India: India-Mauritius Tax Treaty: AAR Re-Iterates Need For ‘Substance'


India-Mauritius Tax Treaty has always attracted interest of international investor community as well as the tax authorities. While the law on the application of this treaty was settled by the Hon'ble Supreme Court in its land mark ruling in the case of Azadi Bachao Andolan in 2003; on ground, application of this treaty has often been the subject matter of challenge and dispute from the tax authorities. Recently, the Hon'ble AAR has delivered two rulings in the context of this treaty. Interestingly, though seemingly pronounced in relation to the same group restructuring, in one case ('Negative Ruling', AAR No. 1128 of 20111), the Hon'ble AAR has denied the treaty relief to the Mauritius seller; and in the other case ('Positive Ruling', AAR No. 1129 of 20112), the benefit of Article 13(4) has been granted. This article seeks to analyse both these rulings on facts and sets out the takeaways from the same.

AAR Rulings - AAR No. 1128 of 2011 and AAR No. 1129 of 2011

The principal subject matter of both these applications was similar – viz, whether the capital gains arising to a Mauritius resident company from the sale of shares of an Indian company in FY 2011-12 were liable to tax in India having regard to Article 13 of the India – Mauritius tax treaty. Additionally, both the rulings also dealt with issues regarding applicability of withholding tax provisions, transfer pricing provisions and MAT provisions in relation to such sale.

In both the rulings, the Mauritius seller company was incorporated in Mauritius, was a tax resident of Mauritius, was not a fly-by-night operator, possessed a valid Tax Residency Certificate granted by Mauritius tax authorities and held a Category 1 Global Business License. Thus, while the Positive Ruling decided the question in favour of the applicant and held that the capital gains arising to the Mauritius seller company were not taxable in India; in view of the peculiar facts in the Negative Ruling, the Hon'ble AAR denied the treaty relief to the Mauritius seller company by holding that the Mauritius entity did not genuinely acquire the shares of the Indian company.

With respect to the other questions that were raised in these rulings, the answers are clear., viz. (i) withholding tax provisions would not apply if there is no chargeability to tax in India, viz. if the Mauritius seller is entitled to capital gains tax relief under the India – Mauritius tax treaty, the buyer will not be required to withhold any tax under the provisions of Indian income-tax law, (ii) transfer pricing provisions would apply even if the Mauritius seller is entitled to capital gains tax relief under the India – Mauritius tax treaty because there is no requirement in the Indian income-tax law that the transaction should result in income chargeable to tax for transfer pricing provisions to get attracted, (iii) MAT will not be applicable to foreign companies.

What does the Negative Ruling mean for India – Mauritius tax treaty?

In our view, this ruling of Hon'ble AAR is fact specific and does not really change/upset the settled legal position concerning applicability of tax treaty to residents of Mauritius with respect to taxability of capital gains in India in the relevant period. After detailed analysis of the factual position in this case, Hon'ble AAR reached a conclusion that shares of the Indian company were not really owned by the Mauritius entity and that they were an investment made by its US parent entity. Accordingly, on that basis, the Hon'ble AAR ruled negatively denying the benefit of tax treaty.

Even before this ruling, it was a general experience that in most of the cases involving this tax treaty, the tax authorities have been investigating and examining the facts and 'substance' aspect in detail including whether shares of the Indian company were owned by the Mauritius entities, whether the Mauritius entities are managed and controlled outside India, any round tripping angle and so on. We believe this ruling does not change the legal position; it only re-emphasizes that one will have to examine the facts and substance aspect of a given case in detail.

What factors would be relevant to demonstrate that the Mauritius entity is the legal and beneficial owner of the shares of Indian company?

While there is no express list of factors which, if addressed, would establish that the Mauritius entity is the legal and beneficial owner of the shares of Indian company and thus, entitled to the capital gains tax relief under the treaty; the aforesaid two recent rulings by the Hon'ble AAR throw light on some of the factors that would be relevant in this regard and should be appropriately addressed while assessing the Mauritius entity's eligibility to claim treaty benefits:

  • Who paid the consideration when the Mauritius entity acquired the shares of Indian company?
  • Who executed agreements for acquiring the shares of the Indian company?
  • Educational and technical qualifications of the Board of Directors of the Mauritius entity.
  • Composition of the Board of Directors of the Mauritius entity. In case at least majority of the Board are local Mauritius residents, the burden of proof is on the revenue authorities to establish that the control and management of the Mauritius entity is not in Mauritius.
  • In case of non-local directors occupying major positions, whether they were present in Mauritius when essential business decisions were taken in Mauritius.
  • Quantum of expenditure incurred by the Mauritius entity on its operations. The nature of expenditure would depend upon the type of business in which the Mauritius entity is engaged. For instance, for an investment holding company, even administrative expenses and legal & professional fees can be said to be operational expenditure.
  • Number of employees, staff etc employed in Mauritius.
  • Office area in Mauritius commensurate with the nature of business in which the Mauritius entity is engaged.
  • Whether the Mauritius entity has made investments in jurisdictions other than India as well?
  • Place where the meetings of Board of Directors of the Mauritius entity are held.
  • Language of the minutes of meetings of the Board of Directors of the Mauritius entity.
    • this should demonstrate that the Mauritius entity is an independent legal entity capable of taking its own decisions,
    • this should demonstrate that the Board of Directors of the Mauritius entity engaged in deliberations, discussions etc – prior to making the investment into the shares of Indian company – with respect to business decisions related to the Mauritius entity.


It may be noted that these rulings dealt with a period which was governed by the pre-amended India – Mauritius tax treaty. Though these rulings are very fact specific and do not really change the legal position in relation to the India – Mauritius tax treaty, it does give a sense of the factors that are being considered by the judicial authorities in evaluating the claim of a foreign entity for treaty relief. In summary, the foreign entity's claim for treaty relief would invariably depend, amongst other, upon the twin elements of intention to invest (control and management) and the contribution of consideration by such foreign entity.

The assessment becomes tricky in cases where the foreign entity's parent entity exercises influence over its decisions. While some level of shareholder level influence is bound to be there in such cases, it is worth noting that there is a difference between having the power and having a persuasive position. Having said so, in such type of cases, as long as it can be demonstrated that, inter alia, the foreign entity was acting as an independent legal entity (and not as a puppet of its parent entity), taking its own decisions, had made investments out of its own funds through banking channels, signed proper agreements for acquisition of shares, and doing business over a considerable period of time, had a sound business objective, and had invested in other companies as well, its claim to treaty relief becomes strong. Thus, these rulings re-iterate the need for having 'substance' for claiming treaty relief even in respect of income from transfer of investments which stand grand-fathered under the relevant tax treaty as well as under the GAAR (i.e. investments which were made prior to 1 April 2017).


1. In Re: "AB" Mauritius

2. In Re: AB Holdings, Mauritius-II

This article was first published in Taxsutra.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
Email Address
Company Name
Confirm Password
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions