there is no disabling or disentitling conditions in the India-Mauritius tax treaty prohibiting the resident of a third nation from deriving benefits thereunder. Further it took cognizance of the observation of Hon’ble Supreme Court decision in case of Azadi Bachao Andolan (supra)9 and held that entering into a treaty and terms/conditions thereof are sovereign functions involving important aspects of the policy and should be left to policy makers.

Investment not made with purpose of sale

The High Court examined the following facts of the transaction and concluded that there is nothing to suggest that investment was made with an intention to earn profits from sale of Serco Service’s shares or that the sale of shares in the year 2011 was conceived at the time of investment in 2007:

�� The sellers had acquired the shares in Serco Services almost since its inception and had managed its business over six years by employing about 1,000 personnel.

�� The tax payer had made detailed sub-missions including all relevant aspects of the transaction (such as, flow of funds, commercial purpose of Mauritius entities, commercial expediency of transactions, etc.) which were crucial for determining the nature of transaction.

Our comments

There has been significant litigation on the non-residents’ claim for tax treaty benefits on the basis of the TRC, especially in the context of the India-Mauritius tax treaty despite there being a specific CBDT circular and a subsequent decision of the Supreme Court upholding the validity of the said circular.

In view of the above, it is desirable that the tax authorities should respect the circular issued by the CBDT as well as the judicial precedents on the subject and grant the tax treaty benefits based on the TRC.

Looking forward - BEPS Action Plan 6

While the dust appeared to have settled on availability of tax treaty based on TRC, there have been some interesting developments in the form of the action plans being developed by OECD and the G20 group of countries (including India) as a part of its Base Erosion and Profits Shifting Project (BEPS) targeted to identify and combat host of aggressive tax planning strategies.

The BEPS Action plan 6 deals with the treaty abuse and treaty shopping which has been identified as one of the primary concern areas of BEPS. Some of the key measures recommended by the OECD are summarized below:

�� The preamble to the tax treaties should include a clear statement that the con-tracting states intend to avoid creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance;

�� Tax treaties should include an anti-abuse rule based on the limitation of benefits (LOB) test. The action plan provides for draft language of the LOB test based on LOB clause contained in tax treaties entered into by USA, Japan and India.

�� Tax treaties should address situations not covered by the LOB rule by way of a general anti-abuse rule based on the principle purpose of the transac-tion (PPT) test. The PPT test would be applied to deny the tax treaty benefits when it can be reasonably concluded that one of the principal purposes of a transaction is to secure a benefit under the tax treaty which is not in accord-ance with the object and purpose of the tax treaty.


It appears from an overall reading, that the action plan 6 emphasizes the importance of substance in tax treaty claims and aims to prevent treaty abuse/treaty shopping resulting into double non-taxation.

India impact

While the BEPS project came into existence in the year 2013 mainly as a result of the G20 group of nations to combat aggressive tax planning strategies, the Indian legislature has already introduced anti-avoidance provisions - General Anti Avoidance Rules (GAAR) in the Act. The GAAR is slated to come into effect from FY 2017-18 and provides for

tax treaty override in case of impermissible avoidance arrangements10.

India is a part of G20 group of nations and has welcomed the BEPS project. It is expected that the necessary legislative amendments/administrative actions will be undertaken for aligning the Indian Income-tax Act with the BEPS action plans.

Further in light of the BEPS action plans, it will be interesting to see the approach that will be adopted by the Indian government in the context of tax treaties which contains beneficial provisions but without LOB clause such as India- Mauritius tax treaty11.

i

1. [2015] 60 taxmann.com 433 (Punj. & Har.). 2. Section 90(2). 3. Section 90(4). 4. Section 90(5) provides for furnishing of details in form 10F. 5. Circular No. 789 dated 13 April, 2000 - [2000] 243 ITR (St.) 57. 6. [2003] 263 ITR 706/132 Taxman 373 (SC). 7. Prescribed in Form 10F. 8. Some of which being Bombay High Court decisions in case of DIT (International Taxation) v. Chiron Bearings Gmbh & Co. [2013] 351 ITR

115/213 Taxman 174/29 taxmann.com 199 (Bom.), DIT (International Taxation) v. Universal International Music B.V. [2013] 31 taxmann.com 223/214 Taxman 19 (Bom.).

9. The Supreme Court held that “If it was intended that a national of a third State should be precluded from the benefits of the India-Mauritius tax treaty, then a suitable term of limitation to that effect should have been incorporated therein. In the absence of a limitation clause, such as the one contained in article 24 of the Indo-U.S. Treaty, there are no disabling or disentitling conditions under the India-Mauritius tax treaty prohibiting the resident of a third nation from deriving benefits thereunder.”

10. Section 96 of the Act defines impermissible tax avoidance arrangement to mean an arrangement, the main purpose of which is to obtain a tax benefit and which creates rights or obligations not ordinarily created between persons dealing at arms length/results into misuse or abuse of the provisions of the Act/lacks commercial substance/is carried out by means not ordinarily employed for bona fide purposes.

11. News of renegotiations of India-Mauritius tax treaty have been going around for some time now including reports of inclusion of a LOB clause.
