Recently, the High Court of Delhi (‘Delhi HC’) in Tiger Global International III Holdings v. AAR,^[1] reiterated the settled position^[2] that a ‘Tax Residency Certificate’ (‘TRC’) issued by Mauritian tax authorities in favour of a Mauritian resident was sacrosanct, and that due weightage must be accorded to it for treating its holder as a bona fide entity. The issue before the Delhi HC involved taxation of capital gains derived by a Mauritian entity on account of alienation of shares held in a Singaporean Company (which in turn held stake in an Indian company) to an entity resident in Luxembourg i.e., indirect transfer of Indian company shares. While the Singaporean Company shares were acquired by the Mauritian entity before April 1, 2017, they were sold post such date, thereby also triggering the grandfathering concept under the India – Mauritius Double Taxation Avoidance Agreement (‘IM DTAA’).

Owing to Explanation 5 to Section 9(1)(i) of the Income-tax Act, 1961 (‘IT Act’), which contains the indirect transfer provisions, the Mauritian seller approached the Authority for Advance Rulings (‘AAR’) for determination of whether the capital gains that they would derive from transaction as stated above, would be chargeable to tax in India in terms of the beneficial provisions of the IM DTAA. The AAR rejected the application at the threshold under Section 245R(2) of the IT Act, holding that the transaction was designed to avoid taxes in India.

In a writ petition challenging such order, the Delhi HC set aside the order passed by the AAR while according to the grandfathering benefit to the capital gains in question in terms of Article 13(3A) of the IM DTAA. The Delhi HC has also observed that not every investment coming from companies interposed in Mauritius indicate a sham/ fraudulent transaction. Interestingly, the Delhi HC, in this case has gone extensively into what beneficial ownership means, to conclude that the seller in this case, was in fact, the beneficial owner of capital gains.^[3]

While there is no significant deviation in this decision from the settled jurisprudence, one may ponder over whether there was any need to apply the grandfathering provision, when there is no direct stipulation for inclusion of indirect transfer of shares in the capital gains provision under the IM DTAA. Furthermore, this decision also contains observations around the interplay between international law and domestic law in the context of the General Anti Avoidance Rule, which may become significant once the protocol dated March 7, 2024 for amending the IM DTAA comes into force.

[1]    Tiger Global International III Holdings v. AAR, [2024] 165 taxmann.com 850 (Delhi HC).

[2]    Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1 (SC) and Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613 (SC).

[3]    However, it must be noted that in Blackstone Capital Partners v. ACIT, (2023) 452 ITR 111 (Delhi HC), in the context of the India Singapore DTAA, the Delhi High Court had taken a view that the beneficial ownership test is irrelevant for the purposes of the capital gains Article.