Relevance of Beneficial Ownership in context of Article 13 of DTAA between India and Mauritius

Facts of the Case:

The Assessee is a company incorporated in and fiscally domiciled in the republic of Mauritius and is a registered FVCI (Foreign Venture Capital Investor) with SEBI. During the year, the Assessee has sold equity shares of CMS Info Systems Ltd. (i.e, an Indian Company) to Sion Investment Holdings Pte Ltd. for a consideration of US$ 15,95,02,497/- as per the share purchase agreement executed between them.
Cost of acquisition of these shares is stated to be US$ 1,73,21,565/- and accordingly long-term capital gains earned by the Assessee are quantified to be US$ 14,21,80,932/-. Further, no securities transaction tax was paid on this transaction.
As per the assessing officer the Assessee is not eligible to claim the benefits of DTAA between India and Mauritius and further the demand for levy of tax on the long-term capital gains had been raised on the Assessee. Aggrieved by the demand the Assessee has raised this issue before the tribunal.

Contention of the Income Tax Department:

Basis the information from Foreign Tax and Tax Research Division, the Assessee’s effective ownership is with Cayman Island based entities.
For availing benefit of Article 13(4) of the DTAA between India and Mauritius, it is necessary to understand the real owners of the shares.
Basis the principles emerging from Supreme Court judgement of McDowell &Co Ltd v CTO it is clear that the Assessee has no independent existence and its entire activity was controlled and directed as per direction of its affiliates.
Accordingly, scheme was designed for the benefit of Cayman Island entities and thus was a fit case to lift the corporate veil.
The Assessing Officer’s assessment order was confirmed by the Dispute Resolution Panel. Thus, the above issue is before the tribunal.

Issue before the Tribunal

Whether the benefits under Article 13(4) of India-Mauritius Tax treaty be applicable to real / beneficial owners of the shares only.

Decision of the Tribunal:

Unlike in Article 10 or Article 11 of India-Mauritius tax treaty which specifically provides for beneficial ownership, there is no such provision in Article 13 of the afore-mentioned treaty.
International Tax treaties are contract between states and are signed to ensure tax certainty and predictability. Tax treaties are governed by ‘pacta sunt servanda’ which provides that every treaty in force is binding upon the parties and it must be performed in good faith.
The Assessing officer has erred in proceeding that concept of beneficial ownership is relevant under Article 13 without assigning cogent and specific reasons.
The Tribunal thus vacated the impugned assessment order and remitted the matter to the file of the Assessing Officer for deciding the fundamental issue as to whether the requirement of beneficial ownership can be read into the scheme of Article 13 of the Indo Mauritius Tax treaty.

Case Law: Blackstone FP Capital Partners Mauritius V Ltd v DCIT, International Taxation, Circle 1(2)(2)

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