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Tax Tribunal Rules on ‘Beneficial Ownership’ Test in India–Mauritius Tax Treaty

June 10, 2022, 7:00 AM

A recent ruling by the Income Tax Appellate Tribunal (ITAT) has reignited discussion of the capital gains tax article in the India–Mauritius tax treaty (Tax Treaty). The ITAT, adjudicating a Mauritius-based investor’s appeal against the denial of benefits under the Tax Treaty on account of alleged non-fulfillment of the “beneficial ownership” test, has raised a fundamental question as to whether the test is in fact a condition precedent to obtaining such benefits.

The taxpayer was Blackstone FP Capital Partners Mauritius V Ltd, a company (a wholly owned subsidiary of Cayman Island based entity) incorporated, and fiscally domiciled, in the Republic of Mauritius. It was incorporated on June 8, 2006, and held a global business license issued by the Financial Services Commission, Mauritius. It was also registered as a foreign venture capital investor with the Securities and Exchange Board of India, and had been issued a tax residency certificate by the Mauritian Revenue Authority.

During the financial year 2015–16, the taxpayer sold equity shares of an Indian company, in furtherance of their share purchase agreement dated Feb. 16, 2015, earning long-term capital gains of 9 billion Indian rupees ($115.7 million). While the taxpayer claimed the same to be protected by article 13 of the Tax Treaty, the tax authority denied this exemption claim by alleging that the taxpayer was not the beneficial owner of the transferred shares.

In this regard, the taxpayer referred to aspects such as who had the administrative control of the taxpayer, source of investment in the transferred shares, trail of transactions of acquisition of shares and sale thereof, and directions issued to carry out such transactions.

Tribunal Ruling

During the appellate proceedings, at the outset the ITAT questioned whether the tax authority’s proceeding on this presumption—that the beneficial ownership test was an in-built requirement to be satisfied by a taxpayer to claim capital gains tax relief under article 13 of the Tax Treaty—was in fact the correct approach. In this regard, the ITAT took note of the fact that unlike some other articles of the Tax Treaty, article 13 does not contain this beneficial ownership test.

From the perspective of international fiscal law discipline, and balance, the ITAT noted that unless a condition is specifically set out in the treaty provision itself, it cannot possibly be inferred. This is because the taxing provisions in tax treaties are consciously agreed by two willing partners and hence cannot be unilaterally nullified on the basis of perceptions about some underlying notions of what would constitute good public policy.

The ITAT also remarked that in the context of international tax treaties, respect for negotiated bargains between contracting states is fundamental to ensure tax certainty and predictability and to uphold the principle of pacta sunt servanda, which is specifically referred to in article 26 of the Vienna Convention on the Law of Treaties (Vienna Convention) and which provides that “every treaty in force is binding upon the parties to it and must be performed by them in good faith.”

In light of this, the ITAT ruled that as a first step, a conscious call on the question whether the requirement of “beneficial ownership” is embedded in article 13 is sine qua non before proceeding on that basis. Accordingly, the Tribunal remitted the matter to the tax authority to decide the fundamental issue of whether the requirement of “beneficial ownership” can be read into the scheme of article 13 of the Tax Treaty, and it is only in the event of the answer being in the affirmative that the question of the beneficial ownership of the taxpayer in respect of the shares can be examined.


Article 13 of the Tax Treaty, which provided that capital gains earned by a Mauritius resident from transfer of Indian assets were outside the ambit of the Indian income tax net, has been subject to considerable judicial scrutiny in the past. While the capital gains tax exemption has been withdrawn for investments made on or after April 1, 2017, instances of denial of treaty relief by alleging non-fulfillment of the beneficial ownership test are still not uncommon—despite the fact that Circular Number 789 dated April 13, 2000, issued by the Central Board of Direct Taxes (highest body for direct tax administration in India) categorically stated that wherever a tax residency certificate is issued by the Mauritian Authorities, such certificate will constitute sufficient evidence for accepting the status of residence as well as beneficial ownership for applying the Tax Treaty accordingly.

The ITAT has rightly observed that before adjudicating on the issue of who has the beneficial ownership in such situations, the fundamental question to be addressed is whether this beneficial ownership test is indeed a requirement to be satisfied in the first place. Certainly, the text of article 13(4) of the Tax Treaty does not have a beneficial ownership requirement. It will be interesting to see what criteria or reasons tax authorities will apply/assign to decide whether the requirement of beneficial ownership is in-built in article 13(4) of the Tax Treaty.

One is reminded of the celebrated judgment of the Supreme Court of India in the case of Union of India v Azadi Bachao Andolan [2003] 263 ITR 706 (SC), where in the context of “treaty shopping,” the court remarked that until provisions dealing with treaty shopping are incorporated in a tax treaty, they cannot be imported artificially therein.

The acknowledgment by the ITAT that any violation of the Vienna Convention can only be at a huge cost of tax unpredictability is also a welcome remark, as certainty and predictability are some of the most important considerations for foreign investors. The investment structure adopted by the taxpayer per se is fairly typical across industry. Hence, clarity on “beneficial ownership” will provide a sigh of relief for many foreign investors.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners. 

The views of the author(s) in this article are personal and do not constitute legal/professional advice of Khaitan & Co.

Author Information

Sanjay Sanghvi is a Partner and Raghav Kumar Bajaj is Counsel, direct tax practice group at Khaitan & Co., India.

The authors may be contacted at: