India: SMR Ruling: Tax Department Attempts To Deny Treaty Benefits To Mauritius Company

The Tax department recently1 attempted to deny tax benefits in respect of capital gains arising from sale of shares, available to a company incorporated and resident in Mauritius ("Taxpayer") under Article 13(4) of the India-Mauritius tax treaty ("Treaty"). It contented that an Indian resident, who held 99% shares in the Taxpayer, had ordered the sale of shares (of an Indian company) held by the Taxpayer, and hence, the effective place of management of the Taxpayer was in India. Consequently, the Taxpayer was liable to be treated as a resident in India, and not eligible for benefits of the Treaty, as a Mauritius resident.

However, in appeal, the Income Tax Appellate Tribunal ("ITAT") has remanded the matter back to the Assessing Officer ("AO") for the AO to re-examine evidence pertaining to the residential status of the Taxpayer's directors at the time of holding of the meeting of the board of directors ("Board") in the relevant financial year. Interestingly, the ITAT had sought third party evidence or evidence by any government agency to substantiate the Taxpayer's claim.

The Ruling:

The tax department contented before the ITAT that since the Taxpayer was being effectively managed from India, it should be deemed to be a resident of India under Article 4(3) of the Treaty. It submitted that since the order for sale of shares were given by the Taxpayers shareholder in India, its effective place of management was in India. The T axpayer relied on the ruling of Radha Rani Holdings Limited, [(2007) 110 TTJ (Delhi) 920] where it was held that the place of control and management of a company is where all the meetings of its board of directors were held. The Taxpayer argued that the AO failed to appreciate that its director was at all relevant times (when the Board meetings were held) in Mauritius and there were no facts to substantiate that the meetings of the Board were held outside Mauritius.

The tax department distinguished the Taxpayer' case from the case of Radha Rani Holdings Limited on the ground that unlike in that case, minutes of meetings of the Board of the Taxpayer were not authenticated by the Indian High Commission in Mauritius, or by any third party. Further, it contended that there was no documentary evidence available in the Taxpayer's case to indicate that the meetings of the Board were held in Mauritius. The tax department also raised serious doubts as to the correctness of the signature of the director, on various documents and disputed their genuineness. The Taxpayer argued that the AO had not substantiated its allegation that its control and management was situated in India with any documentary evidence. As per section 114 of the Indian Evidence Act, 1872, the onus of proving the allegations of the tax department was to be borne by the department itself.

The ITAT noted that the Taxpayer had submitted a copy of the passport of a director of the Taxpayer indicating his presence in Mauritius on dates of holding the Board meetings. The ITAT held that considering the arguments of the taxpayer, it was essential to examine the authenticity of the evidence placed before the AO in respect of the Board meetings and directed the AO to decide the matter afresh in terms of the observations of the ITAT. It also observed that any third party evidence or an evidence by a government agency situated in India or Mauritius, relevant to the Board meetings being held in Mauritius should be brought on record to substantiate the Taxpayer's claim.

Analysis:

In our view, this judgment has not considered some essential points. Firstly, as per section 6(3) of the ITA, for an offshore company to be a resident in India in a financial year, its entire control and management has to be in India for the relevant financial year. Therefore, in the case of a foreign company, even if a slightest control and management is exercised from outside India it should not fall within the ambit of Section 6(3)(ii) and the company should be treated as a non-resident.2 Mere ordering of sale of shares etc. held by the Taxpayer, which could be a pure execution function, may not necessarily mean that the Taxpayer's entire control and management was in India. Further, in the case of Radha Rani Holdings3 the ITAT, Delhi had held that the control and management of a company lies where the place where the board of directors meet, since the board was the head and brain of the company. Generally, the management decisions of a company are taken by its board of directors, which actually control and manage the affairs of the company, subject to the overall supervision of the shareholders. Moreover, as rightly contented by the Taxpayer, the general presumption under law of evidence would be that the Board meetings of a Mauritian activity would have been held in Mauritius. The onus of proving the contrary should have been shouldered by the department.

Interestingly, the ITAT has observed that any third party evidence, or an evidence by a government agency situated in India or Mauritius, relevant to the Board meetings being held in Mauritius should be brought on record to substantiate the Taxpayer's claim. However, considering that the maintenance of minutes of the board meetings is an internal compliance procedure of a company, it could be a bit challenging for companies to get an authentication of such minutes from a government agency. Further, the ITAT's decision in this case is quite relevant for many FIIs and hedge funds trading on Indian stock exchanges, which in the interests of time and efficiency in getting trades executed, many times give Indian residents the authority to give orders based on a prior approval of the Mauritius Board. In such a case, where the board of directors of a company has sanctioned a particular action to be performed in the name of a company, the mere execution of that action by another person should not be relevant for ascertaining the situs of the company's control and management. Therefore, the effective place of control and management of the company, in such cases, should still be where its board of directors ordinarily meets.

Footnotes

1 SMR investments Limited v. DDIT, ITA Nos. 4084 & 46/D/2006

2 Radha Rani Holdings v. ADIT, [(2007) 110 TTJ (Delhi) 920]

3 [(2007) 110 TTJ (Delhi) 920]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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

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

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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

Mondaq.com (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 www.mondaq.com

To Use Mondaq.com 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.

Disclaimer

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.

General

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